May 12 (Bloomberg) -- The dollar dropped to the lowest in a year against the euro and eight months versus the yen on concern a U.S. government report will show the trade deficit widened.
The U.S. currency, down 3 percent this month, fell below 110 yen for the first time since September on speculation the Commerce Department will report its third-largest deficit, meaning more dollars need to be converted to pay for imports. China, the world's fastest-growing major economy, posted a larger-than-expected trade surplus.
``There's a greater emphasis on the deficit now, and some people are expecting a record,'' said Daragh Maher, a currency strategist in London at Calyon, the securities unit of Credit Agricole SA. ``The data could be a further excuse for selling the dollar.''
The dollar bought 109.54 yen at 7:13 a.m. in New York, from 110.72 late yesterday. It's poised for its biggest weekly drop in two months. Against the euro, the dollar is headed for a fifth straight weekly decline, the longest series of losses since August. It traded at $1.2921 per euro today, from $1.2837 yesterday, and $1.2727 a week ago.
The U.S. trade deficit in March increased to $67 billion, according to economists surveyed by Bloomberg. The report is scheduled to be released at 8:30 a.m. in Washington. The gap was $65.7 billion in February and a record $68.6 billion in January.
``There is a danger for the dollar around this trade deficit number,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``There is a risk we could see a fresh record deficit.''
Beats Estimate
China posted a $10.5 billion April trade surplus, beating the $7.2 billion median estimate of 21 economists in a Bloomberg survey, and compared with $11.2 billion in March. Exports jumped 23.9 percent.
The yen has risen since finance ministers and central bankers from the Group of Seven industrialized nations on April 21 called on Asian countries, and particularly China, to allow faster currency appreciations to fix lop-sided trade flows.
Gains beyond 110 yen versus the dollar may be curbed as Finance Minister Sadakazu Tanigaki said Japan is on alert for rapid moves in currencies that may hurt businesses and the economy.
``Authorities have been using verbal intervention almost on a daily basis recently,'' said Satoru Ogasawara, a currency strategist at Credit Suisse Group, in Tokyo. ``Comments such as those from Tanigaki are adding credibility to the possibility of intervention, especially after the yen reached 109'' per dollar.
The Japanese currency will move between 108 and 114 yen against the dollar in the next month, Ogasawara said.
`On Alert'
Japanese manufacturers said they expected the yen to trade at 110.60 in the fiscal year that started April 1, according to the Bank of Japan's Tankan quarterly survey released April 3.
``We must be on alert against rapid changes and speculative moves of the currency market, which cause disorder,'' Tanigaki said at a press conference in Tokyo today. ``Such moves may have an effect on business activity.''
The economy probably grew at a 1.1 percent annual pace in the three months ended March 31, a fifth straight expansion, according to a Bloomberg survey. The Cabinet Office releases the next report May 19.
The dollar reached a one-year low against the euro after European Central Bank council member Nout Wellink said yesterday the region's rates are too low and signaled he may support an increase by a half-percentage point in June.
`Entrenched'
The central bank has raised borrowing costs twice since December, to 2.5 percent. The U.S. Federal Reserve lifted its benchmark rate to 5 percent on May 10, the 16th straight rate increase since June 2004, while the Bank of Japan has kept its key rate near zero percent since 2001.
``With the euro-zone looking to hike again together with this dreadfully entrenched trade deficit in the U.S.,'' it's a negative backdrop for the dollar, said Stephen Koukoulas, chief Asia-Pacific strategist at TD Securities Ltd. in Sydney. ``A poor trade result will see the dollar under huge downward pressure'' through $1.30 against the euro and 110 yen.
A report today showed inflation in Germany, Europe's largest economy, accelerated for the first time in seven months in April following a surge in energy prices. Consumer prices rose 2 percent from a year earlier after increasing 1.8 percent in March, the Federal Statistics Office said.
Traders raised bets on how high the ECB will lift rates by year-end, futures prices show. The yield on the three-month Euribor contract due December 2006 rose 2 basis points this week to 3.55 percent. A basis point is 0.01 percentage point.
The contracts, which are traded on London's Euronext.liffe exchange, settle to the three-month euro interbank offered rate, which has averaged 0.16 percentage points more than the ECB rate since 1999.
