The euro rose to a 14-month high against the dollar on Thursday, heading for its best month in over a year as signs of recovery in the euro zone's economy set the currency on a bullish trend.
The yen fell to a 2-1/2-year low against both the U.S. dollar and euro, extending its recent decline on expectations of further monetary easing in Japan.
The dollar was on pace for a monthly gain of 5.3 percent versus the yen. The euro rallied for a sixth consecutive month against the yen, rising 8.3 percent in January, which marked its the best month since February 2012.
Trading grew choppy as the session came to a close as investors prepared their books for month-end positioning and for U.S. jobs data on Friday.
"I think whatever we get in terms of payrolls, it will likely be knee-jerk because we don't yet really know what the Fed's newest voting members are thinking for a few more weeks,'' said Brian Kim, currency strategist at RBS Securities in Stamford, Connecticut.
He was referring to minutes of the latest U.S. Federal Reserve Board meeting due for release in about three weeks, in which new voting members' comments take on greater weight.
"If there is a perceived dovish sentiment, then it is more selling of the dollar. But we likely have a reaction and refocus on data,'' Kim said.
Economists polled by Reuters forecast a rise to 160,000 new non-farm jobs in January, up from 155,000 in December, with the unemployment rate steady at 7.8 percent.
On Wednesday the Fed left in place its monthly $85 billion bond-buying stimulus plan. The Fed said the U.S. jobs market would continue to improve at a modest pace and pledged to keep purchasing securities until unemployment falls "substantially."
(Read More: New Hawks and Doves at Fed Likely Won't Alter Policy)
Weak German retail sales data released on Thursday slightly dented the bullish sentiment on the euro, but it was offset by a strong reading on the country's labor market and did little to change to the currency's rising trend.
"We're looking at dollar weakness to persist," said Eric Viloria, senior currency strategist at Forex.com in New York. "The (jobs) number probably isn't going to change the outlook in terms of Fed policy because even if you have a number that's a lot better than expected, they need to see sustained improvement in the labor market."
The euro rose as high as $1.3593 on Reuters data, its strongest level since November 2011, and was last up 0.08 percent at $1.3577. It was on track for a 3 percent rise this month, the biggest since October 2011.
On Wednesday the euro decisively broke above the $1.35 level, which coincided with the 50 percent Fibonacci retracement of the drop from May 2011 peak through the July 2012 trough, a bullish signal.
Traders said month-end flows could trap the euro in a range and leave it below a reported option barrier at $1.3600.
Further upside targets are at $1.3640, the high in mid-November 2011, and $1.3833-35, the 61.8 percent retracement of the move down from May 2011 to July 2012, which also coincides with the July 2011 low.
Against the yen, the euro rose 0.53 percent to 124.22, having hit as high as 124.31 yen, the strongest level in nearly 3 years.
The dollar climbed 0.44 percent to 91.50 yen, just off its 2-1/2 year high of 91.54 yen set earlier on Thursday. The dollar has rallied over 12 percent versus the yen since mid-November.
European politicians have ramped up talk of a "currency war" as the euro has been the biggest beneficiary of weakness in the yen and the dollar. But European Central Bank policymakers have maintained a view that the euro is well within its long-term averages, reflecting little desire to curb its recent strength.
A Bank of Japan deputy governor shrugged off criticisms overseas, sending the strongest signal yet that the BOJ will boldly implement more stimulus if needed to achieve its new 2 percent inflation target.
While the Fed and the Bank of Japan both signaled more stimulus, the ECB said last week that banks would pay back a greater-than-expected amount in loans. The ECB is the first major central bank to start unwinding some of its unconventional monetary policy measures.
Some analysts said the euro also gained as fears of a Greek exit and a break-up of the euro zone eased, prompting investors to reinvest in the region after shunning it much of last year.