NEW YORK (CNN/Money) -
The dollar fell Wednesday after a report showed the U.S. trade deficit widened in November way beyond expectations, sparking a sell-off in the currency, pushing bonds higher.
Late Wednesday, the euro had eased from intraday highs to trade at $1.3263, still well above $1.3114 hit late Tuesday in New York.
Against the Japanese yen, the dollar dropped to ¥102.39 from ¥103.37 on the session, climbing back from a five-week low struck earlier in the day at ¥102.15.
The trade data, showing a record trade gap, highlighted the economic imbalances that have trapped the dollar in a three-year declining trend.
Analysts said the November figure of $60.3 billion, well above Wall Street's $54 billion forecast, threatens to push the currency lower given the magnitude of this latest number.
"Today's trade figures are a stark reminder to the structural deficiencies of the U.S. economy and the reason for our negative dollar outlook for the year despite (its) recent bounce," Ashraf Laidi, chief currency analyst at MG Financial in New York, told Reuters.
"Given the aforementioned dynamics, it is more probable for the U.S. trade deficit to continue soaring to record highs than it is probable for foreign capital flows to keep up with swelling imbalance," Laidi added.
Other analysts added that the deficit will continue to grow until Asia, China in particular, embraces flexible exchange rates.
The Chinese yuan remains pegged at approximately 8.28 per dollar, keeping their exports artificially low, but currency analysts are on alert for any sign that China will decide to start relaxing that peg.
Along with the trade gap report, balanced comments from Federal Reserve officials that tempered the outlook for interest rate hikes pushed long-term Treasury debt higher.
In the bond market, the benchmark 10-year note ticked higher 1/32 of a point to 100-3/32, yielding 4.23 percent, down from 4.24 percent late Tuesday. The 30-year bond added 5/32 of a point to 108-30/32 to yield 4.76 percent, down from 4.78 percent late Monday. Bond prices and yields move in opposite directions.
The two-year and five-year notes were unchanged on the session. The two-year traded at 99-20/32, yielding 3.19 percent, while the five-year note traded at 99-3/32, yielding 3.70 percent.
Analysts said the huge $60.3 billion shortfall implied trade took a chunk out of economic growth last quarter, leading some to cut their GDP forecasts by a full percentage point.
With growth looking less robust, the market saw less risk of the Fed raising rates at every meeting this year, a sentiment that was reinforced by comments from Fed Bank of Boston President Cathy Minehan and Fed Governor Edward Gramlich.
The latest slip in the dollar and weak earnings reports could drive overseas central banks to buy Treasuries, but there is a risk that private investors will short U.S. Treasuries and switch to euro zone debt.
-- Reuters contributed to the story
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