The US dollar traded mainly higher despite news of a wider-than-expected US trade gap in December, but the yen rallied on speculation about a monetary move by the Bank of Japan.
The euro fell to US$1.1903 at 10pm GMT in New York from US$1.1979 late on Thursday, with the dollar nearing its highest level since Jan. 3.
But the greenback slipped to ?117.84 from ?118.83 on Thursday after news that the US racked up its largest ever trade deficit last year and data suggesting the Bank of Japan may be forced to tighten its monetary policy soon.
The US Commerce Department reported that the US trade deficit widened by 1.5 percent in December to US$65.7 billion, pushing the gap for all of last year to US$725.8 billion, or 5.8 percent of GDP.
"While the monthly December data was not itself a negative surprise, the aggregate 2005 total was a rude reminder," said Michael Woolfolk, senior Bank of New York currency strategist.
The news initially caused liquidations of some dollar positions, but the selling lightened as the day wore on and the dollar won back some ground, according to Brian Dolan, head of currency research at Gain Capital.
Ashraf Laidi, chief currency analyst at MG Financial Group, said that the US was able to fund its trade gap, despite its record size last year, noting the heavy demand for the revived 30-year long bond Thursday on the part of foreign buyers.
"The prospects for continued foreign inflows may have improved after the reintroduction of the 30-year bond, which even though will exacerbate the budget deficit, is expected to channel a new source of dollar-bound flows. This is especially essential considering the slowing pace into US treasuries and the volatile pace of foreign flows into US equities," Laidi said.
The yen began rising earlier in overseas trading after strong Japanese machinery-orders data fueled speculation that the Bank of Japan will have to loosen its ultra-easy monetary policy soon.
The Japanese government reported that the core measure in December of the nation's machinery orders, which strips out volatile components such as ship orders, surged 6.8 percent on a month-on-month basis, outstripping expectations of a 1.5 percent monthly rise.
Caroline Newhouse-Cohen, of BNP Paribas in Paris, said the strong Japanese machinery-orders data signal a shift in the economy.
"All in all, they are announcing that the end of deflation is nearing," she said.
Markets remain attentive to how new US Federal Reserve Chairman Ben Bernanke will present his monetary outlook to Congress next week.
"Bernanke will want to put the message out that he's no less a champion of stable prices than [former chairman Alan] Greenspan," CIBC World Markets economist Avery Shenfeld said.
The federal funds rate is at 4.5 percent, and it remains unclear how far the Fed will push up rates.
"The Fed chairman will want to deliver some tough talk on the need for anti-inflation vigilance. Although the markets have made some room for that in pushing up near-term fed funds futures yields, the two-year Treasury [bond], sitting at only 4.6 percent when fears of a 5 percent [Fed] funds rate abound, remains vulnerable to that testimony," Shenfeld said.
In late New York trade, the US dollar stood at 1.3067 Swiss francs from SF1.2995 on Thursday.
The pound was being traded at US$1.7442 from US$1.7411 late on Thursday.
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