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The waning prospect of an imminent military strike in Syria supported sentiment but traders fear a changing outlook on Fed action could spark some near-term volatility.
"The Fed is still likely to taper next week or in October but the trajectory of the tapering that we had assumed can no longer be taken for granted," said Ned Rumpeltin, head of G10 FX strategy at Standard Chartered Bank.
Last week's worse-than-expected US jobs numbers and some soft data on the housing market have caused something of a scale back in forecasts of the size of the likely Fed tapering most still expect to be announced at next week's Fed policy meeting.
A Reuters poll of economists on Monday found most now see the Fed trimming its $85 billion spending on asset purchases by about $10 billion. This was down from $15 billion in a poll before the jobs report.
The shifting views have undermined the dollar which dropped to two-week lows against a basket of major currencies on Thursday and have seen US Treasury yields dip.
The weakened dollar saw the euro push hold around $1.3309 as it recovers from the selloff seen last week last week following the European Central Bank's commitment to maintain loose monetary policy despite signs of recovery in the euro area.
While the dollar bought 99.50 yen, down about 0.4%. It has moved away from Wednesday's high of 100.60 yen, which was the highest since July 22, according to Reuters data.
Asian relief
Reduced expectations of the degree of Fed tapering have eased pressure on emerging market currencies that recently sold off amid fears of capital outflows. That bought some time for the central banks of Indonesia, the Philippines and South Korea, which all have to consider the impact of eventual Fed stimulus reduction.
MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.2% while the stronger yen and downbeat economic data helped push Japan's Nikkei stock average down 0.3%.
Europe's broad FTSE Eurofirst 300 index was up 0.1% in early trade at 1,248.33 points, putting it within touching distance of a 5-year high of 1,258.09 points reached in late May this year
In fixed income markets the focus was on an Italian auction of up to 7.5 billion euros of new debt which comes against a volatile domestic political backdrop.
A cross-party Senate committee in Italy is due to resume a hearing later on whether to bar Silvio Berlusconi from political life as the former prime minister's political allies threaten to pull out the coalition government if its does.
No decision by the Senate is expected until mid-October leaving investors facing considerable uncertainty over the ability if the government to implement much needed economic reforms and manage its budget deficit.
On the commodities front, copper slipped 0.3% to $7,148.75 a tonne, on subdued interest ahead of next week's Fed decision. An improved outlook for China's economy and the reduced risk of a strike on Syria have helped bring copper prices off the three-year lows plumbed in late June.
Gold skidded 0.5% to $1,358.06 an ounce, after hitting a low of $1,354.10 - its weakest since August 20 - as a US strike on Syria looked less likely.
Oil was slightly higher, with Brent crude adding about 0.1% to $111.61 as diplomatic efforts to place Syria's chemical weapons under international control stepped up.
US Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov are due to meet in Geneva on Thursday to try to agree on a strategy to eliminate the chemical arsenal.
