The euro, on the other hand, gained versus an overall weak dollar, even as European Central Bank President Christine Lagarde warned about a renewed surge in COVID-19 infections and the prospect of prolonged restrictions that could challenge the region's economic outlook.

The ECB, which kept interest rates steady on Thursday, also pledged to provide more support for the economy if needed.

The FX market showed little reaction to Lagarde's comments, as market participants continued to focus on what seemed like an improving global economic outlook and a nearly $2 trillion U.S stimulus package proposed by new Democratic President Joe Biden's administration.

On Thursday, U.S. data showed an economy slowly getting some traction, with slightly better-than-expected initial jobless claims, upbeat housing starts data, and a higher factory index for the mid-Atlantic region.

"Across asset markets, optimism about growth is high and I think it's appropriate," said Anujeet Sareen, global fixed income portfolio manager at Brandywine Global Investment Management in Philadelphia.

"We see the dollar going lower because global growth will get better, the trade balance is deteriorating, and the Federal Reserve is going to keep its easy monetary policy," he added.

The dollar typically loses out against its major peers in times of global expansions, when investors are inclined to take on more risk.

In late afternoon trading, the dollar index fell 0.3% to 90.103, after touching a nearly one-month high of 90.956 on Monday.

The euro gained 0.5% against the dollar to $1.2163 , rising 0.5% as well versus the yen to 125.92 yen.

That said, TD Securities global head of FX strategy Mark McCormick noted that there is a brewing shift for a lower euro against the dollar because of delays in the vaccinations in the euro zone compared with that of the United States.

"These delays will result in a slower timeline to herd immunity. The downside for markets is that it's also likely to have an immediate impact on the mobility and growth trends," McCormick wrote in a research note.

The greenback also dropped versus currencies tied to commodity prices such as the Australian, Canadian and New Zealand dollars.

Sterling likewise set a fresh 2-1/2-year high against the dollar and a new eight-month peak against the euro on hopes Britain's brisk pace of COVID-19 vaccinations would lead to a relatively quicker rebound in economic growth.

Many analysts overall expect the dollar to continue its downtrend, which saw it lose nearly 7% in 2020.

In the cryptocurrency market, bitcoin slumped 9.1% to $32,247, retreating further from record highs, with traders citing fears of tighter U.S. regulation.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis, Hugh Lawson and Nick Zieminski)

By Gertrude Chavez-Dreyfuss