Expert Analysis of Today's Market

• The dollar fell against most key currencies on Friday as data suggested inflation may be easing. However, the greenback reached a fresh 4-1/2-year high against the yen after the Bank of Japan said it needs to be more certain about prospects of the US and Japanese economies before raising interest rates further. The yen fell versus most major currencies as higher equity prices gave renewed interests in carry trades. The EUR/USD is set to have its first weekly gain in seven weeks.


• The EUR/JPY broke the 164.60 resistance, the previous all-time high, on today’s dovish BOJ statement and stock market rally. This will most likely lead to further EUR/JPY rise.

• Carry trades will likely continue. However, a Goldman Sachs report suggested greater volatility in equity markets, bonds and currencies may reduce demand for the carry trades as global rate policies are becoming less certain.

Financial and Economic News and Comments

US & Canada

• Core US Inflation was subdued, but overall inflation is still high. The core consumer price index (CPI) rose a less-than-expected 0.1% m/m and 2.2% y/y in May as goods inflation offset strong service sector inflation, the Labor Department reported. The headline CPI rose 0.7% m/m and 2.7% y/y. The core CPI’s 2.2% y/y rise is the smallest since March 2006 but still above the Fed’s comfort zone.

• US industrial production was unchanged in May following a downwardly revised 0.4% m/m gain in April, the Federal Reserve said. Capacity utilization fell to 81.3% in May from a downwardly revised 81.5% in April. Over the 12 months ending in May, industrial production increased 1.6%, while capacity utilization rose 2.1% from a year earlier.


• Reuters/University of Michigan’s consumer confidence index fell more than expected in June. Consumer sentiment fell to 83.7 in June from 88.3 in May. Current conditions fell to 100.2 from 105.1 and expectations declined to 73 from 77.6.


• The US current account deficit rose to $192.6b in Q1 2007. Income flows and unilateral transfers added to the goods and service deficit.

Europe

• The eurozone’s trade balance with the rest of the world in April 2007 rose to a €1.8b surplus, compared with a €2.7b deficit in April 2006. The March 2007 balance was €7.6b, compared with €0.4b in March 2006. Exports rose 0.6% m/m and imports increased 2.2% m/m in April.


• European Central Bank council member Axel Weber said interest rates will have to rise a lot more before they start to curtail economic growth in the eurozone.

Asia-Pacific

• The Bank of Japan, as expected, unanimously voted to keep its key interest rate at 0.5%. BOJ Governor Toshihiko Fukui said he wants to be more convinced that Japan’s economic growth is sustainable before proposing an interest-rate increase. “We need to be more confident about the outlook for the economy and prices,” Fukui said. BOJ board members agreed that there are still many factors that need to be examined closely, including consumer prices, long-term bond yields and spending by companies and consumers.


• Japan’s tertiary index, measuring spending in the services sector, rose 1.7% m/m in April, posting the first gain in two months, the Ministry of Economy, Trade and Industry said.


• Japan’s index of leading economic indicators for April was revised down to 18.2 from the initial reading of 20.0, staying below the key 50 level for six months in a row, the Cabinet Office said.


• China’s fixed-asset investment in urban areas rose 25.9% in the first five months from a year earlier to 3.2 trillion yuan ($420 billion), the Statistics Bureau said.

FX Strategy Update