NEW YORK, Feb 11: The dollar traded mainly higher despite news of a wider-than-expected US trade gap in December, but the yen rallied on speculation about a monetary move by the Bank of Japan.

The euro fell to $1.1903 to $1.1979 in New York late on Thursday, with the dollar nearing its highest level since January 3.

But the dollar slipped to 117.84 yen from 118.83 yen on Thursday after news that the US racked up its largest-ever trade deficit last year and data suggesting the Bank of Japan may be forced to tighten its monetary policy soon.

The Commerce Department reported that the US trade deficit widened by 1.5 per cent in December to 465.7 billion, pushing the gap for all of 2005 to $725.8 billion, or 5.8 per cent of gross domestic product.

While the monthly December data was not itself a negative surprise, the aggregate 2005 total was a rude reminder, said Michael Woolfolk, senior Bank of New York currency strategist.

The news initially caused liquidations of some dollar positions, but the selling lightened as the day wore on and the dollar won back some ground, according to Brian Dolan, head of currency research at Gain Capital.

Ashraf Laidi, chief currency analyst at MG Financial Group, said that the US was able to fund its trade gap, despite its record size in 2005, noting the heavy demand for the revived 30-year long bond Thursday on the part of foreign buyers.

The prospects for continued foreign inflows may have improved after the reintroduction of the 30-year bond, which even though will exacerbate the budget deficit, is expected to channel a new source of dollar-bound flows, Laidi said.

This is especially essential considering the slowing pace into US treasuries and the volatile pace of foreign flows into US equities.

The yen began rising earlier in overseas trading after strong Japanese machinery-orders data fueled speculation that the Bank of Japan will have to loosen its ultra-easy monetary policy soon.

The Japanese government reported that the core measure in December of the nation’s machinery orders, which strips out volatile components such as ship orders, surged 6.8 per cent on a month-on-month basis, outstripping expectations of a 1.5 per cent monthly rise.

Caroline Newhouse-Cohen, of BNP Paribas in Paris, said the strong Japanese machinery-orders data signal a shift in the economy. All in all, they are announcing that the end of deflation is nearing, she said.

Markets remain attentive to how new Federal Reserve Chairman Ben Bernanke will present his monetary outlook to Congress next week.—AFP