Expert Analysis of Today's Market

• The dollar rose against its rivals on Thursday after US economic releases showed the economy is at a stall speed but not falling off a cliff, making it more possible the Federal Reserve is done lowering interest rates. The dollar was supported by better-than-expected US ISM manufacturing data, US stock rallies and optimism on the Fed’s rate-cut pause. Although falling against the greenback, the pound appreciated to the highest level in more than a month against the euro as the Bank of England said the worst of the credit crunch may be over. The yen fell as the US equity market rallied increasing risk appetite and demand for carry trades. The dollar block currencies were pressured by declining commodity prices.


• After falling to the lowest level in five weeks, the EUR/USD is testing the important 1.54-area support ahead Friday’s US employment data. A much better-than-expected US employment number is likely to break the support. If it is broken, the EUR/USD will drop and possibly test the 1.49 handle.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims soared 35,000 to a 4-week high of 380,000 in the week ended April 26, the Labor Department said, double the forecast rise. The 4-week moving average for the initial jobless claims declined to 363,750 from 370,250. Continuing jobless claims in the week ended April 19 jumped 74,000 to 3,019,000, the highest level since April 2004. The figures signal another bleak job report in April.

• US personal income increased at a seasonally adjusted rate of 0.3% m/m in March after rising 0.5% m/m in February, the Commerce Department said.


• US personal spending rose 0.4% m/m in March, double the forecast number, following a 0.1% m/m increase in February, data from the Commerce Department showed. Spending slightly outpaced income growth, leading a decline in the saving rate.

• US consumer spending adjusted for inflation increased only 0.1% m/m in March, the Commerce Department said. A price index for personal consumption expenditures rose 0.3% m/m in March after increasing 0.1% m/m in February. The PCE price index climbed 3.2% y/y in March after rising 3.4% y/y in February. The PCE price index excluding food and energy, or core PCE, rose 0.2% m/m in March, after increasing 0.1% m/m in February. The core PCE price index climbed 2.1% y/y in March following a 2.0% y/y increase in February. The Federal Reserve watches the year-over-year core PCE price index closely for signs of problematic inflation. The Fed’s preferred range for this core gauge is considered to be 1.0-2.0%. Thus, the March annual core PCE rise will keep the Fed on edge about inflation prospects.

• The US ISM manufacturing index was at 48.6 in April, unchanged from March and indicative of a slight contraction in factory activity, data from the Institute for Supply Management showed.

• US construction spending in March fell 1.1% m/m, much more than expected, as homebuilding posted the biggest one-month drop on record, after declining 0.3% m/m in February, the Commerce Department reported.


• US Treasury Secretary Henry Paulson said the credit crisis is “close to the end” and retained his forecast for the US economy to keep growing.


• Former Federal Reserve officials William Poole and Susan Bies said it would not be wise for the Fed to cut the benchmark US interest rate below the current 2%.

Europe

• The UK CIPS manufacturing PMI fell less than expected to 51.0 in April from 51.3 in March, near the 50 threshold between expansion and contraction and signaling slowing growth in the UK manufacturing sector, the Chartered Institute of Purchasing and Supply reported. The UK service PMI fell to 52.1 in April.

• The UK producer-price index rose in April to 61.9, the highest since at least 1999, adding to the case for the Bank of England to pause before lowering interest rates again this year.


• The Bank of England signaled the worst of the credit crisis in the UK may be over. “The pricing of risk in credit markets seems to have swung from being unsustainably low last summer to being temporarily too high relative to fundamentals,” said John Gieve, BOE deputy governor for financial stability. “While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months,” he said.

Asia-Pacific

• Japan’s monthly wages, rising for a third month in March, increased 1.2% y/y, the Labor Ministry said. The number of those employed on a full-time basis rose 2.3% y/y, the most since February 1993.


• China’s manufacturing expanded at the fastest pace on record, spurred by new orders from domestic customers. The PMI rose to 59.2 in April from 58.4 in March, the highest since the index began 28 months ago, the China Federation of Logistics and Purchasing said. The index of new orders rose to 65.0, the highest since April 2007 while export orders fell for the first time in three months.

FX Strategy Update