The dollar steered a steady course against other major currencies on Friday after falling sharply in the previous session as U.S. trade data failed to dispel concerns about structural problems in the U.S. economy.
The dollar initially gained ground after Thursday's data showed the U.S. trade deficit narrowed to $56.4 billion in December from a revised $59.3 billion in November.
But the currency quickly gave up gains and fell deeper as the numbers showed the trade deficit for 2004 as a whole surged 24 percent to a record $617.7 billion.
"We were cautiously positive on the dollar for a few weeks and then there was a lot of talk that the trade numbers were not good enough. The dollar fell, inspired also by technicals and profit-taking," said Peter Wuyts, market analyst at KBC in Brussels.
At 5:45 a.m. EST, the dollar traded at $1.2865 per euro and 105.72 yen, little changed against both currencies on the day.
The euro showed little reaction to data on Friday showing France posted a trade deficit of about 7 billion euros in 2004, its first annual deficit in four years, or to figures from Germany showing wholesale price inflation unexpectedly slowed for a third month in January.
Other data showed the French economy put in a strong end-of-year performance in 2004 but missed the government's growth target for the year, with a 2.3 percent expansion.
U.S. POLICYMAKERS IN FOCUS
No major U.S. economic releases are scheduled for Friday, though the market will pay close attention to speeches from Federal Reserve Board Governor Ben Bernanke, San Francisco Fed President Janet Yellen and U.S. Treasury Under Secretary John Taylor.
"It will be interesting to hear what the Fed speakers say about the pace of monetary tightening and whether they touch on the U.S. current account deficit," said Steven Pearson, chief currency strategist at HBOS.
Since the start of this year, investors have pushed their earlier concerns about the U.S. trade and budget deficits to the backburner, bringing the dollar up from December's record lows against the dollar.
But some in the market are still looking for the moment when the dollar returns to its downtrend.
"The deficit is enormous and it's not going to go away in a day," said Mark Cranfield, head of treasury in Asia at Landesbank Baden-Wuerttemberg in Singapore.
"On a short-term basis, the euro and the yen were pretty oversold, so the trade figures probably allowed some people to book some profits (from dollar recent gains)."
Investors were also looking at news from North Korea after its announcement on Thursday that it had nuclear weapons helped the dollar rally versus the yen.
Increased tensions in the Korean peninsula could hurt the yen, and the South Korean won, helping boost the dollar, Cranfield said.
"The Korean story may turn out to be something worse; it could get nasty," he said.