By Sinéad Carew

The U.S. dollar lost ground as equities gained in volatile trading on Thursday with investors betting on the prospects for a new U.S. stimulus package to boost the coronavirus-battered economy after data showed rising unemployment claims.

Currencies and stocks reversed directions as the day wore on as traders latched on to hopes that stalled stimulus talks could resume between House of Representatives Speaker Nancy Pelosi, a Democrat and U.S. Treasury Secretary Steven Mnuchin and Democrats prepared a new stimulus plan.

House Ways and Means Committee Chairman Richard Neal said top Democrats in the chamber were working on a $2.2 trillion coronavirus stimulus package that lawmakers could vote on as soon as next week.

The dollar had risen while stocks fell in morning trade after the U.S. Labor Department said initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 870,000 for the week ended Sept. 19, compared with 866,000 in the prior week and economist expectations for 840,000 applications.

"We had a very disappointing jobless claims number that emphasizes that more needs to be done. The recovery is stalling, and you're going to see Congress will feel more pressure the longer the recovery stalls," said Edward Moya, senior market analyst with OANDA. On top of this, he said, "we've had a few days of (Federal Reserve Chair) Powell beating the drum that we need more fiscal stimulus."

Federal Reserve policymakers, including Powell, have made multiple public appearances this week calling on the U.S. government to provide more fiscal support.

But some currency experts were skeptical about headlines suggesting progress on stimulus as the Washington talks have seen so many setbacks over the summer.

"The market's put two plus two together and made five out of it, but if you were really to pressure some of those traders and say do you really believe it, they'd back away from it." said Amo Sahota, director at Klarity FX, a San Francisco company which advises companies on currency. "We really think its more of a breathing space we're seeing right now, a small respite."

The dollar index <=USD>, which measures the greenback against a basket of major currencies, was last down 0.01% at 94.373 after earlier rising to 94.60, its highest level since July 24. The Euro was up slightly against the dollar at $1.1664.

Federal Reserve officials also told investors this week that they will keep monetary policy easy for years to allow unemployment to fall, emphasizing that interest rates will stay near zero until inflation gets to 2%.

Boston Federal Reserve Bank President Eric Rosengren said on Thursday that the U.S. economy was far from maximum employment or 2% inflation, and that interest rates would stay low for several years.

The Norwegian and the Swedish crown came under pressure. The dollar was last up 1.07% against the Swedish crown after earlier touching its highest level against the currency since July 14. The greenback was last up 0.0.22% against the Norwegian crown after hitting its highest since July 1 earlier.

The British pound was last up 0.11% against the greenback. It had recouped earlier losses after the country's finance minister, Rishi Sunak, announced a new job support program, but said the government wouldn't save every job.

EU health officials warned on Thursday that a surge in COVID-19 cases in Europe risks becoming a deadly double epidemic of flu and coronavirus infections as they urged Europeans and their governments not to let their guard down.

The Aussie dollar pared some losses but was last down 0.38% in its fifth straight day of losses against the dollar after earlier hitting its weakest level since July 21.

(Additional reporting by Gertrude Chavez-Dreyfuss in New York, Saikat Chatterjee in London; Editing by Kirsten Donovan, Bernadette Baum and Jonathan Oatis)