Dollar stuck near lows before US trade data

The dollar was mired near a two-month low against the euro on Friday as the market girded for US data expected to show a widening of the trade gap to a near record, magnifying worries about US deficits. The dollar recovered from an early dip after Federal Reserve Chairman Alan Greenspan said in a late Thursday speech that foreign investors would reduce their US asset holdings at some point, similar to remarks he made late last year.
His comments come just a day after Japanese Prime Minister Junichiro Koizumi rattled markets by saying diversification of foreign exchange reserves was "necessary", reviving fears of Asian central banks cutting their giant dollar reserves.
Japan's Finance Ministry quickly clarified that it had no intention of reducing the dollars in its $840.6 billion of reserves, the world's largest.
But the sharp sting to the dollar and US Treasuries on Thursday underscored the market's sensitivity to central bank diversification plans, which could hamper the United States' ability to fund its deficits and hurt the US currency.
Even a surprisingly smaller US trade gap may not provide much help to the dollar before next week's reports on capital flows into the United States in January and the current account deficit in the fourth quarter of 2004, analysts said.
"If the trade numbers come in a bit more positive, it might help the dollar. But it's not just the trade balance," said Naomi Fink, senior currency analyst at BNP Paribas in Tokyo.
"The current account deficit is one of the reasons the dollar's bearish trend came back to the limelight," she said.
One Tokyo-based trader at a US investment bank said the market was generally trying to sell dollars and the US currency would likely "take another bashing" on any widening of the deficit.
The euro was up a tad against the dollar at $1.3425 per euro, just off its two-month high of $1.3457 hit on Thursday.
The dollar was virtually flat at around 104.10 yen.
Worries about the dollar's vulnerability to reserve diversification and the giant current account deficit have reached a pitch before US trade data lands at 1330 GMT.
Economists in a Reuters poll forecast a deficit of $56.50 billion in January, what would be the second biggest on record and slightly wider from December's $56.40 billion. The November deficit was a record $59.3 billion.