NEW YORK ? The dollar held in a narrow range Thursday as a mixed report on US jobless claims muddled the outlook for an improvement in the labor market and traders mulled prospects for a Federal Reserve rate hike.

The euro was fetching $1.4732 at 2200 GMT against 1.4726 late Wednesday in New York.

The dollar meanwhile was trading at 88.25 yen, up from 87.88 on Wednesday.

The markets digested a report showing a surprise drop in the US trade deficit with a jump in exports offsetting a smaller rise in imports. The data suggested trade flows are growing, helping the global economic recovery.

"The overall message of the last few months of data remains one of recovery from the Great Recession, both in the US and in its major trading partners," said Christopher Cornell of Moody's Economy.com.

A separate report showed new US claims for unemployment benefits rose in the past week, although holding below the level of 500,000.

New unemployment claims in the week ending December 5 climbed to 474,000 from the prior week's unrevised 457,000, the Labor Department said. But the four-week average and continuing claims continued their trend lower.

"The drop in continuing jobless claims suggests that hiring is starting to increase," said Michael Malpede at Easy Forex.

"US equities rallied and the dollar weakened after the report... today's improvement in risk appetite generated selective selling of the dollar mainly against the high-yield currencies."

Eugene Lightner at PNC Bank said market participants were watching for signs of an interest rate policy change from the Federal Reserve, which is unlikely without an improvement in the job market.

"The dollar's current strengthening is largely due to expectations that as the US job picture improves so will the need for the Fed to increase interest rates," he said.

In other action, the Bank of England said it was keeping its key interest rate at an all-time low level of 0.50 percent and maintaining its credit-easing plans in the face of record British recession.

Boris Schlossberg at Global Forex Trading said sterling "has been weighed down by the dilutive aspects of the (quantitative easing) program" of pumping money into the financial system,

While Bank of England officials would like to pull back, to allow the economy to recover on its own, "the country continues to face serious structural problems with regard to its fiscal and current account deficits that are likely to persist for all of 2010," Schlossberg added.

In late New York trade, the dollar stood at 1.0256 Swiss francs from 1.0261 Wednesday.

The pound was at $1.6276 after 1.6259.