By Kate Duguid
NEW YORK (Reuters) - The dollar limped back from a three-year low against a basket of currencies on Friday but still marked its fifth weekly loss out of seven weeks this year, driving the euro up to its highest level since December 2014.
The U.S. currency has been weighed down by several factors this year, including the perceived erosion of its yield advantage as other countries start to scale back easy monetary policy.
Traders' confidence in the dollar has also been worn down by worries over the United States' current account and budget deficits, with the latter projected to balloon to near $1 trillion in 2019 amid a government spending splurge and hefty corporate tax cuts.
"Markets are looking at the policies put in place last year, in particular the tax cut, and what the impact of those policies are going to be on the U.S. fiscal deficit," said Sireen Harajli, a currency strategist at Mizuho in New York.
The euro <EUR=> was last down to $1.241 after hitting its highest since 2014 at $1.256 earlier in the day.
Traditional market correlations have been scrambled this week. Declines in the dollar have come as U.S. Treasury yields hit four-year highs and as stronger-than-expected U.S. inflation bolstered bets that the Federal Reserve could increase interest rates as many as four times this year.
"The market is befuddled by what seems to be changing inter-market relationships ... Last week, the stock market was falling off because of rising yields. This week yields rose and stock markets rallied," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman & Co in New York.
The S&P 500 looked set to close out the day with gains. It remained set for its sixth straight day of gains after inflation fears sparked a market correction earlier in February.
The U.S. currency traded slightly up on the day at 106.30 yen <JPY=>, having earlier sunk to a new 15-month low of 105.52 yen.
"For dollar/yen in particular, we’re seeing a tendency towards a stronger yen, despite easy monetary policy in Japan," said Harajli. "It seems like the markets are beginning to test the BOJ’s resolve."
Sterling <GBP=> was last at $1.402 down from a weekly high of $1.414.
(Reporting by Kate Duguid and Jemima Kelly; Editing by Bernadette Baum and Nick Zieminski)