The dollar is on-pace to record a large weekly decline Friday -- undoing last week's gains against the euro and pound -- as traders and analysts debated the likely next step for the U.S. Federal Reserve and European Central Bank.

The dollar traded at about $1.5637 to the euro Friday at mid-day, which would represent a 3-cent decline for the week, if it maintains that level by the New York close at 5 p.m. The dollar also traded at $1.9760 to the British pound, also about a 3-cent loss for the week.

Currency trader Andrew Resnick told BloggingStocks Friday concerns about rising inflation in Germany and financial service losses in the United States have caused a sentiment adjustment in the often-volatile currency markets.

A shift in sentiment

"Last week, the debate was structured around rising inflation in the U.S. and how long the Federal Reserve could hold-off before raising interest rates. That was bullish for the dollar," Resnick said. "But this week we've seen a reversal. The talk now is about [European Central Bank President Jean-Claude] Trichet beating [Fed Chairman Ben] Bernanke to the punch on interest rates, and that put a lot of traders in euro-buy mode." Resnick added that he is presently flat, or has no open currency trading positions.

Resnick added that rising interest rates for the euro and the dollar would be euro-bullish, due to Europe's higher GDP growth. A rise in oil prices -- oil jumped $3.92 to $135.85 per barrel on tough talk between Israel and Iran on Iran's nuclear program -- also weighed on the dollar, Resnick said.

Still, Resnick said those looking for a long-term rally in the dollar have some solace at the end of this week. Resnick said the usual culprits in a dollar sell-off, the U.S. trade deficit and federal budget deficit, did not play a major role in the present sell-off. Each picture is brightening, the trade deficit decreasing on rising U.S. exports, and the budget deficit not increasing considerably, despite the U.S. economic slowdown, he said.