The dollar fell against the euro Wednesday after a report showed the U.S. private sector shed more jobs than expected in June, which may diminish the likelihood of a rate increase by the Federal Reserve.
In contrast, investors bought the euro ahead of an expected interest rate hike by the European Central Bank on Thursday.
The ECB is widely seen lifting its key lending rate by 25 basis points to 4.25 percent and President Jean-Claude Trichet's news conference after the meeting may indicate further increases.
Higher benchmark rates in Europe will boost the return of euro-denominated assets and weigh on the greenback.
In the United States, private employers slashed 79,000 jobs in June, the largest drop since November 2002, according to a private report by ADP Employer Services.
The ADP data is often seen as a precursor to the government's monthly report on the labor market, which is slated for release Thursday, earlier than usual because of Friday's U.S. Independence Day holiday.
Economists polled by Reuters expect another drop in non-farm payrolls last month.
"The (ADP) headline bodes unfavorably for the U.S. dollar," said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto.
"The fact that ADP has not been a good predictor of non-farm payrolls in 2008 could soften the impact, however, given other evidence of a deteriorating labor market, expectations for tomorrow's number have probably worsened," he said.
In midday trading in New York, the euro was higher against the dollar, having earlier topped at $1.5886 -- a level last seen in late April, according to Reuters data.
The euro was firmer versus the Japanese currency .
More fuel for ECB hawks came from euro zone producer prices, which were above forecast at 7.1 percent year-on-year in May, with euro zone headline inflation running at 4.0 percent.
"The short-dollar bias heading into tomorrow's ECB decision helped to explain the sizable reaction to the ADP report this morning," said Michael Woolfolk, a senior currency strategist at The Bank of New York Mellon.
"The 'trifecta' of an ECB rate hike, hawkish comments by Trichet and a negative non-farm payrolls report should provide sufficient ammunition for speculators to mount an attack on the 1.6000 level in the euro-dollar," he said.
The greenback edged lower against the yen and slid against a basket of currencies.
U.S. Treasury Secretary Henry Paulson was quoted as saying Wednesday the U.S. economy faced a tough second quarter and Europe would not be immune to the impact.
The Treasury also said high oil prices, further home price declines and capital markets turmoil will prolong the American economic slowdown, while Europe and the UK were also showing signs of slower growth.
Another report Wednesday showed U.S. May factory orders rose 0.6 percent.
Australian Dollar Gains
Sterling fell broadly as tumbling UK housing shares and a profit warning from retailer Marks and Spencer cast a shadow over the slowing British economy.
The pound fell versus the dollar, while the euro rose against the pound .
Both the euro and the dollar fell versus a broadly stronger Aussie dollar, which jumped after Australian retail sales soundly beat expectations for May, challenging the official view that interest rates were high enough to curb domestic demand.
The Aussie advanced versus the dollar, nearing a 25-year peak of $0.9668 set Monday.
At 7.25 percent, Australian interest rates are among the highest in the industrialized countries.