The dollar rallied on Thursday after U.S. payroll data suggested the job market was not as dire as many investors had feared while the European Central Bank president struck a less aggressive tone on prospects for rate hikes.
Demand for the greenback started to rise after a U.S. jobs report for June was largely as forecast. Traders said a steeper-than-expected decline in payrolls would have triggered a sell-off in the U.S. currency.
"The unemployment number really didn't break the dollar's back. The market was so bearish that I thought we would see a minus-100 print, so this is moderately good news," said Boris Schlossberg, senior currency strategist, at DailyFX.COM, in New York.
June payrolls fell 62,000, the Labor Department said.
At the same time the jobs data was being released, ECB President Jean-Claude Trichet said the current level of interest rates would help achieve the bank's price stability goal. The ECB earlier raised its key rate as expected by 25 basis points to 4.25 percent.
Analysts said the remarks suggest that the ECB's rate hike on Thursday was a one-off event and that further rate rises will depend on economic data. Trichet also said downside risks to the euro-zone economy persist.
"Trichet is being cautious. He's leaving the door open to the possibility of further hikes if inflation goes higher. But he doesn't want to spook markets into pushing the euro even higher," Schlossberg added.
In mid-morning trading in New York, the euro was last 1.1 percent lower on the day at $1.5707 , its biggest one-day drop in about three weeks. The dollar was also 1 percent higher against a basket of currencies and last traded at 72.728.
The fall in payrolls in June marked the sixth straight month of declines and the longest losing streak for the labor market since 2002.
The euro rose earlier to as high as $1.5909 in the run-up to the ECB decision, its highest since April 23. But further gains failed to materialize once Trichet said in a news conference that the current rate stance will contribute to achieving the bank's price stability objective.
Trichet "dropped his hawkish stance and moved to a more neutral one. That doesn't rule out another rate hike down the road, but it counters what the market was pricing in," said Meg Browne, a senior currency strategist at Brown Brothers Harriman, in New York. "People were a bit long euros coming in and now they are cutting positions."
Against the yen , the dollar jumped almost 0.9 percent to trade at 106.80. With Japanese rates seen on hold at an ultra low 0.5 percent, the yen was hurt as ECB rate hike expectations put yield differentials back on the market's radar.
The dollar pared some of its gains versus the yen after another report showed a weaker-than-expected reading on the U.S. service sector in June.
The Institute for Supply Management's non-manufacturing index came in at 48.2 for June, compared with 51.7 in May. A reading below 50 signals contraction. Economists had expected a reading of 51.0, according to a Reuters poll.
U.S. markets will be closed on Friday in observance of the U.S. Independence Day holiday. Trading will resume on Monday.