NEW YORK (CNN/Money) - The dollar continued to rally Wednesday after a morning report showed the country's trade gap narrowing more than expected.

Bonds ticked lower in light trading as investors awaited major economic reports slated for later in the week.

In currency trading, the dollar stemmed losses posted in the previous session. The euro bought $1.2091, down from $1.2240 late Tuesday, while the dollar bought ¥111.89, up from ¥110.87 the previous session.

The trade gap narrowed in May, the Commerce Department said, with imports of goods and services outstripping exports by $55.3 billion, down from the revised $56.9 billion figure for April.

Economists surveyed by Briefing.com had forecast a trade gap of $57 billion.

"It was very dollar positive, as it gets factored into the GDP (gross domestic product) numbers. GDP growth may be revised up a bit," Brian Taylor, at Manufacturers and Traders Bank, in Buffalo, New York, told Reuters.

Also helping the dollar Wednesday was news that the federal budget deficit may be smaller than anticipated.

The Bush administration projected a deficit of $333 billion for the fiscal year ending Sept. 30, compared with the previous estimate of $427 billion, mostly due to an increase in tax revenue.

Analysts say that a gaping trade deficit has weighed on the dollar over the past several years, and that if structural economic problems are not addressed, the greenback could resume its long-term slide, which brought it down 30 percent against the euro during the last three years.

But this year the dollar has rallied despite concerns about structural economic weakness and gained 10 percent versus the euro. Investors have been taking advantage of rising interest rates, which generally help the dollar by making dollar-denominated securities more attractive to foreign investors.

But traders said it was unclear whether rising U.S. interest rates and perhaps temporary dips in the trade deficit would continue to give the dollar support, or whether worries about structural imbalances -- such as the huge trade and budget deficits -- would regain the upper hand.

In Treasuries, the benchmark 10-year note fell 4/32 of a point to 99 22/32, yielding 4.16 percent, up from 4.15 late Monday. The 30-year bond lost 7/32 of a point to 114-29/32 to yield 4.39 percent. Treasury prices and yields move in opposite directions.

In shorter-dated government debt, the five-year note fell 2/32 of a point to yield 3.95 percent, and the two-year note was flat to yield 3.83.

Trading was relatively thin as investors took a wait-and-see attitude ahead of reports later in the week on industrial production and retail sales. These reports will be closely watched for signs of economic softness, perhaps exacerbated by recent high oil prices.

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-- from staff and wire reports