The dollar weakened across the board on Monday in generally thin trading after the US unit's failure to break key technical barriers set off a wave of short-covering in other currencies. "Dollar buyers ran out of gas once we couldn't break through $1.2750 (against the euro) and 106 in dollar/yen and as a consequence we started technically trading off those levels," said John McCarthy, director of foreign exchange at ING Capital Markets in New York.
"We started a short-covering rally in the euro last Friday and last night in Asia they just continued to take it up," he added.
In late afternoon trade in New York, the euro was trading at $1.2968, up about 0.8 percent from late Friday. Against the Swiss franc, the dollar was down 1 percent at 1.1978 francs.
Analysts said dollar selling gained momentum earlier in the session after Japan's current account surplus, the broadest measure of a country's trade in goods and services, grew 35.1 percent in December from a year earlier to a record 1.616 trillion yen. This was far higher than the forecast 4.5 percent rise.
This underlined the argument for a weaker dollar, particularly after news last week that the US trade deficit widened to a record $617.7 billion in 2004, swelling 25 percent from a year earlier.
Dollar investors are hoping the decline in the dollar will ultimately help correct the United States' gaping trade deficit.
The dollar was trading at 105.14 yen, down 0.5 percent from late Friday in New York.
Separately, International Monetary Market futures data on Friday indicated speculators in the Chicago futures market were net buyers of dollars last week for the first time in eight months, a shift of market positioning that traders said left the dollar vulnerable to downside surprises.
"The market is long dollar for the first time in a long time, and anything that is dollar negative is going to prompt those long the dollar to react," said Thomas Molloy, a trader at Bank Leumi in New York.
Sterling, meanwhile, was up about 1.1 percent at $1.8883. The pound enjoyed its best day against the dollar in 10 weeks after UK producer price data raised hopes of a potential currency-supporting increase in interest rates. British raw material costs rose at their fastest pace in more than four years.
Some dealers were also taking positions ahead of a much anticipated appearance by Federal Reserve Chairman Alan Greenspan.
Greenspan will give his twice-yearly testimony on monetary policy to the Senate on Wednesday and the House of Representatives on Thursday.
The Fed chief is also expected to say additional, steady interest rate rises are on the way, which would also bolster the bullish view on the dollar.
Before Greenspan's testimony, the market will look to Tuesday's release of US capital flows in December to see how well the country was funding its current account deficit.
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