The euro slipped on Thursday after Europe's biggest economy, Germany, was confirmed to be in recession, while the dollar hit a two-month high, benefiting from safe-haven demand as worries rose about a US default.
The latest concerns were raised by Fitch, which put the United States' "AAA" debt rating on negative note after lawmakers failed to agree to raise the $31.4 trillion debt ceiling.
The US dollar, on the other hand, got a boost as a safe haven with a week to go before the end of the debt ceiling negotiations, when the Treasury Department has warned that it will not be able to pay all its bills.
There are signs of a growing economic recession in Europe, which has caused the euro to trade lower against the dollar.
The latest sign of weakness comes from Germany, where the economy contracted slightly in the first quarter, and is also in recession after negative growth in the fourth quarter of 2022.
The US dollar index, which measures the currency against six major currencies including the euro, strengthened by 0.3% to 104.16, its highest since March 17.
The euro slipped about 0.2%, enough to refresh a two-month low of $1.0715. Sterling slipped 0.1%, after hitting its weakest level since April 3 at $1.2332.
U.S. currency has also been supported by reduced bets for a Federal Reserve rate cut this year, with the economy proving resilient to the effects of the central bank's aggressive tightening campaign so far.
Traders have cut expectations for a Fed rate cut this year to just a quarter point in December, from as many as 75 basis points previously.
Ken Cheung, chief Asia FX strategist at Mizuho Bank, expects the yuan to remain under pressure until Chinese economic data shows improvement or the People's Bank of China takes policy action to stabilize the currency market.
The Australian dollar has been feeling the effects of China's economic weakness due to trade ties, falling to a 6 1/2-month low of $0.6520.
