In carry trades, market players use low-yielding currencies such as the yen to finance purchases of assets offering higher returns. Those trades are more attractive when stock markets rise, supporting investor risk appetite.
Investors also took small comfort from a financial package U.S. President George W. Bush is expected to propose on Friday which is aimed at cushioning the economy from a downturn.
U.S. Treasury Secretary Henry Paulson on Friday said that there was an urgent need for a fiscal stimulus program to give the slowing economy a boost but said it was not in danger of stalling.
Early in the New York session, the dollar rose 0.7 percent to 107.49 yen. The euro was up 0.8 percent against the yen at 157.75 yen.
Investors cautioned that the dollar's problems are not over yet with the longer-term outlook for the U.S. economy remaining bleak.
Helping lift some of the gloom surrounding the U.S. economy, Bush's plan is to introduce tax rebates for families and breaks for businesses that could cost up to $150 billion.
Federal Reserve Chairman Ben Bernanke, in testimony before the House of Representatives' Budget Committee on Thursday, also backed the idea that the struggling economy needed rescue.
Bernanke reiterated a down assessment of the U.S. economy that he gave last week, which investors saw as a signal that the U.S. central bank was willing to cut the benchmark federal funds rate aggressively from the current 4.25 percent this month.