The euro and high-yielding currencies held firm on Friday after an improvement in U.S. housing and jobless claims data bolstered investor appetite for risk ahead of key U.S. jobs data due later in the day.
Still, reflecting simmering worries about a slowdown in the U.S. and global economies, the yen was locked near a 15-year high against the dollar and the Swiss franc hovered near a record peak against the euro.
The two low-yielding currencies tend to be favored when investors want to avoid losses rather than seek higher returns, despite efforts by their governments to stem currency strength.
Market players have been building up positions for some time to brace for a weak U.S. recovery. So I guess that any upside surprise in the payrolls data could move the market, said Daisuke Karakama, market economist at Mizuho Corporate Bank.
The euro changed hands at $1.2827, flat on the day and within sight of this week's high of $1.2856 hit on Wednesday.
Positive news on the U.S. economy and rises in global shares have tended to help the euro and higher-yielding currencies more than the dollar in recent months, as investors increasingly see the greenback as a funding currency for investments on expectations of a prolonged period of near zero rates in the U.S.
The next target for the euro was around $1.2873 -- a 38.2 percent Fibonacci retracement of its fall from its August peak around $1.3334 to its August low near $1.2588. The target after that would be $1.2923, touched on August 18.
Pending U.S. home resales rose unexpectedly in July and new claims for unemployment insurance fell for a second straight week, which, together with upbeat manufacturing data on Wednesday, eased the gloom over the economy.
Dollar/yen stood at 84.25 yen per dollar, down slightly on the day and not far from the 15-year low of 83.58 yen hit late last month.
There are said to be some stop-losses and option triggers around 83.50. So it could get ugly if the dollar/yen hits that level after the payroll data, said Teppei Ino, an analyst at Mitsubishi-Tokyo UFJ Bank.
While the yen's persistent strength -- which comes despite Japan's own economic problems such as low growth and high debt -- may suggest investors are positioned for poor U.S. payroll figures, there are also some signs of opposite moves to prepare for positive surprises in the data.
Either way, the yen could trim its gains toward the end of New York trade as some players are likely to book profits on the Japanese currency's rise ahead of a three-day weekend in the U.S., traders said. U.S. financial markets will be closed on Monday for the Labor day holiday.
There has been some demand for dollar/yen calls with strike prices around 85.50-86.00 yen this week, which could be attempts to gain on a possible jump after the jobs data, or even in the event of intervention.
Reflecting these moves, one-week dollar risk reversals show the price of dollar calls is on par with, or slightly higher than, dollar puts.
That is unusual -- it has happened only once in the last two years -- as dollar/yen risk reversals are almost always skewed in favor of dollar puts because of Japanese exporters' constant needs to hedge against falls in the dollar.
Traders are also getting cautious about bidding the yen too much after Japanese ministers said they could take action -- normally a code word for intervention -- to stem the yen's strength since late last week.
But many traders have doubts over whether Tokyo will step into the forex market now given that Tokyo could have trouble convincing other G7 members about the need to intervene at a time when they are calling on China to make the yuan more flexible to ease global imbalances.
A sharp drop in dollar/yen, such as 1 to 2 percent or more in a single day toward the 80 yen level and below, is seen as the most likely scenario that would prompt Japan to stick its neck out and buy dollars.
Thus many traders expect the market to test the willingness of Japan to intervene, especially if the U.S. payrolls data comes in weaker than expected.
Economists expect a decline of 100,000 jobs overall, and a rise of 41,000 private-sector jobs in August.
While better-than-expected figures would lift investor risk appetite, some market players also say they could diminish expectations of more easing by the Federal Reserve, possibly boosting U.S. bond yields. That in turn could help the dollar.
The Swiss franc traded at 1.2985 franc per euro, not far from a record high of 1.2850 hit earlier this week. The Swiss central bank intervened in markets earlier this year to curb the franc's rise but has had little success.
Against the dollar, the Swiss currency stood at 1.0125 franc per dollar, near a nine-month peak of 1.0065 marked earlier in the week.
The Australian dollar, which boasts the highest yield among major currencies, traded at $0.9081, after having risen $0.9122 on Thursday, its highest in about three weeks.
(Additional reporting by Rika Otsuka; Editing by Joseph Radford and Chris Gallagher)