The dollar rose on Thursday, boosted by better-then-expected jobless claims data, but support remained fragile as record high oil prices stoked worries about the health of the U.S. economy.
The U.S. currency got a modest boost against the euro and yen after data showed Americans filed fewer applications for first-time jobless benefits than expected in the latest week.
That helped it reverse some losses suffered after the Federal Reserve on Wednesday downgraded its 2008 growth forecast, and some analysts said it offered a glimmer of optimism for the overall May employment picture.
"The market may begin to fret less over the May non-farm payrolls report," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.
But he added that "we are not going to get too much follow through though unless oil prices come off and stocks turn sharply higher."
The euro was last trading down 0.3 percent at $1.5738 <EUR=>, off a fresh one-month high of $1.5814, while the dollar rose 0.7 percent to 103.70 yen <JPY=>.
Oil jumped above the $135 a barrel mark CLc1, bringing its gains for the year to date to 40 percent and feeding worries the United States is sliding into stagflation -- a vicious combination of rising inflation and tepid growth.
And minutes from the Fed's April policy meeting on Wednesday showed officials lifted their inflation forecast, suggesting the Fed's move to reduce interest rates to 2 percent last month was likely to be its last reduction for a while.
"People are of two minds about what oil prices will do for the dollar," said Chris Turner, head of FX strategy at ING.
On the one hand, it can hurt U.S. growth and prompt central banks to shift reserve holdings out of dollars.
But fears of stagflation "can also turn the focus of the Fed to deprioritize growth and focus on inflation, increasing the prospects of higher rates and a dollar supportive yield curve."
Persistently high inflation and a rise in German business confidence also has increased expectations that the European Central Bank next interest rate move may be an increase from the current 4 percent.
Elsewhere, the dollar rose 0.3 percent against the Canadian dollar to C$0.9861 <CAD=> after softer-than-expected Canadian retail sales data, though traders said high oil prices should limit the greenback's upside and recommended selling it on rises above C$0.99.
The biggest mover among the majors was the New Zealand dollar, which jumped more than 1 percent to US$0.7895 <NZD=> thanks to a bigger than expected $8.2 billion cut in personal taxes in the 2008-09 budget [ID:nWEL285158].
The stimulus package left investors thinking the Reserve Bank of New Zealand may not have to cut interest rates.
Sterling rose to session highs of $1.9796 <GBP=>, after UK retail sales data came in stronger than expected, slightly easing concerns on the health of the UK economy.