Expert Analysis of Today's Market

• Falling across the board on Tuesday on diminished US interest-rate advantage, the dollar was further pressured by Federal Reserve Chairman Ben S. Bernanke’s speech. Bernanke said tighter lending standards for mortgages will restrain housing demand. The European Central Bank is widely expected to increase its key interest rate and signal further tightening at the ECB meeting tomorrow. The euro rose to a one-week high versus the dollar and reached a new all-time high against the yen before the yen gained on falling stock prices in New York. It will be interesting to see if there is some follow-through after tomorrow’s ECB interest-rate decision.


• Unable to penetrate support last week, the EUR/USD has rallied for two days. The pair has broken resistance from the downward sloping trend-line, likely testing the high at the 137-handle set in April. We lower the stop on our short position to 1.3630.

Financial and Economic News and Comments

US & Canada

• US Federal Reserve Chairman Ben S. Bernanke said a slowdown in housing construction will remain a drag on US economic growth “somewhat longer” than expected.


• The ISM non-manufacturing business index rose stronger than expected to 59.7 in May from 56.0 in April, the Institute for Supply Management reported.

Europe

• The purchasing managers’ index (PMI) for the European service sector gained pace for the first time in four months in May. Weakness in France was offset by strength in Italy and Spain. The PMI for eurozone rose to 57.3 in May from 57.0 in April, indicating a strong expansion for the European service sector. The PMI for Italy rose to 56.5 from 53.9, services growth in Spain rose to 56.2 from 54.2, the index for Germany eased to 57.5 from 57.8 while the gauge for France fell to 57.9 from 58.7.


• UK retail sales rose 1.8% y/y in May the slowest pace since November, the British Retail Consortium said.

Asia-Pacific

• Bank of Japan Governor Toshihiko Fukui said the BOJ needs to watch for the risk of a sharp unwinding of carry trades. Fukui, saying upward cost pressure is likely to increase, expects consumer prices to rise 0.5% in the 2008 fiscal year.


• Australia’s current account deficit narrowed to A$15.38 billion ($13 billion) from a revised A$15.5 billion in Q4, the Bureau of Statistics said.

FX Strategy Update