The dollar rose broadly on Thursday ahead of the long Easter holiday weekend, helped by more evidence of a firming US labour market, traders said.
But very thin trading volumes exaggerated the climb of the dollar, which remained potentially vulnerable to the volatile situation in Iraq and global security jitters, analysts said.
Weak German industrial production and a report on Japanese investors' weekly purchases of US assets gave the dollar an initial boost, as did position-squaring, traders said.
The euro then extended its losses from $1.21 to a session low under $1.2070 after a report that first-time US unemployment claims fell to 328,000 in the week to April 3, well below forecasts of a smaller drop to 340,000.
"It's a good number. It shows continued improvement in the US labour force ... and should bode well for the whole economic picture and strengthen the buck," said Tim Mazanec, senior currency strategist with Investors Bank & Trust in Boston.
Sterling fell after the Bank of England left interest rates at 4.0 percent. Analysts had been divided over whether the BOE would choose to raise rates this month or wait until May.
Analysts said price moves were prone to exaggeration in a thin market as players hunkered down ahead of a four-day weekend in many parts of Europe and a three-day US break.
"I think this is position-squaring. Heading into the long holiday weekend the market was long euros and short dollars and that is unwinding because of a thin market," said Russell LaScala, chief spot dealer at Deutsche Bank in New York.
In late New York trade, the euro was at $1.2085, a loss of 0.7 percent, according to Reuters data.
This reversed gains made in Asian trading when the euro hit the week's highs around $1.2220.
Earlier in the global day, German industrial output fell 0.7 percent in February, unexpectedly posting its first drop in five months and contributing to euro selling, analysts said.
The euro has been undermined in recent weeks by growing speculation the European Central Bank might cut interest rates from 2 percent to boost a European flagging recovery.
Sterling traded at $1.8335, a loss of 0.4 percent, but up from the session low of $1.8285.
The dollar rose to 1.2818 Swiss francs, a gain of 0.4 percent on the day.
The US dollar lunged steeply higher against the Canadian dollar, up 1.4 percent at C$1.3271.
The dollar rose over 1 percent above 106.40 yen as stop loss orders were triggered, before trading at 106.25 yen late in New York.
"There was some stop-loss buying above 106.30 yen that moved it up. Overall, this is the result simply of market positioning within an illiquid trading environment," said Patrick Brodie, trader at SMBC in New York.