Record Trade Gap Hit Dollar, by Kyle Peterson
CHICAGO (Reuters) - The dollar recovered some of its overnight losses but remained lower against the euro and yen at midday on Friday, weakened again by sluggish U.S. stocks and news of a record U.S. trade gap in May.
"I think mainly it's U.S. equities," said Tim Mazanec, director at Investors Bank and Trust Company. "We seem to be headed lower there. The market may be a little extended long euro. But at the same time, if we don't get much performance here, that's the trade to be in."
The euro peaked overnight at 2-1/2-year high of $1.0210 (EUR=) before trimming gains to trade at $1.0141, up 0.25 percent from Thursday's New York close.
The dollar fell to a low of 115.56 yen (JPY=) before climbing back to 115.84 yen, still a loss of 0.57 percent and above Tuesday's 17-month low of 115.34 yen.
Pressure mounted on the dollar as the Dow Jones industrial average (CBOT:^DJI - News) slumped to its lowest level since September 2001 amid news of a criminal probe into drug maker Johnson & Johnson (NYSE:JNJ - News) and a weak outlook for high-tech leaders like Sun Microsystems Inc. (NasdaqNM:SUNW - News) The bad news for those firms added to growing concern about sagging U.S. equity markets.
The dollar also suffered on news that the trade gap grew to $37.64 billion from an upwardly revised $36.14 billion in April as American demand for imported automobiles, food and consumer goods hit records, the Commerce Department said.
The greenback has been under pressure lately because of the enormous trade gap. As the economy draws in imported goods, foreign investors have shunned U.S. assets, causing an outflow of dollars and an unfunded trade gap.
"(The trade deficit) eclipsed anyone's expectation. Trade will be a very large drag on growth in the second quarter and is off-setting the contribution in inventory upswing," said John Herrmann, Chief U.S. economist at IDEAglobal. "The dollar must adjust lower against major currency blocks."
The trade data overshadowed a report showing inflation at the consumer level rose less than expected last month.
INTERVENTION WATCH CONTINUES
While the dollar fell against the yen, its losses stopped short of the 115 yen mark that traders have come to believe is the near-term threshold for intervention. Japanese officials have led markets to think the Ministry of Finance would intervene to weaken the yen near that level. They have complained that a strong yen is a drag on exports.
Japan sold yen for dollars on at least seven days in the past two months but has been absent in recent weeks, even as the dollar has continued its decline.
During Asian trade, Bank of Japan Governor Masaru Hayami told a news conference there were few reasons for the dollar to fall further, while Finance Minister Masajuro Shiokawa said he was concerned about rapid currency moves.
IMM floor traders said yen traders were alert to the possibility that the Bank of Japan could enter the market at 115 yen, but they were not necessarily counting on it.
"I think they're certainly pared down position-wise to be aware of it so they won't get crushed by it," said one IMM floor trader. "But I wouldn't say they're expecting it. They'd be trading away from it if they were."
LOOKING FORWARD
Dealers said trade was light after the European close heading in the weekend. Traders were looking ahead to data next week on consumer sentiment.
On Friday, the University of Michigan will release its final report on consumer sentiment in July. Analysts forecast the index to come in at 87.7, down from 92.4 in the previous report.
"I'm looking for next Friday's consumer confidence figures, because if that continues to fall, it's just not going to be good," Mazanec said. "The bottom line is that two-thirds of the economy is consumers. All these other numbers to me are second tier."
Other key U.S. data due next week include reports on durable goods and new and existing home sales on Thursday
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