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The greenback rallied on Thursday to its highest against the euro this year after the European Central Bank (ECB) cut its growth outlook for the 15-nation region, boosting the likelihood of interest rate cuts. The ECB staff now forecasts growth in the eurozone for 2008 at between 1.1 and 1.7 percent and between 0.6 percent and 1.8 percent for 2009.

After the ECB left its benchmark lending rate at 4.25 percent on Thursday, the euro deepened its losses versus the dollar as the chairman of eurozone finance ministers, Jean-Claude Juncker, said the zone's single currency was still effectively overvalued despite its recent fall in ECB news conference. In late afternoon trading in New York, the euro tumbled more than 1 percent on the day and traded as low as 1.4315 against the dollar, its lowest since December 2007. Adding to dollar gains versus the euro were comments by the International Monetary Fund that the euro was on the strong side despite some weakening and the greenback was now closer to its medium-term equilibrium level. The euro also fell sharply against the Japanese yen to its lowest since March due to unwinding in carry trade on the back of tumbling U.S. stocks, the pair last traded at 153.42, down 2.1 percent on the day.

U.S. stock markets tumbled on Thursday as more signs of weakness in the labour market and incessantly sluggish growth overseas fueled fears about the ability of the U.S. economy to stage a recovery. The Dow Jones index dropped nearly 3 percent or 344 points and last ended at 11,188 by New York closing.

The ICE Futures U.S. Dollar index which tracks the value of the greenback against a basket of six major currencies, rose to as high as 79.077 n last traded up 0.11 percent at 78.966. The dollar, however, fell 1.1 percent against the Japanese yen and touched a session low of 106.97, hurt by sharp losses on Wall Street..

Sterling eased its early gains following the Bank of England's decision to leave it’s target lending rates unchanged at 5.0 percent. Policy makers judged the fastest inflation in more than a decade outweighed the risk that the British economy is sinking into a recession. The British pound rose initially to 1.7860 versus the dollar in European session but dropped afterwards, fell to as low as 1.7627 in late New York trading.

On Friday, the closely watch data will be the U.S non-farm payroll at 12:30GMT, other economic data releases include Japan business capex, German industrial production, Canada unemployment rate, net change in employment and ivey, as well as U.S. unemployment rate and Average hourly earnings.