The dollar was on the back foot on Friday after taking a tumble following a surprise contraction in US manufacturing, which cast some doubts on the strength of US economic growth ahead of closely-watched employment data later in the day.
The Institute for Supply Management (ISM) said its index of national factory activity fell 3.2 percentage points to a reading of 49.4, the first contraction since February.
The result was a setback for dollar bulls, who had bet solid US data this week would cement the case for an early rate hike by the Federal Reserve.
The euro held firm in Asia at $1.1195, maintaining Thursday's 0.35 per cent gains.
Its next target is seen around $1.1215, where it has its 100-day moving average as well as 38.2 per cent retracement of the decline from its Aug 18 peak of $1.1366 to Wednesday's three-week low of $1.1123.
The dollar slipped to 103.35 yen after having climbed to as high as 104.00 yen, its highest level in over a month, on Thursday.
The dollar index slipped to 95.664, though it is still above its low so far this week of 95.479, with its fate seen hinging on the looming jobs data.
Employers are expected to have added 180,000 jobs in August, according to the median estimate of 91 economists polled by Reuters.
“While a weak ISM reading raises question about a rate hike in September, considering that the US economic recovery is in its eighth year, it's unlikely that conditions will become favourable for rate hikes even if the Fed waits longer,” said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
“I would think markets will gradually price in a rate hike unless the payrolls come below 150,000,” he added.
US Fed Funds rate futures are only pricing in just over 20 percent chance of a tightening at the Fed's next meeting on Sept 21-22, despite recent comments from Fed officials suggesting a hike was imminent.
Cleveland Fed President Loretta Mester, a voting member on the Fed's policy-setting committee this year, was the latest to join the chorus on Thursday, saying the U.S. labour market is at full strength and the Fed needs to be on a path of gradual interest rate increases.
“The Fed could have raised rates already if it is just focusing on the employment and wages. They will try to gauge until the last minute whether financial markets can withstand a rate hike,” said Makoto Noji, senior strategist at SMBC Nikko Securities.
Elsewhere, the British pound jumped to a one-month high of $1.3318 on Thursday and was last at $1.3280 after data showed the British manufacturing sector staged one of its sharpest rebounds on record in August.
The Markit/CIPS Purchasing Managers' Index (PMI), a closely watched gauge of factory activity, jumped to a 10-month high of 53.3 in August, recovering from the three-year low it hit in July after Britain's June 23 vote to leave the European Union.
The surprise strength could prompt the Bank of England to rethink the need to cut interest rates again if other surveys confirm the trend.
Sterling also hit one-month highs of 83.885 pence per euro and 138.00 yen on Thursday. It last stood at 84.29 and 137.30 respectively.