Dollar fell against the Japanese yen on Thursday, as weak U.S. economic data deepened investors' fears that the U.S. economic recovery remained fragile.

Although the greenback rose against the Japanese yen in Asia and price then climbed to an intra-day high of 85.92 in Europe as news reported that BOJ started to consider additional monetary easing measures and there was rumour that BOJ would hold an emergency policy meeting, dollar dropped from there on renewed risk aversion and fell sharply to 84.89 after the release of disappointing U.S. initial jobless claims and Philadelphia Fed business index. Later, dollar staged a recovery from there on short-covering and rose to 85.45 in NY afternoon before stabilising.

U.S. initial jobless claims rose unexpectedly to 500,000, the highest level since November, versus the economists' forecast of 476,000, from upwardly revised reading of 488,000 of the prior week. Philadelphia Fed business index came in at -7.7, the lowest reading since July 2009, versus the expectations of 7.0 and the reading of 5.1 in July.

In addition, U.S. St. Louis Fed President James Bullard said that U.S. Fed might need to ramp up its purchases of U.S. Treasury debt if price levels in U.S. continued to show signs of softening.

Earlier, Japanese Trade Minister Naoshimas said he was watching economy with sense of urgency but there was no specific talks on economic steps with the Prime Minister yet. Naoshimas added that the rise of yen was accelerating and he had talked with Prime Minister about the currency moves.

Although the single currency tanked initially ahead of Asian opening in reaction to the bearish comments from Germany's Der Spiegel magazine that the austerity measures were killing the economies of member nations of EU and edged lower to 1.2772 in Europe, euro staged a strong rebound and extended its intra-day cable-led rise to 1.2903 after the release of U.S. jobless claims data. However, euro retreated sharply from there to 1.2792 on profit-taking before stabilising, as DJI tumbled by 144.33 points or 1.39% and closed at 10271. European equities also sank on Thursday, as FTSE-100, CAC-40 and DAX dropped sharply by 1.73%, 2.07% and 1.80% respectively.

Earlier, the single currency was pressured, as European Central Bank governor Patrick Honohan said in Asia that the bailout for another Irish bank could be as much as 3 billion euros.

In other news, the Bundesbank said the Germany economy was set to grow by around 3% this year, lifting its forecast from the 1.9% it predicted in June, but the rate of expansion would slow following a surprising surge in the second quarter of the year.

The British pound fell sharply in tandem with euro in Australia after Wednesday's rally from 1.5498 to 1.5689 and ratcheted lower to an intra-day low of 1.5510 in Europe. However, cable rebounded strongly from there after the release of stronger-than-expected U.K. retail sales and rallied to 1.5672 in response to U.K. CBI orders before retreating sharply with euro to 1.5573 in NY afternoon.

U.K. retail sales came in at 1.1% m/m and 1.3% y/y, much stronger than the economists' forecast of 0.4% m/m and 0.6% y/y respectively. U.K. CBI orders came in at -14 as expected versus -16 in July.

Economic data to be released on Friday include: Canada CPI, CPI core.