updated 2/10/2005 11:29:35 AM ET 2005-02-10T16:29:35

The U.S. dollar lost ground against the euro Thursday after the Commerce Department reported that the U.S. trade deficit soared to an all-time high last year.

Major Market Indices

The 12-nation European currency spiked to $1.2849 after the report’s release, up from $1.2794 in New York late Wednesday. The British pound rose to $1.8624 from $1.8587.

The dollar also gave back earlier gains against the Japanese yen to trade at about 105.86 yen, up slightly from 105.76 Wednesday.

The U.S. currency has slipped after days of gains fueled by market optimism that the United States is getting serious about tackling its trade and budget deficits.

Thursday’s data showed the trade deficit soaring to a record $617.7 billion last year as Americans’ appetite for foreign goods from crude oil to imported cars hit all-time highs. The Commerce Department reported that the deficit for all of last year was 24.4 percent above the previous record, an imbalance of $496.5 billion in 2003.

However, the trade deficit in December declined 4.9 percent to $56.4 billion.

Big trade deficits are one factor that can undermine a country’s currency.

While the U.S. dollar remains weak, the currency has nonetheless pulled out of a nosedive that took the euro from $1.20 in September to an all-time high of $1.3667 at the end of December — a drop caused by nagging concerns over the U.S. trade and budget deficits.

The euro dipped under $1.28 on Monday for the first time since Nov. 5 after President Bush sent Congress a $2.57 trillion budget for 2006 that he described as “lean.”

The dollar also has been boosted by comments last Friday from U.S. Federal Reserve Chairman Alan Greenspan suggesting that the United States was coming to grips with its huge trade deficit. Traders interpreted Greenspan’s comments as a sign that the dollar doesn’t necessarily have to weaken to shrink the U.S. current account deficit.

Still, economists are skeptical as to whether the dollar can hang on to its gains in the long term.

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