The dollar gained against the euro on Friday as traders viewed the latest batch of US data as positive for the currency ahead of next week's non-farm payrolls report.
The Chicago purchasing management index, which gives a view of US Midwest business activity, bounced to 64.7 in July from 56.4 in June, giving the dollar a much-needed shot in the arm. Analysts were expecting a reading of 59.0.
Earlier in the day, the dollar fell after news that US second-quarter gross domestic product expanded at a 3.0 percent pace after an upwardly revised 4.5 percent clip at the start of the year. Economists had forecast growth of 3.6 percent.
"The net result of today's economic news is (still) dollar-positive despite a disappointment in the headline GDP figure," said Michael Woolfolk, senior currency strategist, at Bank of New York.
"The market was fully expecting weakness in second-quarter GDP, but first-quarter GDP was stronger than expected and third quarter appears to be starting out on the right foot. Strong consumer confidence and PMI for July reported this week gives dollar bulls reason to be optimistic about next Friday's payrolls report," he added.
By late afternoon in New York, the euro fell against the dollar to $1.2020 after touching session highs around $1.2120. The dollar was down 0.7 percent against the yen at 111.27 yen.
Against the Swiss franc, the dollar was steady at 1.2814 francs. Sterling rose to $1.8213.
The non-farm payrolls report for July is due next Friday, with markets expecting 220,000 new jobs, according to Reuters data.
A recovery in payrolls growth in July following the softer numbers in June will restimulate market speculation on the pace of rate hikes and provide fuel for an extended summer rally for the dollar, analysts say.
"Market estimates for non-farm payrolls have been rising. This should help squeeze some of the remaining dollar shorts," said Meg Brown, currency strategist at HSBC in New York.
Short positions are effectively bets that a specific currency will depreciate.
Before the release of the Chicago PMI report, the dollar traded steady after the University of Michigan's US consumer confidence survey showed an increase in late July to give a final reading of 96.7, up from 95.6 in June. Analysts had forecast a reading of 96.5.
Over the past 10 days, the US currency had gained about 4 cents versus the euro and some 4 yen as investors cheered an upbeat assessment of the US economy and bet on gradual increases in US interest rates after Federal Reserve Chairman Alan Greenspan said recent economic softness was transitory.
On Thursday, the market's optimism about the US economy pushed the dollar up to a six-week high around $1.1990 per euro and a two-month peak of 112.48 yen.
Investors were also eyeing surging oil prices, which hit record peaks on Friday.
But they took a neutral view on their impact on the US interest rate outlook.
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