The dollar hit a two-month low against the euro on Wednesday as investors positioned themselves for more dollar losses ahead of U.S. trade data due later in the week.
The dollar weakened further against most major currencies after a steep fall on Tuesday. It held near a 22-1/2 year low against the New Zealand dollar and a one-year low against the Australian dollar as commodity prices rose.
It's more positioning than anything fundamental but the last trade number was one of the reasons why the dollar started to weaken," said Bilal Hafeez, foreign exchange strategist at Deutsche Bank.
"So this will be the next test to see if the current account deficit story is going to become a driver of currency markets again... People are scrambling to put on long euro/short dollar positions on now."
The market has started to refocus on the massive U.S. current account deficit -- one of the driving forces behind the dollar's three-year decline -- ahead of Friday's U.S. trade data.
By 4 a.m. EST, the dollar hit its lowest level since January 4 against the euro at $1.3382, down around a third of a percent on the day. Against the yen, it traded at 104.40 yen.
The latest bout of dollar selling was also prompted by a spike in commodity and oil prices, fueling buying of currencies of countries that export such products, such as Canada and Australia.
U.S. light crude futures peaked at $55.15 on Tuesday, just shy of a record high, while the CRB Index of 17 commodity futures rose to a 24-year high.
The Australian dollar bought around US$0.7973, in striking distance of the one-year high of US$0.7990 hit on Tuesday. The Canadian dollar gained around 0.6 percent to trade at a two-month high at C$1.2058 per dollar.
"The recent rise in U.S. share prices has made investors more capable of taking risks," said a forex trader at a major Japanese bank. "So they are now eager to invest abroad and that puts the dollar under pressure."
Some traders said the euro was helped by talk that the European Central Bank was leaning toward raising interest rates, following comments from ECB governing council member Nout Wellink on Tuesday.
Wellink said there would come a time when the ECB would have to act against excess money supply in the euro zone.
Friday's U.S. trade data is expected to show the deficit widened to $56.50 billion in January from $56.40 billion in December, moving to within sight of record levels hit late last year.