The dollar fell against the euro for the second session on Tuesday as investors and traders braced for trade figures that could reinforce market worries about the record deficit in the United States.
The euro tumbled nearly 4 percent against the dollar last week in one of the single currency's biggest weekly declines since its 1999 launch, driven by speculators reversing bets for the U.S. currency to fall, traders and analysts said.
Some analysts said that while the dollar may have room to extend its rebound this year, the trade deficit figures due on Wednesday would likely test the currency's sudden strength.
"If the trade data is not that bad, the market will continue to buy back the dollar," said Tohru Sasaki, chief forex strategist at JPMorgan Chase Bank. "But if it is disappointing, the sell-off could resume."
So far in 2005 the dollar has recovered less than half its roughly 8 percent slide to a record low against the euro during the final three months of last year, when the market focused on the yawning U.S. current account and budget deficits.
Fears about the ability of the United States to fund those deficits and a growing belief a weaker dollar is needed to help correct them have helped fuel the dollar's three-year slide against major currencies.
Beyond the U.S. trade figures, traders and analysts are looking for concrete plans from U.S. Treasury Secretary John Snow and U.S. officials to back up recent vows to shrink the budget deficit.
At 2 a.m. EST, the euro was up a quarter-percent against the dollar at around $1.3115, while the Japanese currency climbed a fifth of a percent to 103.98 yen per dollar.
The euro's gains were fueled in part by Snow saying in an interview with Television that the market should set the dollar's exchange rate.
Such a remark is a usual part of Snow's script, and when he omitted it last week in reaffirming U.S. support for a strong dollar some in the market speculated that Washington may be changing what's viewed as its tacit support for the dollar to fall.
While traders said that dollar/yen was supported by stop-loss orders lined up around 103.75 yen, they added that resistence was strong around 105 yen. Japanese exporters are believed to be dollar buyers around 105 yen.
The Japanese currency slipped a tad to 136.43 yen per euro compared with late New York levels around 136.30 yen.
More stern warnings from Federal Reserve officials about needing to respond aggressively against inflation failed to help the dollar on Monday, after some analysts had wondered whether the market focus would shift to rising U.S. rates.
Atlanta Fed President Jack Guynn said the Fed has never made a pledge to lift rates at a measured pace and the central bank was keeping a close eye on whether slowing productivity gains would stir price pressures.
For now, traders said dollar positions were closer to neutral after the unwinding of short-dollar bets over the past few weeks.
The market was biding its time before the announcement of the U.S. trade deficit figures.