The dollar fell in NY trading Friday as a government report showed the US economy contracted less than expected in Q2 2009. Private inventories declined sharply for a second quarter, making it likely that the Q3 2009 GDP will show a strong economic expansion as the record drawdown of inventories will set the stage for increased production. The S& P 500 rose 1.73 points to 988.48, moving closer to the 1000 resistance on economic recovery optimism. The euro gained on improved risk sentiment and better-than-expected European labor market statistics. The GBP/USD surged above the important 1.66 resistance. The yen rose against the dollar but fell versus most other key currencies. The commodity currencies advanced. The Australian dollar rose to the highest level since September. The Reserve Bank of Australia will likely keep its key interest rate unchanged at 3.00% early next week. The Canadian dollar climbed to the highest level since October.

The dollar index fell sharply on Friday. The dollar index, trading inversely with the stock market and risk appetite, is testing the lows set in June and December. The index peaked in the beginning of March, which coincided with the US stock market's low. The index then traded sharply lower as stocks rallied. During June's stock-market consolidation, the dollar index moved sideways. If the 78-area support is broken, the index will drop significantly.

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Financial and Economic News and Comments

US & Canada

The US Q2 2009 GDP declined at a less-than-expected 1.0% q/q annualized rate after a downwardly revised 6.4% q/q contraction in Q1, according to advance Q2 GDP data released by the Commerce Department. The Q2 GDP shrank 3.9% y/y, the largest drop for any year in the post-WWII era. The largest negative drags on the Q2 GDP were business investment, personal consumption, home building, and inventories. The Q2 personal consumption declined at a more-than-expected 1.2% q/q annualized pace after Q1's 0.6% q/q increase. The strongest components of the Q2 GDP were international trade, which added 1.4 percentage points to the GDP growth rate, and government spending, which added 1.1 points. The GDP price index was up at a 0.2% q/q annualized rate in Q2, up 1.5% y/y.

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US employment costs rose a slightly more-than-expected 0.4% q/q in Q2 2009 after a record-low 0.3% q/q increase in Q1, according to a Labor Department report.

The Chicago business barometer increased to 43.4 in July, slightly more than our forecast and the highest reading since September 2008, from 39.9 in June, indicating the rate of contraction in business activity slowed this month, according to the Chicago Report by Kingsbury International, Ltd. and the Institute for Supply Management – Chicago, Inc. The production index increased to 43.3 in July from 39.3 in June; the new orders index rose to 48.0 from June's 41.6; the employment rate of decline slowed; the inventories index was at 25.4, the lowest reading since mid-1949; and the price paid and order backlog indexes declined, according to the Chicago report.

Canada's GDP fell a more-than-expected 0.5% m/m in May, a tenth consecutive month-on-month contraction, after a downwardly revised 0.2% m/m decline in April, data from Statistics Canada showed. The GDP dropped 3.5% y/y in May, the largest contraction since October 1982.

Europe

The eurozone consumer-price inflation rate was forecast at -0.6% y/y for July, the deepest decline since records began in 1996, a flash CPI estimate released by Eurostat showed, after -0.1% y/y in June.

The eurozone unemployment rate increased less than expected to 9.4% in June, the highest since 1999, from a downwardly revised 9.3% in May, according to data from Eurostat. The number of persons unemployed rose 158,000 in June.

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The GfK UK consumer sentiment index was unchanged at -25 in July, indicating UK consumer confidence held at the highest level since April 2008, data from GfK NOP showed, adding to signs the UK recession is easing.

The KOF Swiss leading economic index increased to -0.99 in July from an upwardly revised -1.49 In June, the Konjunkturforschungsstelle Swiss Institute for Business Cycle Research reported.

Asia-Pacific

Japan's core consumer prices, which exclude fresh food, fell 1.7% y/y in June, as forecast and the deepest decline since records began in 1971, after a 1.1% y/y slide in May, CPI data from the Statistics Bureau showed. The CPI excluding food and energy declined a slightly more-than-expected 0.7% y/y in June, the fastest pace in more than four years. Tokyo's core CPI fell as estimated 1.7% y/y in July, a record drop. These CPI figures indicate deflation is deepening in Japan.

The Nomura/JMMA PMI advanced to 50.4 in July from 48.2 in June, indicating Japanese manufacturing activity expanded for the first time since February 2008, data released by Markit Economics showed.

Japan's unemployment rate rose more than expected in June to 5.4%, matching June 2003's high, from 5.2% in May, according to data from the Statistics Bureau. The job-to-applicant ratio declined to a record-low 0.43, as forecast, from May's 0.44. Household spending posted the second consecutive gain in June, increasing a less-than-expected 0.2% y/y, a separate report from the Statistics Bureau showed.

Japanese housing starts fell for a seventh consecutive month in June, falling a more-than-expected 32.4% y/y, after May's 30.8% y/y decrease, according to data released by the Ministry of Land, Infrastructure, Transport and Tourism. Construction orders fell for an eighth straight month in June, falling 28.0% y/y to ¥869.7 billion ($9.13 billion), following May's 41.9% y/y drop.

Australia's private sector credit increased 0.1% m/m June, as forecast, after a 0.1% m/m decline in May, data from the Reserve Bank of Australia showed. June private sector credit rose 3.4% y/y, as estimated.

FX Strategy Update

 EUR/USDUSD/JPYGBP/USDUSD/CHFUSD/CADAUD/USDEUR/JPY
Primary TrendNeutralNeutralNeutralNeutralNeutralNeutralNeutral
Secondary TrendNeutralNegativeNeutralNeutralNeutralNeutralNeutral
OutlookPositiveNeutralPositiveNeutralNegativePositivePositive
ActionNoneNoneBuyNoneNoneBuyNone
Current1.425294.611.67031.06851.07750.8361134.85
Start PositionN/AN/A1.4845N/AN/A0.6601N/A
ObjectiveN/AN/AN/AN/AN/AN/AN/A
StopN/AN/A1.5845N/AN/A0.7670N/A
Support1.400094.001.63001.06501.07500.8000132.00
1.380091.501.60001.05001.05000.7800128.00
Resistance1.430097.001.67501.10001.15000.8500137.00
1.460099.001.70001.13001.17000.8700140.00