The U.S. dollar decreased in early European trade on Friday, retreating from two-month highs, but it is still expected to post a positive weekly performance for the fifth week in a row due to the sturdy U.S. economy, which predicted higher rates for longer.

Early on Friday, the dollar experienced some profit-taking as risk sentiment increased following the People's Bank of China's announcement that it would continue to provide more liquidity in an effort to help the nation's sluggish economic recovery.

The dollar index that gauges the greenback versus its major pairs dipped 0.2% at 103.290 post yesterday touching the highest level in two months at 103.59.

On the other hand, the dollar index is still expected to rise by 0.5% for the week due to growing optimism that the U.S. Federal Reserve would continue to tighten monetary policy for a longer period of time than initially anticipated.

EUR/USD plunged to 1.0868, close to Thursday's six-week low of 1.0856, with President Christine Lagarde's comments suggesting that the ECB will likely suspend its over-year-long campaign of rate increases in September.

GBP/USD slipped 0.3% to 1.2712 British retail sales dropped more dramatically than anticipated in July, down 1.2% from June and 3.2% annually. Shoppers are undoubtedly feeling the effects of rising inflation and 14 consecutive hikes in interest rates, but the month's terrible weather also had an influence.

USD/JPY dropped 0.4% to 145.30, as more pressure is being placed on the Bank of Japan to start tightening monetary policy after July's robust inflation readings helped the yen.