Dollar mired near lows ahead of US trade data

The dollar was stuck near a six-week low against the yen and a two-and-a-half month nadir versus the euro on Friday with investors worried about a possible sharp deterioration in the US trade deficit.
The trade report at 1230 GMT is expected to show the June trade gap swelled to $57.30 billion from $55.35 billion in May as steep oil prices boosted the cost of imports and the dollar's strength crimped demand for exports.
Concern about the United States' ability to fund its trade and current account deficits was the major driver of the dollar's fall in the three years to 2004. A report on Monday will show how much foreign capital headed to the United States in June.
"The dollar could see some initial selling if the release shows a widening US trade deficit," said Hiroshi Shimazu, a market economist at Mizuho Securities.
Analysts are divided about whether the market is swinging its focus back to the dollar's deficit woes or whether the prospect of still-rising US interest rates will help inspire further gains in the US currency.
The dollar's retreat comes even as a variety of data has pointed to accelerating US growth and the Federal Reserve appears likely to lift interest rates even higher than many investors had expected just a few months ago.
Earlier this week the Fed raised its funds rate for a 10th straight time to 3.5 percent and said more "measured" increases were likely.
The dollar had edged up about 0.3 percent from late New York levels to around 109.90 yen but was still close to a six-week low of 109.56 yen hit in the previous session.
Growing confidence in Japan's economy, foreign buying of Tokyo stocks and easing worries about a September 11 snap election have helped drive the Japanese currency up almost 2.5 percent against the dollar since Monday.
The euro inched up against the yen to near 136.85 yen But the euro was a touch weaker against the dollar at around $1.2455 after having jumped as high as $1.2476 on Thursday. The market shrugged off a weaker headline figure for second-quarter growth in Japan and focused on an upbeat outlook for the economy's recovery.