The euro moved sharply lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3990 level and was capped around the $1.4155 level. The common currency gaved back most of yesterday’s gains ahead of the long holiday weekend in the U.S. As expected, the European Central Bank kept monetary policy unchanged and ECB President Trichet reported interest rates remain “appropriate.” Trichet also said recent economic data indicate the global economy has reached an “inflection point in the cycle” and said policymakers “have to remain very alert.” He added risks to the economic outlook are “balanced” and added inflation expectations are “anchored.” Most traders walked away with the impression that official eurozone interest rates will remain unchanged for quite some time. The ECB will begin buying covered bonds – including mortgages and public sector debt – on 6 July as part of its quantitative easing framework. The euro also moved lower after Ireland’s credit rating was downgraded by Moody’s and after it was reported the EMU-16 unemployment rate climbed to 9.5% in May, the highest level in ten years. Also, eurozone producer prices were off for a tenth consecutive month in May, down 0.2% m/m and 5.8% y/y, the largest annual decline since at least January 1982. In U.S. news, it was reported that June non-farm payrolls fell by 467,000, much worse than the -325,000 forecast. The national unemployment rate rose to 9.5%, less than expected, but many economists continue to suggest the national unemployment rate will reach the psychologically-important 10.0% level. Average hourly earnings were up 2.7% y/y, below expectations. Euro bids are cited around the US$ 1.3435 level.

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥95.80 level and was capped around the ¥96.85 level. New Economy and Fiscal Policy minister Hayashi warned “Japan may slip back into deflation if the strength of the recovery is weak and the output gap keeps falling. We don’t want deflation to become the main scenario.” Prime Minister Aso must call a general election by September and current polls show his Liberal Democratic Party of Japan trailing the opposition Democratic Party of Japan. Data released in Japan overnight saw the June monetary base up 6.4% y/y. Vice finance minister Sugimoto said he is unaware if Group of Eight leaders will discuss a replacement of the U.S. dollar as the world’s key reserve currency when policymakers convene this month. Notably, the yen’s value on a trade-weighted basis declined to its lowest level since October 2008, trading at ¥114.80. The Nikkei 225 stock index lost 0.64% to close at ¥9,876.15. U.S. dollar offers are cited around the ¥104.15 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥134.10 level and was capped around the ¥136.75 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥156.85 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥88.30 level. In Chinese news, the U.S. dollar moved lower vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8304 in the over-the-counter market, down from CNY 6.8331. Vice foreign minister He Yafei reiterated China’s calls for a diversification of foreign reserves and a stable dollar. Group of Eight officials convene in Italy next week and may discuss China’s proposal regarding a new international reserve currency.