The dollar extended gains today against the euro and sterling, recovering from previous session's losses to rise toward the 1.58-level versus the euro and beneath 2 against the sterling. The greenback benefited from further declines in crude oil, which lost over $4 to $134.58 per barrel amid softening demand and increased supply as reflected by today's unexpectedly higher EIA oil inventories data. US equities also rallied on a combination falling crude prices and upbeat earnings from Wells Fargo, with the Dow Jones recovering close 2% and the Nasdaq up by nearly 2.75% by the New York afternoon.

CPI Surges, Data Mixed

A barrage of US economic reports were released earlier in the session, including CPI, May net long-term TIC flows, industrial production, NAHB housing market index, and the minutes of the Fed's June meeting. Headline consumer prices jumped higher than expected, rising by 1.1%, sharply outpacing calls for a slight increase to 0.7% from 0.6% a month earlier in May, while the annualized figure posted its largest increase in 17 years, to 5.0% from 4.2% a year earlier.

Industrial output in June reversed a 0.2% decline from May, increasing by 0.5%, while capacity utilization also increased by more than expected to 79.9% from 79.4%. However, the July NAHB housing market index disappointed to the downside, falling to 16 from 18 a month prior.

The minutes from the Fed's June meeting revealed a hawkish tone among the FOMC, reinforcing sentiment that the Bank's easing cycle is over. According to the minutes, the committee said "with increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate". The Fed said "the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and magnitude of s

future policy actions was quite unclear". Nonetheless, the meeting took place prior to the recent strains prompted by uncertainties stemming from concerns over the solvency of Fannie Mae and Freddie Mac, and as such, Chairman Bernanke's testimony yesterday reflected increased risks to growth that were not addressed in the previous meeting's statement. Accordingly, we look for the Fed to remain unchanged from its current policy stance until late Q4, at which point, we deem inflationary conditions would warrant a 25-basis point rate hike to 2.25%.