The dollar edged up on Tuesday, boosted by a smaller-than-expected US trade deficit in July, but investors sought more clarity as to whether the Federal Reserve would continue to raise interest rates.
Currency traders shrugged off softer-than-expected growth in producer prices in August and focused on the trade numbers, which showed the gap between US imports and exports narrowed to $57.9 billion in July from $59.5 billion in June. The trade deficit also beat the $59.8 billion forecast by economists.
But the inflation data helped to pare back expectations in interest rate futures of how aggressively the Federal Reserve will raise rates, pushing bond yields lower and putting a lid on the dollar.
"The trade data was a little boost for the dollar. What's clouding the issue though is whether the Fed is finished or not," said Michael Cairns, trading manager with FX Solutions in Ridgewood, New Jersey. "We're in limbo for the moment."
By midday, the euro was at $1.2263, down 0.14 percent compared with late Monday. It has remained within a range of $1.2590 to $1.1866 since May.
Against the yen, the dollar was up 0.2 percent, at 110.63 yen while against the Swiss franc, the greenback strengthened 0.2 percent to 1.2615 francs.
The US currency has recently drawn support from expectations the Federal Reserve will raise interest rates next week and forego any signal of a near-term pause. Dallas Fed President Richard Fisher said on Monday he would not rush to judgement on how the appropriate monetary policy response to Hurricane Katrina.
That was understood by the market to mean the Fed will remain on course to raise rates next week when it meets and will depend on economic data for its policy decisions beyond then.
However, in addition to recent political developments in Germany, the US trade data did little to deter euro bulls.
The US trade deficit for June was revised to the second largest monthly gap ever. So after spiking up to new two-week highs against key currencies immediately after the data, the dollar pared its gains slightly.
"I continue to be bullish on the euro," said Daniel Yovich, market strategist with RefcoPCG Plus in Chicago. "I think (Monday's) selloff that was blamed on political uncertainty over an election in Germany was overdone to the downside," he added.
Jitters over Sunday's elections in Germany have weighed on the euro as polls show the lead held by the reform-minded Christian Democrat party's (CDU) Angela Merkel over German Chancellor Gerhard Schroeder's Social Democrats was shrinking.
Inflation data showed the core producer price index last month, excluding food and energy prices, was unchanged from July, while overall PPI was up 0.6 percent. Economists had expected rises of 0.1 percent and 0.8 percent, respectively.
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