The dollar fell to a two-month low against the euro and a basket of currencies on Thursday after dovish U.S. Federal Reserve minutes heightened concerns about the outlook for the U.S. economy.

Fed officials last month felt they should be ready to consider additional steps to boost the U.S. economy if an already softening outlook took a noticeable turn for the worse.

The Fed minutes were particularly dovish, with the discussion about the possibility of easing measures providing a soft underbelly for the dollar, said Chris Turner, currency strategist at ING.

The Fed also trimmed forecasts for growth this year. A string of U.S. data is due out on Thursday, including industrial output and weekly jobless claims and any weakness could trigger more dollar selling, analysts said.

The minutes showed about half of U.S. policymakers saw growth risks to the downside, with some worried about the prospect of a deflationary spiral.

At 1125 GMT, the euro was up 0.6 percent at $1.2815. It was given an added boost after better-than-expected JPMorgan earnings fueled demand for perceived riskier assets, pushing the single currency to session highs of $1.2834.

Euro sentiment was helped by Spain selling nearly 3 billion euros of bonds in an auction which traders said met with solid demand, providing reassurance about the debt-laden country's ability to raise cash.

Traders said strong demand for overnight euro/dollar call options with strikes at $1.2825, $1.2835 and $1.2855 had facilitated a rally in the euro.

Technical analysts highlighted the break above the daily Ichimoku cloud at $1.2785 for the first time since December 2009. They said a close above that level was key to further gains, while the 2007 lows at $1.2868 were next resistance.

A move toward $1.30 is realistic for the euro, but we don't see it lasting. If U.S. data continues to deteriorate, it won't be long before that's being replicated elsewhere, said Derek Halpenny, European head of currency research at BTM/UFJ.

The U.S. Commerce Department reported on Wednesday that U.S. retailers' June sales declined 0.5 percent -- more than twice the 0.2 percent drop forecast by economists polled by Reuters.

A raft of U.S. data is set for release later, with producer prices, weekly jobless claims and the empire manufacturing survey all due.

The dollar index .DXY was down 0.6 percent at 82.947, having hit a two-month low of 82.854. It fell through support at around 83.15, a 38.2 percent retracement of its rise from a low of 74.17 in November 2009 to a high of 88.59 on June 8.

The dollar also hit a one-week low against the yen around 87.86 yen.

Traders said charts looked bearish after the greenback failed the previous day to rise above 89.23 yen -- a 38.2 percent Fibonacci retracement of the dollar's fall from its June high just below 93 yen to a July 1 low of 86.96 yen.

(Additional reporting by Jessica Mortimer, editing by Nigel Stephenson)

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