Dollar drops as poor trade data cloud rate hike outlook

US dollar and euro notes (AFP/Philippe Huguen)

NEW YORK: The dollar slid against the euro on Tuesday (May 5) after US data showed a sharp rise in the trade deficit that raised questions about the outlook for an increase in interest rates.

The US trade deficit swelled more than 40 per cent to US$51.4 billion in March, the largest gap since October 2008, the Commerce Department reported.

The stronger dollar in March, coupled with the end of the West Coast port shutdowns, largely unleashed the record flood of imports that far offset a small gain in exports.

"The greenback is softer, with lower US Treasury yields and soft trade data restraining the US currency," said Eric Viloria, a currency strategist at Wells Fargo Securities. The euro bought US$1.1185, up from US$1.1146 late Monday.

The large deficit was expected to force the government to lower its estimate for the first-quarter economic growth rate, originally put at 0.2 per cent.

It also cast a question mark over the timing of the Federal Reserve's plan to raise near-zero interest rates. A rise in rates is typically supportive of the dollar.

But analysts said the market was waiting for Friday's US jobs report for April to gauge the economy's strength to weather a rate hike. "The labour market numbers are much more important to the Fed than GDP growth, which is much more volatile than employment and is revised forever," said Ian Shepherdson of Pantheon Macroeconomics.

The euro gained despite a spike in tensions over Greece's debt crisis, with the Greek government blaming its creditors - the European Union and the International Monetary Fund - for holding up an agreement that would unblock €7.2 million (US$8.1 billion) in bailout cash.

"There have been some improvements in eurozone data but we believe that EUR/USD should be trading lower especially since higher yields will hurt Europe at a time when the US is expected to grow more swiftly," said Kathy Lien of BK Asset Management in a note.