The yen looked poised to test 3-1/2 year highs against the dollar after the United States posted a record trade deficit of $25.18 billion in July on swelling imports. Trade gaps with Western Europe, China, Japan and Canada rose to new highs.

The trade deficit was much wider than the $23.8 billion deficit forecast by Wall Street analysts and compared with a $24.60 billion deficit in June. The deficit with Western Europe ballooned 38 per cent in July as exports declined, while the gap with Canada jumped 28 per cent.

"These numbers don't look very good. The US economy is still strong. Domestic demand growth is still healthy," said Stan Shipley, senior economist at Merrill Lynch & Co.