NEW YORK (MarketWatch) -- The U.S. dollar gained on Friday as traders returned to their desks after the New Year's holiday, but the greenback later gave back some of those gains after a surprise drop in a U.S. manufacturing survey. The euro fell to $1.3975 from $1.4043 Thursday, after earlier dropping to $1.3838 as a European purchasing manager's index fell to its lowest reading in the survey's history. The dollar index which tracks the currency against a basket of six counterparts, was little changed at 81.26 from 81.17 on Thursday in North America. Although currency markets never close, most trading firms sent their staff home for Thursday's New Year's Day holiday. Taking some of the steam out of the dollar's rise, the U.S. Institute for Supply Management said its index of manufacturing activity declined to 32.4 in December, from 36.2 in the previous month, the fifth monthly drop and the lowest in more than 20 years. Readings under 50 indicate contraction in the industry. See ISM story. Some economists expected the index to read 35.4. The report echoed a gloomy European manufacturing reading, which initially supported the U.S. dollar. In Europe, the purchasing managers' index showed manufacturing activity fell for a seventh month, to 33.9 in December from 35.6 in November. The reading was the lowest in the survey's history. Home prices in the U.K. continued to slide last month while that country's purchasing managers' index edged higher but continued to signal a severe downturn. The British pound fell 1.5% to $1.4516. "Softer European and U.K. data, along with softer oil prices appear to have helped the greenback," analysts at Action Economics said. Crude-oil futures dropped Friday as worries returned that a recessionary economy will cut into energy demand. Crude for February delivery fell 5.3% to $42.22 a barrel in early electronic trading on Globex. See oil story.

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