The dollar sank broadly on Thursday, falling to fresh 10-week lows against the euro and 6-week lows against the yen as investors once again began to consider the effect of the massive US trade deficit.
The euro tackled a key technical level in late afternoon, rising 0.6 percent from late Wednesday to $1.2475, the highest since late May. The dollar fell well below the psychologically important level of 110 yen, to 109.57 yen, down 0.9 percent due to strong Japanese stocks and prospects for repatriation flows to Japan.
"Focus in the market has returned to structural issues following China's revaluation in July. That's clear," said Daniel Katzive, currency strategist with UBS in Stamford, Connecticut.
Last month China removed a decade-old peg to the dollar, allowing its yuan currency to appreciate slightly and leading many analysts to believe the yuan will be allowed to strengthen more in the near term.
However, the stronger yuan is widely seen by analysts as so far not significantly affecting the US trade gap, which hit a record high of $617 billion in 2004. Indeed, China said on Thursday its trade surplus increased to $10.4 billion in July, the second-highest on record.
The US trade report for June is due on Friday, and economists are expecting the deficit to have widened to $57.30 billion, compared with $55.35 billion in May.
"To see dollar weakness accelerate from here, especially against Europe, you need to see signs of structural imbalances getting worse again," said Katzive.
He added that a sharply wider-than-expected trade deficit could send the euro above $1.25, which would cause UBS to reconsider its 1-month forecast of $1.23.
Analysts and traders have noted that the dollar has shrugged off mostly solid US economic data since July and even fallen despite no sign the Federal Reserve intends to halt its campaign to raise interest rates.
Citigroup, one of the largest participants in the foreign exchange market, and RBC Capital Markets recommended establishing bets on further euro strength against the dollar, with both banks targeting a near-term rise to $1.27.
Sterling jumped to $1.8115, up 0.9 percent, to its highest level since late June. The dollar slumped to its lowest since early June against the Swiss franc, at 1.2450 francs.
The price of gold, which follows a close inverse relationship with the dollar, rocketed to a new 2005 intraday high of $447 per ounce.
The euro lost ground against the surging yen, falling 1.4 percent so far this week. The euro slipped a quarter of a percent to 136.64 yen.
The Japanese currency was bolstered by Tokyo stocks, which hit four-year highs on optimism about Japan's economy amid buying by foreign investors.
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