The dollar lost ground against the euro yesterday as investors shrugged off news of a sharp narrowing in the US trade deficit.

The greenback rallied briefly after a government report showed the US trade deficit fell to $58.9 billion in October, its lowest level in 14 months.

But it failed to sustain gains amid cautious trading from investors awaiting the Federal Reserve's decision about US interest rates. The Fed was widely expected to leave rates unchanged at 5.25 per cent, but traders were reluctant to chase the dollar higher until they read the central bank's statement for clues as to US monetary policy.

Simon Derrick, currency research chief at Bank of New York, argued that the support once given to the dollar by monetary policy was fast receding. "When the chips are down for a currency, it takes much more to reinvigorate its fortunes and we suspect the most that dollar bulls can expect from this meeting is for emphasis on the lingering upside risks posed to inflation," he said.

By mid-afternoon in New York, the dollar was 0.1 per cent lower against the euro at $1.3250. Against the yen the dollar was flat at 117.00 yen as the Japanese currency came under pressure amid fading speculation the Bank of Japan would raise interest rates this month. The yen fell to an all-time low of 155.11 against the euro, but recovered to 155.00 - still down 0.1 per cent on the session.

The euro was supported after Germany's ZEW index of investor sentiment for December came in stronger than expected.

Jennifer Upham, European economist at Capital Economics, said the report implied the outlook for the German economy remained positive.

"This survey suggests that the German economy still has plenty of underlying momentum and will do nothing to stop the European Central Bank raising interest rates at least once more next year," she said.- (Financial Times service)