The euro surged to a session high of $1.5700, according to Reuters data, adding to overnight gains sparked by a jump in euro zone inflation to a record high in July. It last traded at $1.5598 , up 0.1 percent on the day. The dollar slid 0.2 percent against the yen to 107.85 yen after falling as low as 107.58 yen. The ICE Futures U.S dollar index slipped 0.1 percent to 73.225 index .
In the wake of Thursday's data, implied prospects for the Federal Reserve to raise benchmark lending rates by a quarter of a percentage point at its monetary policy meeting in September dropped to 16 percent from 40 percent on Wednesday. (See the accompanying video to find out why some economists are optimistic about the U.S. dollar...)
Perceived prospects for an October hike fell to 56 percent from 76 percent.
Improving Dollar Outlook
The dollar's outlook started to improve earlier in the month as the credit crunch showed increasing signs of spreading to the euro zone, Japan, Australia and other major economies.
By contrast, the United States, the first major casualty of the nearly 12-month old credit crisis, has garnered support from the decline in oil prices and generally steady run of U.S. economic data.
"The building blocks for a dollar recovery against Europe seem to be falling into place," wrote Jim McCormick, head of global foreign exchange research at Lehman Brothers in London.
"Relative dollar interest rates have been inching up while relative growth surprises are the most dollar-positive since the start of the credit crunch. (Also), the surge in M&A inflows to the U.S. and out of Europe show that long-run investors see value in U.S. assets," he said.
Investors would further look to Friday's non-farm payrolls report for clues on prospects for the U.S. economy. A Reuters poll showed economists are forecasting job losses of 75,000 in July.
A report on Wednesday showing the U.S. private sector added 9,000 jobs this month has added a modest dose of optimism for Friday's data, although Thursday's surge in jobless claims has doused some of the market's upbeat expectations.
"In general, the declines in employment in the current U.S. downturn have been milder than in previous declines and we think this will remain the case," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
Dolan believes a negative jobs report could be an opportunity to buy the dollar. "If the dollar finishes higher after worse non-farm payrolls data, it will be an even more significant piece of evidence that the dollar is turning the corner and other currencies are being shorted."