The single currency rose sharply from 1.5365 to 1.5602 on Thursday after European Central Bank President Jean-Claude Trichet signaled a July rate increase for the euro-zone although ECB kept interest rate unchanged at 4.0% as expected.

Two-year German bunds yielded 2.11% more that comparable-maturity U.S. Treasury notes on Thursday, up from 1.89% on June 4. It was the biggest increase in the spread since March 25. Euro rallied against the Japanese yen and Swiss franc from 162.25 to 165.27 and from 1.6079 to 1.6195 respectively on the Trichet's hawkish remarks.

The greenback rose to a three-month high of 106.44 against the Japanese yen after the release of U.S. jobless claims which unexpectedly dropped to 357,000 last week (forecast was 375,000) from the previous reading of 372,000, adding speculation that the U.S. economy was in much better shape than many initially thought.

The British pound fell initially in European morning to a two-week low of 1.9462 after the Halifax UK House Price Index fell more than expected in May, however, cable rebounded strongly to 1.9597 in tandem with euro on dollar’s broad-based weakness. The Bank of England also kept interest rates unchanged at 5.00% as expected.

Philadelphia Federal Reserve President Charles Plosser that the U.S. central bank typically does not involve itself in currency intervention added to selling pressure on the dollar.

Friday will see German industrial production, U.S. non-farm payrolls, unemployment rate, average hourly earnings and wholesale inventories. Investors are focusing on the jobs data as economists expect U.S. lost jobs in May for a fifth consecutive month.