The dollar index, which measures the greenback's value against a basket of major currencies, fell to a two-month low at about 94.4.
"The huge move in euro/dollar which is up nearly four big figures this week has caught many market participants by surprise," said Boris Schlossberg, managing director of FX Strategy at BK Asset Strategy, in a note."
"The move has been fueled by a massive realignment in the dollar trade as consensus view about the Fed is starting to change quickly," he added.
Monetary policy expectations have been the key driver for major currencies this year, with a 1-trillion-euro ($1.12-trillion) stimulus program from the European Central Bank helping push the euro down, while expectations for the first U.S. rate increase since 2006 pushed the dollar higher.
Currency analysts said signs of improvement in the euro zone economy and a rise in government bond yields in Germany - Europe's biggest bond market - was also lending some support to the single currency.
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Data on Thursday showed that German unemployment fell in April to its lowest level in 24 years as a rebound in Europe's biggest economy gains speed. Meanwhile, separate figures revealed that the euro zone had emerged from fourth months of deflation in April.