•  USD is trading stronger ahead of the two-day EU summit.


  •  EUR fell lower as Italy and Spain await their fate.


  •  JPY strengthens as Japan's political environment improves.


USD - The dollar is stronger against most major currencies as uncertainty ahead of the EU summit remains in the forefront of economic events. Domestically, the Labor Department reported initial claims for state unemployment benefits fell 6,000 to a seasonally adjusted 386,000. Despite the slight drop in claims, the labor market has lost a step in recent months as uncertainty spawned by the debt crisis in Europe and an unclear fiscal policy path at home has made businesses reluctant to hire. However, there are no signs in the claims data that companies are responding to that uncertainty by laying off workers. Jobless claims have barely moved since April and the lack of improvement suggests a fundamental weakness in the labor market. In addition, government data on consumer spending signaled little improvement in the economy. U.S. consumer spending and export growth were lower than previously believed in the first quarter, at a 1.9% annual pace. Concerns about the jobs market prompted the Federal Reserve last week to ease monetary policy further by extending a program to re-weight bonds it already holds toward longer maturities to hold down borrowing costs. However, further stream of weak data could prompt the Federal Reserve to launch a third round of bond purchases to support the lagging recovery.

EUR - The euro hit a four-week low and European shares fell as investors bet that this latest summit would fail to produce concrete measures to tackle the crisis, sending 10-year Spanish government bond yields above the danger level of 7 percent. European finance officials are working intensively on short-term ways to stabilize Spanish and Italian borrowing costs as EU leaders began a 2-day summit to resolve the Eurozone's debt crisis. Despite the efforts to come towards a common strategy, opposing positions in the EU are increasingly suggesting a secondary meet to settle the differences. Dutch Prime Minister Mark Rutte's said that he was not ready to talk about new instruments and rejected German Chancellor Angela Merkel's demand to transfer more sovereignty over national budgets and economic policies to EU institutions. Merkel is being urged at home to hang tough and reject all efforts to make Germany underwrite European borrowing. Despite all the factors stacked against it, the EUR's declines have been relatively mild as investors still expect the region's policymakers to ride to the rescue with a drastic fundamental shift in EU policy.

GBP - Overall risk appetite dragged the pound to a two-week low vs. the dollar, but rose against the euro after a German official quashed any thoughts of rapid decisions at the European Union summit. Domestically, Britain's economy fell back into recession faster than first thought suggesting grim predictions from a central bank now all but certain to revive its stimulus program next week. The Office for National Statistics reported the economy shrank by 0.3% in Q1, a steeper drop than expected of 0.4 from Q1 2011. A spread of downbeat data highlighted broad weakness in Britain's economy, and has bolstered an already strong case for the BoE to restart its quantitative easing bond-buying program. A poll of economists have given a median 75% chance that the bank will add liquidity into the market with another 50 billion pounds of cash at its July 4-5 meeting.

JPY - The yen is up against the dollar and outperforming all of the majors, driven by political conformity and safe haven flows as markets signal concern ahead of the EU summit. The political environment in Japan has also improved as PM Noda has decided not to expel his party's lawmakers that voted against the recent tax hike bill. Domestically, retail sales were better than expected on both a monthly and annualized basis, indicating that improvement in demand is being driven by more than just a recovery from last year's natural disaster. However, if the recent strength in USD/JPY continues further, it is likely to drive an increase in interventionist rhetoric.

Commodity Currencies - The commodity currencies are weaker this morning on risk-off trades amid continued speculation that Europe's financial crisis will slow global growth. With the ongoing EU summit today and tomorrow, market participants are remaining risk averse, thus weighing on equities and commodities. Crude oil, Canada's largest export, slipped 0.5% to $79.83/bbl, gold dropped 1.21% to $1555/oz, and copper remained steady at $343/lb. The CAD dropped over 0.85% against the USD with a change in mortgage rules in Canada, weak retail sales, and headline inflation falling to just 1.8%. The Mexican peso also took a hit, falling from a six-week high to 13.6413 per dollar. The AUD and NZD both dropped 0.43% and 0.57% respectively since yesterday's close.