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Greenback Falls as Oil Surges The Week Ahead updated May 16, 2008 EUR/USD - 1.5503 Daily Market Outlook - May 16 More EUR/USD

• The dollar continued its rally Friday against most major currencies on continued optimism the Federal Reserve will pause cutting interest rates after next week’s presumed 25 basis-point rate cut. Despite higher Japanese consumer inflation, the yen fell versus the greenback as US stocks advanced. Sterling rose on short covering as traders exited the EUR/GBP. The Canadian dollar posted a weekly loss on speculation the Bank of Canada will keep cutting its key interest rate. The Australian dollar fell for a second day pressured by softness in commodity prices. The yuan posted its largest weekly decline in eight months on speculation the People’s Bank of China will curb the yuan’s appreciation due to economic slowdown concern.
• The EUR/USD fell to a 3-week low after the European Central Bank reported European M3 money supply growth was lower than expected. The pair is pressured by expected declines in European growth and interest rate advantage. The pair has fallen 4 cents in three days after hitting a record high of 1.6019 on April 22. There are support in the 1.54-area and resistance in the 1.58-area. We expect a test of the 1.54 support. If this is broken, the EUR/USD may fall to 1.50.

Financial and Economic News and Comments

US & Canada

• US consumer confidence fell more than expected to a 26-year low in April, as record oil prices and rising unemployment threatened to reduce consumer spending. The Reuters/University of Michigan consumer sentiment index fell to 62.6 in April, down from a preliminary estimate of 63.2 issued on April 11 and March’s 69.5. The consumer expectations index dropped to 53.3 from 60.1. The current conditions index decreased to 77 from 84.2. The trend in the three consumer confidence measures is moving downward with the consumer expectations number the lowest, as illustrated in the chart below.

• US Treasury Undersecretary Robert Steel said it is premature to say that the financial-market turmoil is ending. “This is going to take a while to work through, and the improvement from here won’t be in a continual line,” Steel said in an interview on Bloomberg.

• US Treasury Undersecretary Robert Steel said it is premature to say that the financial-market turmoil is ending. “This is going to take a while to work through, and the improvement from here won’t be in a continual line,” Steel said in an interview on Bloomberg.

Europe

• M3 money supply, used by the European Central Bank as a gauge of future European inflation, rose at a lower-than-expected 10.3% y/y in March, compared with 11.3% y/y in February, the ECB said.

• The UK GDP eased from 0.6% q/q in Q4 2007 to 0.4% q/q in Q1 2008, matching consensus forecasts and the least since Q1 2005, data from the Office for National Statistics showed. The UK Q1 2008 GDP expanded 2.5% y/y. The numbers are unlikely to change expectations that the Bank of England will lower interest rates gradually after seeing further evidence of an economic slowdown, since BOE policymakers have emphasized that a period of growth below trend is needed to bring inflation back to target.

• Growth in UK business services and finance slipped from 0.6% to 0.4%, the lowest since 2003. The number suggests the credit crunch is taking its toll on the service sector that drives the UK economy.

Asia-Pacific

• Japan’s core CPI, which exclude fresh food, rose 1.2% y/y in March, the fastest pace in a decade, after increasing 1.0% y/y in February, the statistics bureau said in Tokyo.

• Following the Japan CPI report, traders increased bets the Bank of Japan will raise interest rates from 0.5% later this year to quell inflation. According to JPMorgan Chase & Co. calculations, investors see an 83% chance of a BOJ rate increase by December, compared with 38% before today’s CPI report. The BOJ with new BOJ Governor Masaaki Shirakawa will likely adhere to the BOJ policy of gradually increasing rates.

• South Korea’s economy grew a less-than-forecast 0.7% q/q in Q1 2008, the slowest pace in more than three years, after advancing 1.6% q/q in Q4 2007, the Bank of Korea said.

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