Dollar Drops On Wider
Current Account Gap
By John Parry
NEW YORK (Reuters) -- The dollar fell broadly on Friday, weighed by a report that showed the U.S. current account gap widened more than expected in the first quarter.
By mid-morning in New York trade, the dollar deepened its descent in thin pre-weekend trade that was partly technically driven, traders said.
The wide current account deficit -- the broadest measure of the nation's global trade -- has been a persistent weight on the dollar over the past two years.
"The dollar is weakening a little bit, which would be in line with the notion that a (wider) deficit would raise concerns about the U.S. capacity to fund that deficit," said Jason Bonanca, foreign exchange analyst with Credit Suisse First Boston in New York.
The U.S. current account deficit widened to a record $144.9 billion in the first quarter, exceeding economists' forecasts of a $141.0 billion gap. The deficit is a reflection of more money being switched out of dollars into other currencies to buy foreign goods and services than is flowing into dollars as other countries buy U.S. exports.
The euro climbed to session highs around $1.2120 according to Reuters data, up about 0.6 percent on the day. The euro earlier hit six-week lows against the yen of 131.09 before retracing some of those losses.
Against the yen , the dollar fell about 0.8 percent to 108.68 yen.
Against the Swiss franc, the dollar fell about 0.7 percent to session lows around 1.2431 francs.
Sterling rose 0.3 percent to $1.8390.
Traders also cited technical moves for the dollar's decline against the euro. "There has been some model fund buying of euros that has driven" (the euro higher), said Grant Wilson, senior foreign exchange trader with Mellon Bank, Pittsburgh. "We took out some light stops (stop loss orders) on the way up ... trade has been driven by speculative flows," he said.
Thursday's stronger-than-expected U.S. producer prices for May and the Philadelphia Fed June manufacturing survey added fuel to the debate over the pace of Federal Reserve rate hikes later this year, although markets seem to have settled on a quarter-point rise this month.
The euro, which had attracted funds because of higher interest rates compared with the dollar and the yen, appeared to be the loser from such talk. Markets expect the euro zone to trail others in the global tightening cycle.
The Federal Reserve is expected to raise official U.S. rates by 25 basis points later this month. The market is also speculating the Bank of Japan will end its hyper-loose monetary policy some time next year.
Analysts are closely watching the outlook for prices in the United States, after recent comments on inflation by top Fed officials prompted sharp swings in market expectations over how much rates would rise in the near-term.
On Friday, European Central Bank Executive Board member Tommaso Padoa-Schioppa was slated to speak in London, while ECB board member Gertrude Tumpel-Gugerell was scheduled to speak in Linz, Austria.
- Burton Frierson in London contributed to this report
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