Dollar extends gains on US capital flows data

The dollar rose on Tuesday, building on the previous day's gains on a report that showed the United States attracted enough funds to finance its massive trade gap in June.
Some analysts had thought the deficit data released on Friday would swing the market's focus back to worries about foreign investors' willingness to finance the trade deficit, a key driver of the dollar's three-year slide to the end of 2004.
But a US Treasury International Capital (TIC) report on Monday showed the United States in June attracted the largest net inflow to US assets since February, more than enough to cover the trade deficit.
"Following the TIC data, worries faded in the currency market about the US trade gap," said Daisuke Uno, market analyst at Sumitomo Mitsui Banking Corp.
The TIC report showed that the United States attracted $71.2 billion in foreign capital in June, more than that month's trade deficit of $58.8 billion.
Some market players bought the euro before the US trade deficit data was released, betting that concerns about the gap would push the single currency even higher from a two-and-half-month high of $1.2487, traders said.
"Despite the widening US trade gap, the euro failed to rally so market players dumped it today," said one trader at a Japanese bank.
The euro fetched around $1.2340, down from $1.2367 in late US trade on Monday, when it slid 0.6 percent. The euro's weakness against the dollar pushed the euro below 135 yen for the first time since late last month.
Traders said the euro's weak tone could continue in the short-term given its failure to test the psychologically important $1.25 level.
The dollar climbed to 109.50 yen after a major earthquake hit northern Japan and rocked buildings in Tokyo.
But the US currency quickly erased its gains to settle around 109.35 yen, slightly up on the day and in sight of the seven-week low of 109.21 yen hit on Monday.
Traders said the yen's strength was due in part to optimism that Japanese Prime Minister Junichiro Koizumi would win an election on September 11 and drive economic reforms forward in Japan.
However, this makes the yen susceptible in coming weeks to any swings in opinion polls on the likely outcome of the election, said the trader at the Japanese bank.
"If things turn unfavourable for Koizumi, the yen could easily lose two to three yen per dollar," said the trader.