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Wednesday April 12, 2006 - 10:21:00 GMT
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FOREX-Dollar soft before U.S. trade gap data

FOREX-Dollar soft before U.S. trade gap data
Wed Apr 12, 2006 5:58 AM ET

(Updates price, adds quotes, changes byline)

By Natsuko Waki

LONDON, April 12 (Reuters) - The dollar moved away from this week's one-month high against the yen and steadied versus the euro on Wednesday ahead of U.S. trade data which could rekindle concerns about the dollar's structural problems.

Economists expect the trade gap to have narrowed in February from a record in the previous month, but investors remained on alert for a wider deficit which could push the dollar lower.

Geopolitical concerns over Iran and perceptions that the Federal Reserve could be coming to the end of its monetary tightening, even if recent jobs data suggested it still had some room to manoeuvre, also kept the U.S. currency on the back foot.

"There's been a lot of talk in the market that from now on we will see a return to structural fundamentals, away from interest rate arguments," said Johan Javeus, currency strategist at SEB in Stockholm.

He added the dollar is also losing support from the interest rate environment.

"Now the Fed is raising rates further, but the ECB is in the process of hiking rates. And the Riksbank, Norgesbank... U.S. interest rates might not rise faster than those in the other parts of the world. In that sense the carry outlook is a bit more blurred."

At 0945 GMT, the dollar was steady at $1.2150 per euro , while it was down 0.2 percent at 118.05 yen , off a one-month high of 118.90 set on Tuesday.

The euro was down 0.2 percent at 143.36 yen .

Overall, investors and dealers were reluctant to take fresh positions as trade thinned ahead of the Easter holidays.


The February U.S. trade deficit is expected at $67.50 billion compared with a record $68.51 billion in January.

In the three years to end-2004, the dollar came under pressure on persistent concerns about growing U.S. deficits. But it recovered since then, rising 15 percent against the euro and the yen last year due to the U.S. currency's widening interest rate advantage.

The dollar also drew support from last week's solid U.S. jobs data that traders said bolstered a view that the Fed would raise rates again after an expected hike to 5 percent in May.

However, the dollar's sentiment soured on Wednesday on growing geopolitical concerns after Iran announced it had joined the group of countries possessing nuclear technology only exacerbated the pressure on the U.S. currency.

Tensions on Iran also pushed oil prices above $69, closer to last year's record peak.

Analysts say higher oil prices can be dollar positive as it increases dollar-denominated oil receipts from producers. However, the flow implication was complex.

"A rise in energy costs effectively transfers U.S. dollars from Asia to the oil producers, resulting in a net sale of USD for other developed market currencies," HBOS Treasury Services said in a note to clients.


In Japan, expectations the central bank might hike interest rates as early as July have failed to boost the yen but took long-term yields to a near two-year high.

Finance Minister Sadakazu Tanigaki warned on Wednesday speculative movements in long-term interest rates are undesirable.

Japan's Dai-ichi Mutual Life Insurance said it plans to boost its holdings of yen bonds in the financial year that began on April 1 as a recent rise in yields has made them more attractive.

Dealers said the U.S. trade deficit data, due at 1230 GMT, had also re-emerged as a focus for the market ahead of Chinese President Hu Jintao's visit to the United States next week.

U.S. President George W. Bush has said his meeting with Hu would focus on rising U.S. complaints about Beijing's trade and currency policies, which many in Washington blame for the United States' ballooning trade gap with China.

© Reuters 2006. All Rights Reserved


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