The euro rose against the dollar for a second consecutive session today as investors swung the spotlight onto the huge US deficits ahead of monthly trade figures.
The US currency dropped more than a cent against the euro and the British pound as its fall triggered stop-loss orders that propelled it even lower ahead of the data due tomorrow that could show a near-record high US trade deficit.
But few in the market expect the dollar to suffer for long as it draws strength from the widening interest rate advantage over it rivals and a relatively buoyant US economy.
The trade shortfall likely widened in May to $57 billion, in sight of the record $60.1 billion marked in February, according to a Reuters poll.
BNP Paribas strategists said in a research note that Chinese data on Monday showing a five-fold surge in its trade surplus signalled that the US trade deficit could widen by a bigger margin than expected and send the euro to $1.23 or higher.
The US deficit was a key factor that pushed the dollar into a three-year, 30 per cent decline against the basket of major currencies through the end of 2004, but rising US interest rates have fuelled a dollar rally in 2005.
The dollar has pulled back from 19-month highs against sterling and 14-month highs versus the euro and the Swiss franc this week after a tepid US jobs report on Friday led traders to lock in profits on the dollar's four-month rally.
Dealers were also awaiting US retail sales and consumer price figures later this week to see if the Federal Reserve still has a case for steadily raising rates.