The dollar traded within half a yen of five-year lows against the yen but stabilized against the euro on Thursday, after a record U.S. trade deficit underscored structural weaknesses in the world's largest economy.
The trade deficit in November widened above $60 billion on Wednesday for the first time to $60.3 billion, reinforcing the market's belief that the dollar needs to fall further to help correct the country's still growing trade imbalance.
"My view is that we've now seen a turning point in the U.S. dollar, we should see further weakness from this point on," said Adam Myers, foreign exchange strategist at Societe Generale.
But in early European trade the dollar failed to extend its losses by much, with some traders and analysts saying expectations for official U.S. interest rates to keep rising were providing support for the beleaguered currency.
After the deficit figures were released on Wednesday the dollar quickly wiped out all of its gains against the yen for the year, while the euro jumped more than 1 percent versus the U.S. currency.
At 3:40 a.m. EST, the dollar was down from late New York levels at around 102.33 yen but remained above its five-year low just above 101.80 yen hit in early December.
The dollar gained a little against the euro, standing at $1.3243 and still up two percent on the year. The yen was also stronger against the euro, climbing to around 135.35, close to seven-week lows set yesterday.
RETAIL SALES
U.S. retail sales data due out at 8:30 a.m. EST could revert the focus back to relatively strong U.S. economic growth and supposedly dollar-supportive interest rate hikes by the U.S. Federal Reserve.
"Retail sales are very important for the United States. Because the trade deficit was so strong it obviously means that U.S. consumers are still buying lots of imports," said Myers.
"While that's good for the economy, if retail sales come in stronger than expected I still don't think that will be enough to support the dollar."
Sales are expected to rise 1.0 percent for December.
The European Central Bank is expected to keep interest rates steady at its meeting later on Thursday and the market will be waiting for any comments on the foreign exchange rate from ECB President Jean-Claude Trichet at a press conference after the meeting.
U.S. Treasury Secretary John Snow, speaking in New York on Wednesday, said that Europe and Japan will have to pick up their pace of growth to help correct the massive U.S. trade gap.
The Bank of Japan is also expected to keep rates unchanged next week and analysts said the market was eyeing the Federal Reserve's likely rate increase in early February.
Another quarter-point rise would take the fed funds rate to 2.50 percent, up from 1 percent last June and further above the euro zone's 2 percent level and virtually zero percent in Japan.
"As long as the U.S. current account balance is being financed, ultimately the interest rate differentials become important. People can't ignore that," said Uwe Parpart, senior market strategist at Bank of America in Hong Kong.
The Japanese currency has been on a firm footing in the past few sessions as speculation mounted again that China could soon revalue its currency, allowing the yuan to appreciate and probably carrying other Asian currencies with it.
Such speculation comes ahead of February's meeting of Group of Seven finance ministers and after the ECB's chief economist said earlier this week that Asian currencies needed to bear more of the burden of further dollar depreciation.
Japanese authorities were on high alert to developments in the foreign exchange market and would take bold action against rapid moves, Vice Finance Minister Koichi Hosokawa said on Thursday.