The dollar fell on Thursday, snapping a three-day rally, as dealers anticipated Friday's September U.S. payrolls data may still keep the Federal Reserve on track to cut interest rates later this month.

The euro reversed earlier modest losses and gained on the dollar, after dealers ultimately concluded that the European Central Bank had not changed its focus on inflation after earlier in the day leaving its benchmark borrowing rate unchanged at 4 percent.

The market is becoming a little bit concerned that maybe the jobs numbers will not be strong enough to justify this correction, and therefore I'm not surprised to see the U.S. dollar pushing lower, said Matthew Strauss, senior currency strategist with RBC Capital Markets in Toronto.

A jobs growth figure below the median expectation of 94,000, even if August's contraction is revised to positive, may reestablish a dollar-selling trend triggered last month after the Federal Reserve slashed its fed funds rate by a half percentage point to 4.75 percent.

The dollar index (.DXY: Quote, Profile, Research), a gauge of the greenback's value against a basket of major currencies, slipped 0.2 percent to 78.428. On Monday, the index touched an all-time low of 77.660.

The euro rose to session highs of $1.4149 before settling back at $1.4135, up 0.4 percent from Wednesday and within striking distance of a record high of $1.4281 hit on Monday, according to Reuters data.

Against the yen, the euro was up 0.1 percent at 164.69 yen. The dollar was down 0.1 percent to 116.52 yen.


The euro initially slipped after European Central Bank President Jean-Claude Trichet said risks to economic growth are weighted toward a weakening economy, rather than strengthening. given the backdrop of market uncertainty.

However, in subsequent comments, Trichet said the bank's policy stance had not changed to neutral, suggesting the next action though not imminent could be a rise in interest rates.

Expectations were that Trichet this morning was going to come out and pare back some of his hawkish theme, said Mark Meadows, currency trader at Tempus Consulting in Washington. While his comments did not show an exact timetable for another interest rate increase, they did indicate very strongly to the market that the ECB was concerned with inflation and was going to hike interest rates again.

Earlier, the Bank of England kept UK rates at 5.75 percent, as expected. Sterling was up 0.4 percent against the dollar at $2.0388.

Following the central bank meetings, focus in the market quickly shifted to Friday's September U.S. non-farm payrolls report.

Two private sector employment reports on Wednesday suggested the labor market in September was resilient in the face of the beleaguered housing sector. However, dealers were attentive to the risk payrolls growth would fall below the median expectation for 94,000.

People were getting short euros already on the view that payrolls might be pretty good, but now there's short-covering going on, as somebody's buying a truckload of euros, said a trader at a European bank in New York.

Apparent calm in global financial markets after weeks of credit market-related turmoil has shifted the currency market's attention back to differences in growth and monetary policies between economies.

The Friday payrolls report is important in the eyes of market participants because it could alter expectations for the Fed. Futures markets currently reflect around a three-in-five chance the Fed will cut its benchmark lending rate to 4.50 percent later this month.