The dollar fell against most currencies on Thursday on speculation the US trade deficit is widening and concerns some central banks are reducing their dollar holdings, but the currency ended off the day's lows. The massive US current account deficit hasn't been particularly good for the dollar in recent years, and a reminder of this may come on Friday morning when the Commerce Department releases January's trade data. That report is expected to show a deficit of $56.5 billion, slightly wider than the previous month and what would be the second widest on record.
This week's dive in US Treasury bond prices also weighed on the dollar.
"The dollar has been weakening for quite some time and a number of factors are not doing the dollar a lot of favours this week," said Shaun Osborne, chief currency strategist at Scotia Capital in Toronto. "the assumption is the US trade data will be a bad number and there may well be some pre-positioning ahead of that," he added.
Late in New York, the euro was up 0.2 percent at $1.3417. The dollar was down 0.4 percent at 1.1539 Swiss francs. Against the Canadian dollar the US dollar is buying C$1.2045, after a 0.1 percent decline.
The dollar was slightly higher against the yen at 104.08 yen, while sterling was slightly down at $1.9221.
The yen came under some selling pressure after weak Japanese core machinery orders.
The euro rose to 140.00 yen earlier in the session for the first time this year.
But it was the dollar that shouldered the brunt of negative sentiment.
Having slumped to multi-month lows against major counterparts on Wednesday, the dollar suffered another blow on Thursday after Japanese Prime Minister Junichiro Koizumi told parliament that, generally speaking, diversity in foreign exchange reserves was a good thing.
While the Ministry of Finance, which manages the world's largest foreign reserve holding of $840.6 billion, quickly clarified that it has no plans to shift funds out of the dollars, just the specter of US-dollar diversification was enough. Only a month ago that South Korea's central bank mentioned the subject in a report.
"Although MoF quickly suggested that they had no plans to change now, the suspicion lingers that more Asian central bank diversifiers are to appear," wrote Goldman Sachs analysts in a research note on Thursday.
Adding to the dollar's woes were concerns about the bond market sell-off this week.
"The 'diversification' word really spooked the market but the bond market selloff is weighing on the dollar big time," said Samarjit Shankar, director of global strategy at Mellon Bank in Boston.
"The bond market is really adding that extra piece of weight on the dollar right now."
Prices of US Treasuries have fallen steeply this week, pushing the yield on the benchmark 10-year note up to 4.57 percent overnight, its highest since last July.
Though now down to around 4.47 percent late on Thursday, dollar investors remained rattled by the spike.