The dollar gave up early gains against the euro on Friday as support from firm data in the New York session gave way to concerns that U.S. current account figures due at 1230 GMT would show a widening deficit. Thursday's stronger than expected U.S. producer prices for May and the Philadelphia Fed June manufacturing survey kept up the debate over the pace of Federal Reserve rate hikes later this year, though markets seem to have settled on expectations of a quarter point rise this month. But forecasts for the U.S. current account to show the first quarter gap growing to $141 billion from the previous $127.54 billion restrained the greenback by European midsession as some investors worried it could be even wider that projected. "A current account figure coming in even worse than the consensus the market is looking is seen as a risk. The market has started to position for that," said Ian Stannard, currency strategist at BNP Paribas. "That is one of the reasons we are seeing euro/dollar starting to rebound this morning ahead of those numbers." At 1125 GMT, the euro traded at $1.2036 , down marginally on the day from the New York close. It earlier traded as low as $1.1976, its worst showing since Monday.
The dollar remained a touch higher against the Swiss franc but had fallen half a percent against the yen to 109.04 . Meanwhile the euro also hit six-week lows against the yen of 131.09 before retracing some of those losses to 131.30 yen, still down more than a third of a percent on the day. Dealers said the euro, which had attracted funds because of higher interest rates compared with the dollar and the yen, was losing favour on recent rises in long-term rates in the United States and Japan. "The euro is being hampered by the view the ECB will be a laggard in the rate hike cycle," said Shahab Jalinoos, currency strategist at ABN AMRO.
DATA HURDLE, DATA BOOST
While analysts see higher interest rates supporting the dollar, they say the U.S. current account data will remind investors that the dollar still faces considerable structural hurdles. "In as much as this may remind markets of the poor state of U.S. external balances, the widening current account deficit could be negative for the dollar today," Calyon said in a research note.
Markets expect the U.S. Federal Reserve to raise official rates by 25 basis points later this month. The market is also speculating that the Bank of Japan will end its loose monetary policy some time next year. Analysts are closely watching the outlook for prices in the United States, after recent comments on inflation by top Fed officials prompted sharp swings in market expectations over how much rates would rise in the near-term. The Philadelphia Fed's gauge of mid-Atlantic manufacturing came in somewhat stronger than expected on Thursday, while the government reported that U.S. producer prices in May rose 0.8 percent, compared with forecasts for a rise of 0.6 percent. Excluding food and energy, prices rose 0.3 percent, compared with economists' forecast for a rise of 0.2 percent. On Friday, European Central Bank Executive Board member Tommaso Padoa-Schioppa speaks in London at 1330 GMT and ECB board member Gertrude Tumpel-Gugerell speaks in Linz, Austria at 1815 GMT.////