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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 greenback fell against most major currencies on Monday as US stocks declined and crude oil prices rose above $120 a barrel. The dollar, with its overbought condition, was not boosted by the ISM US nonmanufacturing report showing US service industries unexpectedly expanded in April. The Canadian dollar rose the most in two weeks on surging crude-oil prices. The Australian dollar also rallied on strong commodity prices. The Japanese market was closed for a holiday, but the yen was supported by weakness in US equity prices. Sterling was lower against the euro and moderately lower against the greenback ahead of the Bank of Englands interest-rate decision meeting on Thursday, when the BOE is expected to keep its benchmark rate at 5%.
• The EUR/USD rose for the first time in three days on speculation the European Central Bank will keep interest rates at 4%. ECB President Jean-Claude Trichet called inflation risks "significant" and will likely to reiterate the ECB hawkish stance at the ECB policy committee on Thursday. The pair is oversold, unable to penetrate the important 1.54-area support. A break of the 1.54 support would be an important development, possibly setting a test of the support from the uptrend at 1.49. However, more likely the pair will go higher before a serious challenge of the 1.54 support.

Financial and Economic News and Comments

US & Canada

• The ISM non-manufacturing index unexpectedly rose to 52.0% in April from 49.6% in March, indicating expansion in the US service sector for the first time since December, the Institute for Supply Management reported. The business activity index declined to 50.9% in April from 52.2% in March. The new orders index slipped to 50.1% from 50.2%. The prices index increased to 72.1% from 70.8%. The employment index rose to 50.8%, the highest level so far this year, from 46.9.

• Former Federal Reserve Chairman Alan Greenspan said in an interview with Bloomberg News: "Were in a recession. But this is an awfully pale recession at the moment. The declines in employment have not been as big as youd expect to see." "We are clearly receding," with economic growth currently at about 0%, Greenspan said, adding that the recession may extend for the rest of the year.

• The proportion of US banks making it tougher for companies and consumers to borrow approached a record in the past three months, the Federal Reserve said. A net 70% of banks increased loan rates over their cost of funds for commercial and industrial borrowing, compared with 45% in the January survey, according to the Feds quarterly survey of senior loan officers released today.

Europe

• The Sentix euro-area confidence index unexpectedly fell to 3.5 in May from 4.1 in April, indicating the euroarea confidence dropped to near the lowest level in almost three years, German-based research institute Sentix reported.

• European Central Bank President Jean-Claude Trichet, chairing the G-10 meeting under the auspices of the Bank for International Settlements, said the global economy continues to grow and inflation risks are significant. "We see ongoing growth at a significant level, but somewhat lower than in the previous year," Trichet said at a press conference in Basel, Switzerland. "Inflation risks are significant," he said, due to the rise in commodity prices, which is "a very important phenomenon on a global level."
• Germanys retail sales unexpectedly declined in March for a second month on accelerating inflation. Sales declined 0.1% m/m in March after falling 0.7% m/m in February, the Federal Statistics Office said.

Asia-Pacific

• The Australian service PMI plunged to 47.3 in April from 54.9 in March, indicating Australian service demand shrank for the first time in 17 months, Commonwealth Bank of Australia and the Australian Industry Group said. New orders fell even more to 43.6 in April from 58.1 in March. A reading below 50 indicates contraction in the Australian service sector.

• Chinas economy is at risk of overheating and policy makers may increase interest rates. "We will combat demand and prevent rapid economic growth from turning into overheating," Vice Finance Minister Li Yong told delegates at the Asian Development Banks annual meeting in Madrid. "We always say there is a possibility to use interest rates" to restrain inflation, Peoples Bank of China Governor Zhou Xiaochuan said.

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