The U.S. dollar declined against its major counterparts in the European session on Thursday, as the U.S. yield curve inverted for the second consecutive day, with the yield on 10-year U.S. Treasury bonds falling below 2-year yields amid fears over economic downturn.

The benchmark yield on 10-year note fell 1.53 percent, while that of 2-year equivalent was down by 1.51 percent. Yields move inversely to bond prices.

The spread between the 2-year note and the 10-year note steepened further, stocking fears over an upcoming recession.

The yield on 30-year note slumped to a record low of 1.95 percent.

The sell-off in European shares intensified after China threatened retaliation against U.S. imposing duties on its goods from September 1 date.

China announced that it would take unspecified "necessary countermeasures, if Washington imposes 10 percent tariffs on additional $300 billion of Chinese imports on the proposed date.

Amid heightened trade worries, analysts believe that the Federal Reserve is likely to cut short-term interest rates to support the economy.

Investors await reports on weekly jobless claims, retail sales, industrial production, regional manufacturing activity, business inventories and homebuilder confidence for more direction.

The currency held steady against its major counterparts in the Asian session, excepting the euro.

The greenback dropped to 105.70 against the yen, from a 2-day high of 106.77 it touched at 2:30 am ET. The greenback is seen finding support around the 102.00 level.

Final data from the Ministry of Economy, Trade and Industry showed that Japan's industrial production declined less than initially estimated in June.

Industrial production fell 3.3 percent month-on-month compared to the initial estimate of 3.6 percent decrease.

The greenback edged lower to 0.9722 against the franc, after rising to 0.9757 at 2:30 am ET. The greenback is likely to challenge support around the 0.96 level.

The U.S. currency depreciated to a 6-day low of 1.2114 against the pound from Wednesday's closing value of 1.2053. If the greenback extends drop, 1.23 is possibly seen as its support level.

Data from the Office for National Statistics showed that U.K. retail sales grew unexpectedly in July.

The retail sales volume grew 0.2 percent in July from June when sales advanced 0.9 percent. Sales were forecast to drop 0.2 percent.

The greenback that closed Wednesday's trading at 1.1138 versus the euro dropped to 1.1159. The greenback is likely to face support around the 1.13 level.

On the flip side, the greenback recovered to 0.6427 against the kiwi and 0.6765 against the aussie, from its early lows of 0.6459 and 0.6790, respectively. The next possible resistance for the greenback is seen around 0.63 against the kiwi and 0.64 against the aussie.

The greenback appreciated to an 8-day high of 1.3330 against the loonie, compared to 1.3319 hit late New York Wednesday. Next key resistance for the greenback is seen around the 1.35 region.

Looking ahead, Canada existing home sales for July, U.S. weekly jobless claims for the week ended August 10, retail sales and industrial production for July, New York Fed's empire manufacturing index and NAHB housing market index for August are scheduled for release in the New York session.

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