For a moment it felt like late 2004 all over again. The US reported a record trade deficit and the dollar pliantly plummeted.

But unlike last year - when the dollar's December bear run took it to multiyear troughs against most major currencies ' the Dec. 14th decline followed months of sturdy gains which has seen the US currency enjoy its best year since 2001.

Analysts say it's far too early to conclude that the dollar's declines of recent days are the beginning of a new long-term downtrend, rather than a justified correction to its 2005 gains.

Nonetheless, the resurfacing of the trade deficit story will certainly sound alarms as the market turns its eye to the New Year.

Rising foreign oil purchases helped the trade deficit widen 4.4% to $68.89 billion, a record high and above expectations for a $63 billion gap.

The data pushed the dollar to a six-week low versus the euro and a seven-week low against the yen. In midday trading Dec. 14, the euro was at $1.2013 and the dollar was at Y116.99, more than three yen below its session high.

In an e-mail note, Ashraf Laidi, chief currency strategist at financial advisory MG Financial, said that rising oil imports and the growing bilateral deficits with China, Japan and the euro zone suggest that after a period of stabilization, the US trade balance is worsening again.

'Today's trade report raises the question whether the US deficit is showing its periodic increase after a ... consolidation around the $55-58 billion mark. The monthly deficit figures have a way of consolidating in a range for 6-12 months before a given catalyst lifts it up to the next range,' he noted.

On Dec. 15, the Treasury's international capital flows data - or TICS - were expected to show the US continues to attract enough inflows to finance its trade and current account deficit for now. Still, a significant worsening in the US external position is not what the dollar needs.

Worries about the trade and current account deficits were key to the dollar's 2002-4 declines, with investors figuring a weaker US currency was the route of least resistance to correcting the imbalances.

Those fears were overcome this year, with the dollar receiving such a boost from rising US interest rates that other issues were swept aside. However, anxieties about the twin deficits remain under the surface. Two months of record deficits could be enough to ignite them again.

And the deficit is only one of a growing list of dollar negatives. The softening of the Federal Reserve policy statement suggests the end of the US tightening cycle is nearer. At the same time, the European Central Bank lifted rates for the first time in five years on Dec. 1 and Japanese authorities are still debating ending their ultra-easy monetary policy some time next year. This comes against the backdrop of strong recent data in Japan and Germany.

To top it all, one of the major props for the US currency this year - dollar buying from US companies repatriating dollars under the Homeland Investment Act's tax break - is expected to slow to a trickle from January.

This paves the way for the market to, 'accelerate selling momentum in the (US) currency in the short-term,' said MG Financial's Laidi. He sees the euro lifting to $1.23 early next year and forecasts the dollar to end 2005 at Y117.

Dollar declines not predestined

Yet this barrage of dollar negatives is less clear-cut than it seems. For starters, end-of-year trading often leads to above-average volatility, as low trading volumes allow smaller trades to have a greater impact. That can make a shift in sentiment seem like a new trend.

Year end is also a good time to take profits and square positions. That appears to have happened with a vengeance Wednesday, as speculative investors rushed to exit hefty short yen positions, turning a dollar decline into a rout.

More fundamentally, it remains unclear whether interest rate decisions are really set to turn against the dollar.

While the ECB raised rates to 2.25% early this