Investors took heart from Wednesday's Federal Reserve statement pointing to an improved U.S. economic outlook This fuelled strong gains in equities, with European shares up 2 percent, which boosted the euro while the Australian dollar -- which is typically seen as higher risk -- jumped, hitting a six-month high against its U.S. counterpart.
The optimistic tone of the Fed's statement offset earlier news that the U.S. economy contracted sharply in the first quarter, keeping intact a broad improvement in sentiment and pushing the dollar to a 3-week low against a currency basket.
"Markets are still very much in a risk appetite mood and this looks set to continue for the time being," SEB currency strategist in Stockholm Carl Hammer said.
The dollar came off earlier lows later in the session, however, as traders said some investors opted to buy the currency at more attractive levels, particularly given that several risk factors continue to lurk in the background.
The risk of the outbreak hampering the global economic recovery increased as the World Health Organisation said a pandemic was imminent while reports emerged of an imminent bankruptcy filing by Chrysler.
Market players also remain wary ahead of Monday's release of the U.S. stress tests on banks. At 1206 GMT, the dollar index .DXY, which tracks the U.S. currency's performance against the nation's biggest trading partners, fell 0.2 percent to 84.455, having fallen as low as 83.885, its lowest since early April.
The euro gained 0.1 percent against the U.S. currency to $1.3280
