The dollar was on the defensive near a 3- month low against a basket of currencies after weak U.S. jobless claims figures heightened worries that Friday's payroll data could paint a bleak picture of the U.S. economic recovery.
A weak reading could fuel talk that the Federal Reserve may consider additional easing steps as early as next week, which could put pressure on the dollar particularly against the yen, given the pair's recent strong correlation with U.S. Treasury yields.
Unless employment improves, housing demand won't improve and consumption won't grow. The U.S. economy could hit a lull, said Kakuya Kojoh, head of the securities department at Nissan Century Securities.
Against the Japanese currency, the dollar traded at 85.94 yen, little changed on the day and one yen above its November low of 84.82 yen, a break of which would take it to a 15-year low.
The market is focusing on the outlook for the U.S. economy. If the dollar breaks below the November low, it could enter a whole new world, said Minoru Shioiri, chief manager of forex trading at Mitsubishi UFJ Morgan Stanley Securities.
Traders said there was a sizable volume of knockout option positions below 85 yen, which suggests that the dollar's fall could become more volatile if it does step into those price levels.
While further yen gains could stir talk of yen-selling intervention by Japanese authorities, many market players think Tokyo is unlikely to pull the trigger at this time.
For now the dollar has some support at 85.32 yen, its low on Wednesday.
The euro fetched $1.3180, keeping much of Thursday's gain of about 0.3 percent. Now not far off its three-month high of $1.3262 hit earlier in the week, the currency has immediate support around $1.3105-25, a previous resistance area.
U.S. JOBS IN FOCUS
The dollar index stood at 80.81, little changed from late U.S. trade and near its Tuesday low of 80.469, its lowest since mid-April.
The index, however, appears to have some support around 80.50, having managed to hold near its 200-day moving average, which stood at 80.792 on Friday.
Its 14-day relative strength index is below 30, indicating a heavily oversold position.
Some traders therefore see a chance of a rebound in the dollar if the payrolls data, due at 1230 GMT, provides a positive surprise or even comes close to market expectations.
Economists forecast a total job loss of 65,000 in July, following a fall of 125,000 in June.
On Thursday, the U.S. Labor Department reported that the number of Americans filing for initial jobless benefits rose 19,000 to 479,000 last week, the highest level since early April, despite economists' forecast for a fall.
The Australian dollar erased earlier losses, after the Reserve Bank of Australia stuck to its forecasts for domestic growth to accelerate to 4 percent over the next two years in its quarterly statement.
The Aussie changed hands at $0.9150, nearly flat on the day, and 0.4 percent below its three-month peak of $0.9184 hit on Wednesday.
The Australian currency stayed near a 2- month high against the New Zealand dollar, which continued to suffer from Thursday's poor New Zealand job data.
The Aussie fetched NZ$1.2563, after having risen to around NZ$1.2590 on Thursday.
The kiwi slipped 0.3 percent against the U.S. dollar to $0.7275.
(Reporting by Hideyuki Sano; Editing by Chris Gallagher)