The dollar dipped against the euro and yen today after a column by Federal Reserve watcher Mr John Berry suggested currency markets were misled by central bank chief Mr Alan Greenspan's optimism on the US deficit outlook.
Mr Berry said in his Bloomberg column the market "should have listened more closely" to Mr Greenspan's caveats and explanation of why the record-busting US current account gap "isn't likely to shrink anytime soon".
Last Friday, in remarks that helped ignite a dollar rally, the Fed chairman said market forces and US fiscal restraint "appear poised" to stabilise and even shrink the current account deficit.
While Mr Berry cited no Fed sources for his interpretation of Mr Greenspan's speech, traders seized on the comments to sell the dollar after it had surged to two-month highs against the yen and three-month highs against the euro this week.
The euro rose to $1.2780 up slightly from late New York levels. The dollar fell about 0.25 per cent against the yen to 105.50 yen after hitting a two-month high of 105.96 yen yesterday, according to EBS data.
Mr Greenspan's upbeat outlook for the deficits last Friday, along with a positive reaction to the Bush administration's plans to cut the budget deficit and reduced expectations for a revaluation of the Chinese yuan, have all helped lift the dollar.
With those events out of the way, a key test of the dollar's rally this year will come with tomorrow's data for the US trade deficit, with the market looking for concrete signs of improvement in the record gap.