The euro edged up on Thursday supported by healthy results at Spanish and French bond auctions and stable global equities, but investors remained cautious ahead of a key reading on the U.S. labor market on Friday.
The European Central Bank earlier left interest rates unchanged at 1 percent as expected and extended its liquidity safety-net amid worries about vulnerable banks. The decision and following remarks by ECB President Jean-Claude Trichet had limited impact on the euro.
In the United States, a report showed new claims for unemployment benefits fell last week, but were still too high to signal a change in fortune for the troubled labor market.
The focus now is on the Labor Department's widely watchedmonthly employment report, with analysts predicting U.S. non-farm payrolls probably fell for a third straight month in August.
Currency markets are not paying too much attention to anything but the jobs number tomorrow, said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.
The scarcity of jobs threatens to derail the recovery and a weak employment report will be further confirmation of deterioration in the economy, which could cause investors to favor government bonds, pushing benchmark yields even lower.
Low yields have contributed to U.S. dollar weakness recently.
The key jobs figures tomorrow could set the market's tone for the weeks ahead, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, Inc. in Washington.
Another disappointing employment report... would likely play up concerns about America's recovery losing momentum and see the dollar fall further in the data's initial aftermath, he said.
In morning trading in New York, the euro was up 0.1 percent at $1.2822, gaining support after Spain and France drew decent demand as they sold a combined 12.2 billion euros in bonds.
The next target for the euro was around $1.2873 -- a 38.2 percent Fibonacci retracement of its fall from its August peak of $1.3334 to its August low of $1.2588. The target after that would be $1.2923, touched on August 18.
Earlier data confirmed the euro zone economy grew by 1.0 percent quarter-on-quarter between April and June.
Upbeat U.S. and Chinese manufacturing data on Wednesday lured investors away from perceived safe-haven assets, lifting stocks, commodities and higher-yielding currencies.
With so much uncertainty, the market is very volatile and moves depend on the daily data flow, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
SWEDISH CROWN GAINS
The Swedish crown rose to its highest in more than two years against the euro earlier around 9.2959 after Sweden's central bank raised its key interest rate to 0.75 percent, as expected.
It also left its forecasts for future interest rates unchanged from July, helping to lift the crown as many in the market had expected them to lower the profile slightly. The Riksbank was also upbeat on the economy.
The dollar was down 0.2 percent at 84.27 yen, close to a 15-year low of 83.58 yen hit last week. The yen showed limited reaction to Japan's political heavyweight Ichiro Ozawa saying action was needed to stem yen gains.