The dollar steadied below recent three-month highs against the euro on Thursday as investors looked to U.S. trade data for fresh indicators on the extent of imbalances in the U.S. economy.
The dollar has rallied in recent weeks as the market has reacted to signs of U.S. economic recovery and the prospect of further domestic rate rises rather than the need to attract flows into the United States through a weakening currency.
"Some people are arguing that any improvement in the trade data is already priced into the dollar after Greenspan's comments last week," said Daragh Maher, currency strategist at Calyon.
"The focus for the dollar has shifted to some of the cyclical factors like interest rate differentials and relative growth rates and structural factors are no longer dominant."
U.S. Federal Reserve Chairman Alan Greenspan gave the dollar a lift on Friday, saying market pressures appeared poised to stabilize and possibly cut the U.S. current account deficit over the longer term.
The dollar was steady against the euro at $1.2791 at 5:37 a.m. EST.
The dollar rose as far as 105.94 yen, close to recent two-month highs and up a quarter percent from the U.S. close.
U.S. trade figures for December at 8:30 a.m. EST are expected to show a deficit of $57 billion. That would be narrower than the record $60.30 billion posted in November, which is also expected to be revised downward.
"People are hoping for a better trade number. Lower oil prices should help the deficit to contract a bit," said Lee Ferridge, senior proprietary trader at Rabobank.
"People are focused on the numbers later but the North Korea issue is in the background," he added.
Weekly U.S. jobless claims are also due at 8:30 a.m. EST.
The yen was soft and the safe-haven Swiss franc rose slightly after North Korea said it was suspending participation in six-party talks on its nuclear programs and that it has built nuclear weapons for self-defense.
GEOPOLITICAL TENSION
The market was relatively unfazed by news that North Korea had manufactured nuclear weapons but some analysts advised caution.
"Though the rest of the world has expected for some time that North Korea has acquired nuclear weapons, a real escalation of tension in the region would be bearish for the dollar, yen, Korean won and Chinese yuan while being positive for the euro and Swiss franc," UBS said in its morning note to clients.
Sterling was steady against the dollar and up slightly against the euro ahead of the Bank of England's monthly interest rate decision at 7 a.m. EST. No rate change is expected.
The European Central Bank said in its monthly bulletin there was no build-up in underlying inflationary pressures in the euro zone and that economic growth had yet to pick up.
The ECB's latest quarterly Survey of Professional Forecasters found inflation expectations were revised down to 1.8 percent in 2006, but expectations for 2005 were unchanged at 1.9 percent.
Elsewhere, the Australian dollar was the standout performer, gaining one percent to a two-week high at $0.7796 after strong jobs data fueled talk of a domestic interest rate rise as early as next month.
The Norwegian crown, meanwhile, hit five-month lows against the euro after weak inflation data stoked expectations the central bank will keep rates at historic lows of 1.75 percent for longer.