The dollar index fell to 98.816, shedding about 0.9pc after hitting a 2-1/2-year high this week. It is down 0.3pc on the week.
"Should today's NFP report confirm that the U.S. economy is losing its domestic demand strength, dollar weakness experienced from Monday's high could broaden out, finding its best expression in short dollar/yen and long euro/dollar," Morgan Stanley strategists said in a note.
The euro, which had been dogged by concerns Germany could slip into a recession, rose 0.1pc to $1.0970, extending its recovery from a near 2-1/2-year low of $1.0879 set on Tuesday.
A survey from the U.S. Institute for Supply Management (ISM) showed its non-manufacturing activity index falling to 52.6 in September, the lowest since August 2016, and far below expectations of 55.1, from 56.4 in August.
Coming on the heels of a similar survey on Tuesday on manufacturing showing activity plunging to more than 10-year lows, the weak data increased fears of a U.S. recession.
The U.S. service sector, backed by firm U.S. domestic consumption, has been one of few bright spots in the global economy as the manufacturing sector worldwide has been knocked by the protracted U.S-China trade war.
That does not bode well for the upcoming all-important U.S. jobs data on Friday, said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank, noting the employment component in the ISM has had a meaningful correlation with the payrolls data.
The median economists' forecast polled by Reuters is for a rise of 145,000 in September, a tad below the average over the last 12 months around 173,000.
"A weak figure could cause the Fed to change its characterization of the labor market as 'strong,' which would give them more reason to ease," said Marshall Gittler, chief strategist at ACLS Global.
Elsewhere, the Australian dollar and the New Zealand dollar held near the day's highs thanks to broad dollar strength.