Tokyo, Aug 29 - The dollar retreated against a basket of currencies on Friday as oil prices rose on worries about supply and some investors booked profits on the greenback's sharp rise this month.
Britain's Daily Telegraph reported Russia may restrict oil shipments in the coming days in response to the European Union's threat of sanctions over its military action in Georgia.
Traders said the report, along with the approach of Tropical Storm Gustav towards the Gulf of Mexico, gave a lift to oil prices and helped push the dollar lower.
The dollar gave up some gains made on Thursday on data showing the U.S. economy grew at a faster pace during the second quarter than initially thought.
The dollar index dipped 0.3 percent to 76.936. Oil rose more than $1 to around $117 a barrel.
U.S. markets will be closed on Monday for the Labor Day holiday and this also encouraged market participants to sell the dollar. Friday is the quarter-end for U.S. investment banks and some hedge funds and that may also have led to profit-taking on the dollar.
"A three-day weekend is coming up and some players are opting to shed long positions on the dollar with geopolitical risks in the air," said Joseph Kraft, head of Japan capital markets at Dresdner Kleinwort.
The dollar eased 0.4 percent from late U.S. trading on Thursday to 109.07 yen The euro climbed 0.3 percent to $1.4744.
However, the greenback is still poised to show gains of 5.5 percent against the euro this month, its biggest gain against the euro since the single currency was launched in 1999.
Since late July, the dollar has benefited from growing signs that economic weakness has spread beyond the United States.
U.S. gross domestic product grew at a 3.3 percent annual rate in the second quarter compared with an initial estimate of 1.9 percent, the government said on Thursday.
In contrast, data released by the Munich-based think tank Ifo earlier this week showed that German business morale fell to a three-year low, or the weakest since June 2005.
"When considering how bad the economy really is, it would not be a surprise if the euro were to fall further," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo, adding that the euro could eventually fall below $1.40.
Sterling rose 0.2 percent to $1.8315 amid the dollar's broad decline on Friday. But with its 7.7 percent decline in August, it was on track for its biggest monthly loss since October 1992 -- shortly after Britain was forced to leave the European exchange rate mechanism.
The pound had hit a two-year low of $1.8240 on Thursday, after data showed that British house prices posted their biggest annual fall for 17 years while retail sales saw the steepest drop since records began a quarter of a century ago.
Currency traders and analysts expect the euro zone August HICP flash estimates, indices of consumer sentiment, to provide the euro with near-term direction. The data is due later on Friday.
The European Central Bank this week quashed talk of a looming rate cut but a weak sentiment index could revive such expectations for monetary easing.