April 11 (Bloomberg) -- The dollar fell against the euro and the yen on speculation U.S. government reports this week will show the trade deficit widened to the second largest on record and demand for U.S. assets slowed.

A bigger trade deficit, the amount by which imports exceed exports, means more dollars have to be exchanged for other currencies to pay for purchases from abroad. The figures tomorrow may mean an end to the dollar's 4.4 percent advance versus the euro this year, said Eric Darwell, a currency strategist in New York at Citigroup Inc., the world's biggest bank.

``The dollar's rally has run its course,'' said Darwell. ``We've already seen most of its strength. The market is waiting for data in the U.S. like the trade deficit.''

Against the euro, the dollar dropped to $1.2982 from $1.2934 at 3 p.m. in New York, according to electronic currency-dealing system EBS. It earlier reached $1.3004, the weakest since April 1. The U.S. currency fell to 107.73 yen from 108.24 late on April 8. Citigroup expects the dollar to decline to $1.38 per euro and 98 yen in six months.

``We're putting the move down to investors shifting the focus away from interest-rate increases, which is dollar positive, to structural issues, including the trade numbers, which will be negative,'' said Neil Jones, a director of foreign exchange at BNP Paribas SA in London.

Trade Deficit, China

The deficit probably increased to $59 billion, the median of 68 economists forecasts in a Bloomberg survey shows. Foreigners likely bought a net $65 billion of stocks, Treasury notes and corporate bonds in February, down from $91 billion in January, according to the median forecast in a separate Bloomberg survey. The Treasury will release the figures on April 15.

China's trade surplus widened last month as manufacturers shipped more clothes, electronics and machinery to the U.S. and Europe. The surplus was $5.7 billion, up from $4.4 billion in February and rebounding from a $630 million deficit in March 2004, the official Xinhua news agency said.

The euro was also higher after French Industry Minister Patrick Devedjian suggested yesterday that setting oil prices in euros as well as dollars would make the oil market more stable. He told France's Radio J he is seeking European backing for a basket of currencies to be used in determining prices, Agence France-Presse reported yesterday. Oil is priced in dollars.

`Key Currency'

``If this happens, it would strongly undermine the role of the dollar as the key currency for commodity trading,'' said Michael Klawitter, a currency strategist at WestLB AG in Dusseldorf. ``Even if there is speculation, then it's a negative for the dollar.''

The dollar's decline may accelerate should it weaken to $1.30 per euro, said Klawitter at WestLB, a state-owned German bank. ``If we clear $1.30, then sentiment will change and will be positive for the euro and negative for the dollar,'' he said.

The U.S. currency's drop may be reversed should minutes tomorrow from the Federal Reserve's March 22 policy meeting show officials are becoming increasingly worried by inflation, said Ashley Davies, a currency strategist in Singapore at UBS AG.

``The risk is for the Fed minutes to be more hawkish on rates,'' said Davies. ``They should prove to be a further boost for the dollar.'' The minutes are released after the trade data.

Fed policy makers will raise their target interest rate, now at 2.75 percent, to 4 percent by the end of 2005, according to a survey by Bloomberg News. Last month the prediction was for a year-end rate of 3.75 percent. The Fed has increased the target rate by a quarter-point seven times since June.

`Slow, Methodical' Fed

The central bank can keep to its strategy of raising interest rates in a ``slow, methodical'' way as long as inflation remains tame, Anthony Santomero, president of the Fed Bank of Philadelphia, said in an interview with the newspaper USA Today. Santomero votes on monetary policy this year.

Forty-two percent of the 59 traders, investors and strategists polled from Sydney to New York on April 8 advised buying the dollar against the European currency, up from 38 percent a week earlier. Forty-six percent recommended buying the dollar versus the yen, from 40 percent a week earlier.

Trading by hedge funds and other speculators also suggests the dollar's rally may near an end, said T.J. Marta, senior currency strategist in New York at RBC Capital Markets Inc., a unit of Canada's biggest bank.

Futures traders increased their bets that the yen will decline against the dollar to the most since 2001, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- was 36,442 on April 5, compared with net shorts of 30,189 a week earlier.

``The risks this week are for dollar downside,'' said Marta. The ``dollar rally died'' the last time the CFTC data was this positive on the U.S. currency.

To contact the reporter on this story: Joshua Krongold in New York at at jkrongold2@bloomberg.net; Michael McDonald in New York at mmcdonald10@bloomberg.net.

Last Updated: April 11, 2005 15:04 EDT