The dollar traded lower against most other major currencies Thursday, playing off after economic data that showed a surge in jobless claims and a decline in demand for U.S. durable goods.
Japan's yen, meanwhile, slipped to a three-month low against the greenback.
The dollar index which measures the currency against a trade-weighted basket of six global counterparts, fell to 87.54 from 87.880 in North American action late Wednesday.
The euro gained 0.3% to $1.2758, while the British pound gained 1% to $1.4349.
"From here, equity markets will continue to drive foreign-exchange direction, though dealers will pay attention to any political/central-bank news on bank bailouts and stimulus programs," said analysts at Action Economics.
On Wall Street, U.S. stocks rose, with the Dow Jones Industrial Average (DJIA:
, , ) gaining nearly 1% in the early action.
In economic news, first-time applications for state unemployment benefits rose 36,000 last week to stand at a seasonally adjusted 667,000 -- the highest since October 1982 and up 86% from last year. Read more.
Separately, U.S. orders for durable goods fell 5.2% in January, Commerce Department data showed. See full story.
Yen falls
The yen continued its retreat against the U.S. dollar and other major currencies, dragged down as fears about Japan's economic outlook outweighed the currency's former status as the ultimate safe-haven currency.
One dollar fetched 97.85 yen in recent dealings, up from 97.38 yen in North American trading late Wednesday. The greenback moved as high as 98.18 yen in earlier action, reclaiming the highest level seen since November.
Data showed Japanese investors are turning their attention abroad to boost purchases in foreign bond markets, economists said.
Increasingly weak economic data and a sharply rising trade deficit underscore risks for the yen, said Neil Mellor, currency strategist at Bank of New York Mellon. Read more on Japan.
Also, with Japan's Cabinet Office forecasting an output gap of 4.3% for gross domestic product -- what would be the highest in seven years -- "it is clear that a fresh era of deflation looms," Mellor said in a research note.
"Fears abound, therefore, that the Bank of Japan -- badgered by the Ministry of Finance -- may itself feel obliged to resort to the printing press," he said.
Mellor said technical patterns point to a near-term test of the 102-yen level in dollar action, with resistance seen at 98.93 yen, which marks the 50% retracement from the August high to the December low.
Euro, pound gain, unmoved by data doldrums
For its part, the euro rose against both the dollar and the Japanese yen despite gloomy economic data.
Data released by Germany's statistical agency said unemployment rose by 40,000 in February, taking the unemployment rate to a nine-month high of 7.9% in the largest European economy.
While German unemployment hasn't risen as sharply as in other euro-zone countries, surveys of hiring intentions show much worse is yet to come, said Ben May, an economist at Capital Economics.
Meanwhile, data from the European Central Bank showed that annual private-sector lending growth slowed to a 5% rate in January from 5.8% in December, marking the slowest pace of expansion in more than five years and underscoring that "the credit crunch is tightening its grip on the wider economy," May said.
Also Thursday, a gauge of economic sentiment across the euro zone fell to a new record low in February, the European Commission reported. The sentiment indicator declined from 67.2 in January to 65.4 this month, the lowest reading since the indicator was launched in January 1985.
Gains in the British pound rose came after Royal Bank of Scotland (UK:RBS: news , chart , profile ) said the U.K. government has agreed to insure 325 billion pounds ($462 billion) of its assets as the bank unveiled a 24.1 billion pound net loss for 2008 -- the biggest ever by a British company.
The red ink was less, however, than the 28 billion pounds it had warned it could lose in January.
Meanwhile, British house prices continued to slide in February, down an average 1.8% on the month, according to mortgage lender Nationwide. See full story.
