The dollar fell to two-month lows on Friday after data showed that US job creation was lower than forecast in July, leading investors to all but rule out another rate hike from the Federal Reserve next week.
The chances of the Federal Open Market Committee raising rates for an 18th consecutive time on Tuesday fell to just 16 percent after the government reported US employers added 113,00 workers to payrolls last month, while the unemployment rate rose.
After a series of data that pointed to slower growth and rising inflation, many had viewed Friday's jobs report as the deciding factor for an August rate rise to 5.50 percent, which would have helped the dollar maintain its yield advantage.
"The combination of a small payroll gain of 113,000 and a rise in the unemployment rate to 4.8 percent, a six-month high, is clearly negative news for the dollar ahead of next week's FOMC," said Peter Frank, senior currency strategist at ABN AMRO in Chicago.
By late afternoon in New York, the euro was up nearly 0.6 percent at $1.2875, having eased back from a two-month high of $1.2909.
The dollar also fell to two month-low against a basket of currencies, with the dollar index sliding 0.53 percent to 84.59, while sterling rose to a 15-month high above $1.91, and was last up over 1 percent at $1.9081. Sterling was on track to post its biggest weekly gain against the dollar since the first week of January.
The dollar fell 0.5 percent against the yen to 114.41 yen and 0.6 percent against the Swiss franc to 1.2227 francs.
Several analysts and traders said it is only a matter of time before the euro breaks above the psychologically important $1.30 level, which has not been pierced since April 2005.
The employment report was the last major piece of economic data before the US central bank's Federal Open Market Committee meets on August 8 to decide whether to continue its two-year-long series of quarter-percentage-point rate rises.
Fed fund futures were pricing in a 16 percent chance the Fed will raise rates, down from about 43 percent before the data and 90 percent two weeks ago.
"The market now expects the Fed to remain on hold, which is obviously a significant change. But the dollar has already moved a good deal lower," said Robert Lynch, head of G10 FX strategy Americas at HSBC in New York.
"So frankly, ahead of that event, the declines in the currency are more likely to be limited because the interest rate environment now reflects that anticipated pause from the Fed," he said.
In Canada, the country's employment report on Friday showed fewer jobs created than forecast, which analysts said was another sign of weakness that supports the Bank of Canada's decision not to raise interest rates. As a result, the Canadian dollar fell, with the US unit up nearly 0.3 percent at C$1.1279.
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