The dollar rose on Thursday, recovering as investors unwound bets against the currency thanks to some better signs on the economy ahead of key U.S. non-farm payrolls figures on Friday.
An ADP report on Thursday showed the U.S. added 42,000 jobs in July. Coupled with encouraging service sector data, that relieved some of the recent pessimism about the world's biggest economy, but traders said more good news was needed to overturn negative dollar sentiment.
The dollar index moved back above its 200-day moving average, while traders said its ability to hold above the psychologically key 85 yen level lightened the risk of dollar/yen dropping to a 15-year low.
Friday's payrolls numbers are seen as key for near-term dollar direction. Economists polled by Reuters estimated that U.S. non-farm payrolls fell 65,000 in July as layoffs of federal census workers continued.
Today will be all about squaring of short dollar positions ahead of Friday's payrolls numbers as no one will want to be short of dollars if there is a positive outcome, said Niels Christensen, currency strategist at Nordea.
But nothing has changed the negative dollar environment.
At 3:52 a.m. ET, the dollar index .DXY rose 0.1 percent to 81.003, back above its 200 day moving average around 80.769 and off its recent low of 80.469, its weakest since mid-April, while the euro fell 0.1 percent to $1.3147.
In early London trade the euro dipped below $1.3125 against the dollar -- the 38.2 percent retracement of the November to June decline -- and traders said a close below there could prompt further falls.
Against the yen, the dollar was steady at 86.27 yen, having bounced from an eight-month low of 85.32 yen hit on Wednesday.
A decline beyond the November low of 84.82 yen could open the way for the greenback to slide to an all-time low below 80 yen, hit 15 years ago, traders said.
They are nervous, however, that such a tumble would prompt Japan's Ministry of Finance to take action on the currency's strength, which is hurting Japanese exports, shares and the export-dependent economy.
Players feel they have sold the dollar a bit too much before the U.S. jobs data, and are buying back the currency a little, said a senior trader at a Japanese trust bank in Tokyo.
But the trader said the dollar remained on a downward trend in the longer term, weighed by persistent speculation that the Federal Reserve may further relax its monetary policy to help an economic recovery which looks like losing steam.
The European Central Bank and the Bank of England also announce policy decisions on Thursday, but both are fully expected to leave interest rates on hold at record lows of 1.0 percent and 0.5 percent respectively.
Analysts said ECB president Jean-Claude Trichet may be upbeat in a subsequent press conference, given recent successful bank stress tests and solid European bank earnings, but this is unlikely to be market-moving.
Elsewhere, the New Zealand dollar fell sharply, losing more than 1 percent against the U.S. dollar to $0.7268 after local jobless data was far weaker than expected, prompting markets to scale back rate hike expectations.
Among other commodity-linked currencies, however, the Canadian dollar extended gains against the greenback, while the Australian dollar dipped but hovered near a three-month high hit the previous day.
(Additional reporting by Rika Otsuka in Tokyo; editing by Patrick Graham)