The dollar hovered near a 2- month low and the Nikkei slumped amid weak Asian stock markets as the outlook for the U.S. economic recovery worsened.

The dollar fell broadly on downbeat U.S. manufacturing and inflation data which offset a bright start to the U.S. earnings season earlier this week which had briefly boosted markets.

The slide in the dollar took it close to a 7-month low versus the yen, prompting a drop in Japan's Nikkei <.N225> with investors taking profits before a long weekend, worried that a further advance in the yen would hurt exporters.

Risk avoidance is increasing and investors are unwinding long positions now ahead of the weekend, said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley.

If the yen rose by 1 or 2 yen against the dollar during that time, it'd be really tough.

The Nikkei fell 2.8 percent, far underperforming Asian stocks. The MSCI Asia-Pacific index of stocks outside Japan <.MIAPJ0000PUS> was 0.5 percent lower with markets in Shanghai and Korea also lagging.

European shares were seen rebounding after falling on Thursday. Britain's FTSE 100 <.FTSE> was seen opening as much as 0.5 percent higher and Germany's DAX <.GDAXI> was expected to open up as much as 0.6 percent.

Banking shares would be in focus as investors await results from U.S. companies including Bank of America and Citigroup later in the day.

In Hong Kong, Agricultural Bank of China <1288.HK> made a tepid debut following the modest first-day gains in Shanghai, as concerns about valuations, a waning appetite for new shares amid a glut of bank fundraisings and tough markets kept a lid on gains.

U.S. stocks ended the day flat after recouping losses late in the day, led by a sudden turnaround in Goldman Sachs and BP

Goldman said it would pay a record $550 million to settle SEC charges that it misled investors in a subprime mortgage product.

DOLLAR WEAKNESS

Traders said investors were shifting funds away from the dollar and toward the euro due to combination of factors including receding concerns about sovereign debt problems in the euro zone and worries about a U.S. recovery.

The Thomson Reuters/University of Michigan preliminary survey of consumer sentiment is expected later today. Economists in a Reuters poll expect a reading of 74.5 for July compared with 76 in June.

The euro dipped 0.2 percent to $1.2913, giving back some of its 1.6 percent gain from Thursday, when it scaled a two-month high of $1.2955 on trading platform EBS.

The euro rose could be poised for further gains after Thursday's rally lifted it past key resistance levels, including the 50 percent retracement of the April-June slide and above its 100-day moving average for the first time since December.

It has risen about 8.7 percent from its lows as forex traders focus shifted away from euro zone woes to a slowing U.S. The euro is still just under 15 percent below its November 2009 levels.

The dollar is likely to come under increasing pressure as the U.S. economy slows and others in the world raise rates to fend off inflation, making their currencies more attractive HSBC Global Research said in a note.

In Asian trade, the dollar index <.DXY> dipped 0.1 percent to 82.442, with near term support seen at 82.24, the daily high on April 25.

(Additional reporting by Elaine Lies in Tokyo; Editing by Jan Dahinten)

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