The dollar extended its pullback from seven-week highs against the euro on Tuesday as investors braced themselves for Wednesday's release of US trade data and bought euros on the back of strong German confidence figures. The US trade data could highlight the lasting imbalances in the US economy which have weighed on the dollar over the last three years and brought it to a record low against the euro in December.
Markets, concerned about the impact of the trade figures on the dollar, took advantage of the German institute ZEW survey which showed investor confidence improved by more than expected in January, and bought euros ahead of Wednesday's release.
They also digested comments from US Treasury Secretary John Snow, who in an interview with Reuters reiterated his pledge to cut the US budget deficit but also said market forces should set the value of the US currency, a remark that has hurt the dollar in the past.
"The euro rose in relation to the ZEW and also because of Snow's comments," said Aziz McMahon, currency strategist at ABN Amro in London. "Tomorrow the trade data will also be important."
By 1240 GMT, the dollar was down 0.6 percent against the euro, at $1.3162. The dollar rose to $1.3023 per euro on Friday, its highest since late November and more than six cents above December's record low.
The dollar was also 0.3 percent weaker against the yen, at 103.86.
Data showing French industrial output edged up 0.1 percent in November had little market impact.
But the ZEW research institute's expectations indicator rose to 26.9 in January from 14.1 in December. Analysts had forecast a rise to 17.0.
"The data was much stronger than expected. The ZEW index came out at an opportune moment when the dollar was in a retreat," said Hans Redeker, currency strategist at BNP Paribas in London. "But the market is dominated by comments from Snow."
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