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Written by: Staff

TOKYO, May 12 (Reuters) The dollar sank to a one-year low against the pound and hovered near eight-month lows versus the yen on Friday, slammed by worries about a near-term end to Federal Reserve rate increases and widening U.S. deficits.

Data showing U.S. retail sales posted a tepid gain in April, hurt by surging gasoline prices, gave investors more reason to think the Fed will pause a two-year credit tightening campaign in June after lifting overnight rates to 5 percent this week.

But beyond the Fed outlook, investors have soured on the dollar over the past month after the Group of Seven industrial powers signaled a desire to see currencies of nations with big trade surpluses strengthen.

With the focus back on U.S. deficits, the release of trade data at 1230 GMT will be a big focus for the market.

In a Reuters poll, economists forecast a slight widening of the trade gap to $67 billion in March from $65.74 billion the previous month, when the Lunar Year holidays helped dampen imports from China.

''The prospect of the March U.S. trade deficit widening again keeps dollar shorts well to the fore,'' said Sue Trinh, senior currency strategist at RBC Capital Markets, in a note to clients.

Given the overwhelmingly bearish sentiment, analysts say any surprisingly big trade gap will likely drive the dollar even lower.

In early Tokyo trade, the dollar changed hands at 110.20 yen just above an eight-month low of 110.10 yen struck for two days running.

Traders said automatic sell orders just below 110 yen could exacerbate any move lower.

Sterling punched as high as $1.8867, according to Reuters dealing data, before easing slightly to $1.8850.

The euro gained 0.2 percent from late New York trade to $1.2860 just below a one-year high of $1.2873 struck the previous session.

Against the Japanese currency, the euro slipped to 141.65 yen from around 142.10 yen.

The dollar had bounced back on Thursday after the U.S. Treasury stopped short of naming China a currency manipulator, but those gains proved short lived.


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