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The yen surged further on speculation that Japan could revise its ultra-loose monetary policy, while the dollar edged higher after earlier dipping to its lowest level since June against major currencies.

The dollar index, which measures the safe haven U.S currency against other six major currencies, gained 0.3% to 102.46 as risk appetite faded through the trading session, with mixed U.S. company earnings also setting the tone for markets.

Better-than-expected economic data out of Germany and Britain suggested both countries could escape a recession - at least for now - but the news failed to provide a lasting boost to either the euro or sterling.

The euro was last down 0.4% at $1.08130, easing off a fresh nine-month high earlier in the session. Sterling was last trading at $1.21780, down 0.3% on the day.

Japan's central bank is an outlier in clinging to stimulus while most countries are in tightening mode, but signs of stickier inflation have emboldened some investors to bet that this will change, a move that should boost the yen.

"It's easy to see why the Bank of Japan would be considering more policy tweaks at this time, though that isn't our base case," said Stephen Gallo, head of European currency strategy at BMO capital markets.

The yield on Japan's benchmark 10-year government bonds breached the central bank's new ceiling on Friday, adding to pressure for the yield control policy to be scrapped or revised.

The central bank said on Friday it would conduct additional outright bond purchases on Monday, ahead of a planned rate-setting meeting on Jan. 17-18.

The dollar at one point slipped nearly 1% against the yen on the day to a fresh seven-month low of 128.11, following a 2.4% slide on Thursday. It was last down 0.4% at 128.74.

The BOJ stunned markets last month by widening its 10-year bond yield target, but failed to quell market distortions caused by its huge bond buying.

"Had the BOJ changed policy last year when bonds globally were very much in a bear market ... I think there's a really high risk that they would have lost control of yields and their currency - not unlike what happened to the UK," Gallo said.

"Now would be an opportunity for the BOJ to catch up a little bit," he added.

Cooling U.S. inflation has firmed expectations the Federal Reserve would slow the pace of its interest rate hikes, after data on Thursday showed consumer prices surprisingly fell for the first time in more than 2-1/2 years in December.

"Hikes of 25 basis points will be appropriate going forward," Philadelphia Fed president Patrick Harker said in a speech to a local group in Malvern, Pennsylvania, on Thursday.

Goldman Sachs strategists said the December inflation data likely seals the deal on a shift to 25 basis point hikes in February but cautioned it was too early in the process for central banks to feel comfortable declaring victory.

"Markets pricing immediate rate cuts by the Fed as soon as June/July, right after its last hike in March/April, seems at odds with the fact that the Fed still wants tight financial conditions to avoid any overheating of the labour market," said Samy Chaar, chief economist at Lombard Odier.