The dollar stayed firmly on the back foot ahead of the crucial US trade deficit number for June which may well signal a return to concerns over the structural problems facing the country. The euro continued higher, edging ever closer to the 1.25 usd level while the pound was well bid above 1.81 usd as the dollar failed to capitalise on recent spate of strong US numbers "Little respite appears in prospect for the dollar as analysts and investors focus on its inability to rally in response to positive cyclical developments and potential structural risks," said Steve Pearson at HBOS. He believes the US trade deficit may well exceed the consensus estimate of a 57 bln usd gap, to levels around 60 bln usd due too higher oil prices and a surge in imports from China and Japan. "How the dollar responds will give some important clues as to how mature the current move really is," he said. While some of the dollar's weakness may be due to jitters ahead of the trade data, currencies like the euro and pound have been able to move higher for independent reasons. Carsten Fitch at Commerzbank Corporates and Markets pointed to the slightly more hawkish rhetoric from the European Central Bank for the euro's gains. The central bank was more upbeat about growth prospects than previously and also noted that it will be vigilant about price pressures amid rising oil and house prices. "It would thus seem that the door has been closed on the possibility of a rate cut. It cannot be excluded that rate rise expectations for 2006 might increase, if Euroland's economic data continues on the positive note of the past few weeks," said Fitch. Sterling, meanwhile, appears to be continuing its rebound as markets scale back UK rate hike expectations. The main trigger for this move was the Bank of England's optimistic assessment for growth and inflation. "The unwinding of excessive pessimism over UK interest rates has been a key driver of sterling, helping it to recover from its over-sold state. Sterling now has strong momentum," said Pearson. After delivering its first rate cut in two years earlier this month, the BoE has signalled it is time to wait and see again. Elsewhere, the yen came under mild pressure after disappointing second quarter Japanese GDP data. Japanese GDP grew 0.3 pct from the previous quarter, below expectations of 0.5 pct as strong private consumption and buoyant capital investment was offset by an adjustment of inventories. However, the impact on the currency market was muted as first quarter growth was revised upwards to 1.3 pct.