The Bloomberg Dollar Index advanced on Thursday as mounting evidence of a cooling labor market reinforced expectations for Federal Reserve rate cuts this month. Traders are positioning ahead of Friday's crucial US employment report, anticipating heightened market volatility.

The Bloomberg Dollar Index gained 0.1%.

Dollar overnight implied volatility climbed to its highest level since early July, while EUR/USD one-day volatility also increased.

Thursday's data revealed that US initial jobless claims rose to their highest level since June.

Market attention is now focused on Friday's nonfarm payrolls report, which is expected to provide further confirmation of slowing hiring and show an uptick in unemployment rates.

"The threshold for markets to price out a September rate cut would be quite high," said TD Securities strategist Jayati Bharadwaj. "Markets would need to see a significant rise in unemployment before they start pricing in a 50 basis point cut possibility, which would create notable pressure on the dollar."

"But if it comes in significantly above expectations, we might see some volatility," commented Jefferies global FX head Brad Bechtel. "If it's below expectations, it would only confirm the September rate cut expectations already priced by markets, but if significantly below expectations, it might trigger expectations for a 50 basis point cut."

Citigroup recommended selling the dollar and Canadian dollar ahead of Friday's release of August employment data for both the US and Canada, expecting weaker-than-anticipated figures that would boost rate cut expectations.

EUR/USD declined 0.1% to 1.1651;

USD/JPY rose 0.3% to 148.51;

GBP/USD fell 0.1% to 1.3436;

AUD/USD dropped 0.4% to 0.6517.