The euro appreciated vis-à-vis the U.S. dollar last week as the single currency tested offers around the $1.5650 level and was supported around the $1.5345 level. The pair gained about 280 pips last week. G8 finance ministers met in Osaka and didn’t address the weakness in the greenback. Traders are scaling back their U.S. rate hike expectations. Richmond Fed President Lacker suggested inflation is more of a threat than an economic slowdown. WSJ sees rates steady until the autumn “unless the inflation outlook deteriorates considerably.” Paulson is seeking a financial stability remit for the Fed. Fed #2 Kohn said the financial institutions are improving their balance sheets. The U.S. dollar was off late in the week on downgrades to bond insurers Ambac and MBIA. Israel conducted military exercises for a possible attack on Iran.

ECB’s Tumpell-Gugerell said monetary policy remains “accommodative” and sees a one-off hike in July. Germany’s IW institute lifted its 2008 GDP forecast to 2.5%. The European Commission warned against a wage and inflation spiral. ECB’s Bini Smaghi said a +25bps hike “should be enough” to reduce inflation. ECB’s Stark said May CPI of 3.7% is “unacceptably high.” The German government sees Q2 GDP “dampening.” Euribor interest rate futures are pricing in at least two ECB hikes this year.

Data released in the U.S. last week saw the June Empire State manufacturing index print at -8.68; April net foreign purchases of long-term U.S. securities was US$ 102.8 billion while net buying excluding non-market flows reached US$ 115.1 billion and “monthly net TIC flows” reached US$ 60.6 billion; May producer prices soared 1.4% m/m and 7.2% y/y with core inflation up 0.2% m/m and 3.0% y/y; May housing starts were off 3.3%; May industrial production was off 0.2% with capacity utilization off 0.2% to 79.4%; the Q1 current account goods/ deficit printed at US$ 174.9 billion; the June homebuilders index fell to +18; weekly initial jobless claims were off 5,000 to 381,000 with continuing jobless claims off 76,000 to 3.06 million; the Philadelphia Fed manufacturing index fell to -17.1; and the May leading index climbed 0.1%;
Data released in the eurozone last week saw EMU-15 May HICP printed at 3.7%; the German ZEW June economic expectations index fell to -52.4; the EMU-15 trade balance posted a €2.3 billion surplus; German PPI was up 1.0% m/m and 6.0% y/y; and Italian April industrial orders were up 13.9% y/y.

The yen appreciated vis-à-vis the U.S. dollar last week as the greenback tested bids around the ¥107.20 level and was capped around the ¥108.55 level. The pair lost about 90 pips last week. The Nikkei 225 stock index lost 1.33% on Friday to close at ¥13,942.08. Former MoF official Watanabe said intervention is possible if the U.S. dollar’s depreciation is “sharp.” The government reduced its assessment of the economy for the second time in three months, downgrading its view on exports, corporate profits, and industrial output. PM Fukuda is unlikely to promote an economic stimulus package. Policy Board minutes revealed “both supply and demand” shocks to the Japanese economy. The BoJ Tankan survey of consumer sentiment will be released on 1 July.
Data released in Japan this week saw May Tokyo-area condominium sales were off; machine tool orders were revised to +1.4%; the April tertiary index was up 1.8% m/m and 0.6% y/y; May department store sales were off 2.7%; the April index of leading economic indicators printed at 92.8 with the coincident index steady at 101.7; and the April all-industries index rose 0.8% m/m with the tertiary index up 1.8% m/m.

In Chinese news, the Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8796 in the over-the-counter market, down from CNY 6.9018. PBoC boss Zhou reported “A weak dollar will inevitably result in a rise in primary products including commodities, including oil. Therefore, the RMB will also face a rising pressure, which will drive up inflation.” Paulson said the U.S. “expressed an understanding and appreciation for accelerating pace of appreciation of the renminbi.” China lifted gasoline and diesel prices by 16% to 18% to reduce oil demand.

Data released in China last week saw May wholesale prices up 9.6% y/y; industrial value-added output was up 16.3% between January and May; and January – May urban fixed asset investment was up 25.6% y/y.

The British pound appreciated vis-à-vis the U.S. dollar last week as cable tested offers around the US$ 1.9790 level and was supported around the $1.9455 level. The pair gained about 290 pips last week. BoE is unlikely to cut rates and the chances of 2 or 3 rate hikes this year have fallen. BoE will unveil a new liquidity program later this year. CBI’s 2009 GDP forecast predicted a slowdown. BoE reported high inflation may “materially” become engendered in inflation expectations over the medium-term. BoE Governor King wrote a letter to Chancellor Darling because U.K. CPI was more than 100bps above the 2.0% target. King sees CPI well above expectations well into 2009. June MPC minutes saw an 8-1 vote to keep rates unchanged with Blanchflower favouring a 25bps cut. Policymakers acknowledge the economy may need more slack “to ensure inflation returns to target.” Deputy Governor Gieve is leaving the central bank next year. Chief Economist Bean is being replaced by Spencer Dale and is Bean is assuming Lomax’s deputy governorship from 1 July. Darling is giving the BoE a new financial stability remit. Gieve reported “risks to both the upside and downside remain large.”

Data released in the U.K. last week saw May CPI at 3.3%; the June CBI industrial trends had a balance of 28% of manufacturers who saw higher prices in the next three months; May retail sales were up 3.5% m/m and 8.1% y/y; May public sector net debt and the public sector net cash requirement fell; CML mortgage lending fell to ₤25.5 billion; and May provisional M4 money supply growth was +0.4% m/m and +10.0% y/y.

The Swiss franc appreciated vis-à-vis the U.S. dollar last week as the greenback tested bids around the CHF 1.0305 level and was capped around the CHF 1.0520 level. The pair lost about 125 pips last week. SNB kept interest rates unchanged and hiked its 2008 and 2009 inflation forecasts. SNB chief Roth reported the central bank considered a rate hike and sees the potential for upward pressure on inflation rates.

Data released in Switzerland last week saw April retail sales climbed 2.4% y/y; Q1 industrial production was up 4.3% y/y and off 9.3% q/q; the June ZEW indicator for economic expectations fell to -63.8 from -60.4 with the current economic situation sub-index falling to 53.2; the May trade surplus widened to CHF 1.87 billion; and May producer and import prices were up 1.2% m/m and 3.9% y/y.

The Canadian dollar appreciated vis-à-vis the U.S. dollar last week as the greenback tested bids around the C$ 1.0100 level and was capped around the C$ 1.0295 level. The pair lost about 105 pips last week. Finance minister Flaherty reported the C$ has “borne one-third of the brunt of the depreciation of the U.S. currency.”

Data released in Canada last week saw April foreign investment in Canadian securities increase C$ 975 million while April Canadian investment in foreign securities rose to C$ 5.99 billion; the May composite leading indicators index was up 0.2%; May headline CPI was up 1.0% m/m and 2.2% y/y with the core rate up 0.3% m/m and 1.5% y/y; April wholesale sales were up 1.4%; and retail sales were up 0.6%.

The Australian dollar appreciated vis-à-vis the U.S. dollar last week as the Aussie tested offers around the US$ 0.9565 level and was supported around the US$ 0.9370 level. The pair gained about 150 pips last week. RBA board members concluded on 3 June that rates are appropriate to deal with inflation.

Data released in Australia last week saw Q1 housing starts fall 3.3% q/q; the April Westpac leading index was up +2.8%; May merchandise imports were up 7.0%; and the Westpac industrial trends composite index fell to 53.9 in Q2.