The dollar traded near a recent two-month low against the euro on Friday as investors fretted about upcoming U.S. trade data and the risk of global central banks diversifying their currency reserves.
U.S. trade figures, due at 8:30 a.m. EST, are expected to show the deficit widened to $56.5 billion in January, its second biggest on record.
A large deficit will underscore the persistent structural problems in the U.S. economy, which had brought the dollar to record lows against the euro less than three months ago.
News from India that the central bank was discussing diversification of its foreign currency holdings also highlighted a potential major negative factor for the dollar.
"The trade data is the main volatility point for today," said Paul Mackel, currency strategist at ABN AMRO in London.
"Even if the data is better than expected and the dollar starts to gain traction, it should be temporary. Investors are still happy to sell the dollar on rallies."
"And in India we have another major reserve holder not happy sitting on a ton of (dollar) reserves."
At 4:05 a.m. EST, the dollar traded unchanged from late Thursday levels at $1.3415 per euro. It was not far from the Thursday's low of $1.3456, its weakest level since Jan. 4.
Dollar losses accelerated in recent days after the currency fell through a major support level around $1.33 per euro.
Against the yen, the dollar was unchanged at 104.07 yen.
PERSISTENT DEFICITS
Worries about deficits in the U.S. current account and government budget, as well as about the possibility that global central banks will replace dollars in their coffers with euros, have cost the dollar more than 2 percent of its value against the euro over the last week.
Federal Reserve Chairman Alan Greenspan underscored these concerns, saying in a late Thursday speech that foreign investors may reduce their U.S. asset holdings at some point. However, he also said that so far there has only been a modest shift out of these holdings.
The U.S. needs roughly $2 billion a day of foreign investment inflows to plug its current account deficit, and investors are sensitive to any signs that U.S. shortfall may be widening.
"The current account deficit is one of the reasons the dollar's bearish trend came back to the limelight," said Naomi Fink, senior currency analyst at BNP Paribas in Tokyo.
Greenspan did say he was not "overly" worried about the current account gap and heavy consumer debt loads, but that the fiscal deficit was a "significant obstacle" to long-term economic stability.
Also speaking on Thursday, Fed Governor Ben Bernanke said it may take "some time" for the current account balance to return to an approximate balance.
In India, the diversification comments came just a day after Japanese Prime Minister Junichiro Koizumi said foreign exchange reserves should be diversified, triggering a decline in the dollar.
Japan -- the world's largest holder of foreign exchange reserves -- later clarified that it had no plan to shift funds out of the U.S. currency for now.
India's foreign exchange reserves are at a record high of $135.66 billion, the sixth largest in the world.