The greenback jumped sharply higher against the sterling and euro on rumors circulating earlier in the session over uncertainty over the UK political outlook. The dollar relinquished some of its strength to trade near 1.4180 versus the euro and 1.6190 against the pound.

The key May jobs data is due out tomorrow at 8:30 AM and traders will closely analyze the data to gauge the extent of the deterioration in the labor market. The unemployment rate is seen edging up further to 9.2% from 8.9% a month earlier while the non-farm payrolls are expected to post another loss of 520k jobs from 539k loss lost in April.

If the unemployment report is sharply better than expected, the likely scenario to materialize would be a rally in the US equity bourses, prompting a return to riskier assets which would ultimately be detrimental to the dollar.

Sterling Collapses on Rumor

The British pound collapsed by over 3-cents against the dollar, plummeting from 1.6340 to 1.6088 within minutes after 8:00 AM. The catalyst for the sell-off was the rumor that UK Prime Minister Gordon Brown would be stepping down. The sterling recouped some of its losses, recovering by over 100-pips following the rebuttal from PM Brown's office, which dismissed the rumors of his resignation as absolute nonsense.

The Bank of England announced the results of its monetary policy announcement earlier in the session, leaving rates unchanged at record lows at 0.5%, in line with consensus estimates. The BoE said it would maintain its 125 billion asset-purchasing program and expects it to be completed in two months, with the scale to be kept under review. Data released overnight also saw UK Halifax home prices unexpectedly increase by 2.6% on a monthly basis, beating calls for a decline of 1.0%, while the annualized home price index posted a better than anticipated decline of 16.3% compared with 17.7% in the previous year.

In the session ahead, UK PPI data will be released. The headline May PPI input prices index is expected to increase by 0.7% reversing a 1.0% decline a month earlier while sliding by 8.3% on a yearly basis versus a 5.0% drop previously.

Euro Whipsaws

The euro was hit by the rumor-triggered collapse in the sterling, tumbling sharply to 1.4069. However, the single currency quickly recovered and traded briefly above the 1.42-handle before settling around the 1.4170-region by the New York afternoon.

The ECB, as expected, left its benchmark lending rate unchanged at 1.0%, with Bank President Trichet saying interest rates are currently appropriate. The euro received further boost as Trichet suggested that the ECB is no longer contemplating additional covered bond purchases. He said risks on the downside include the outlook for the economy and that he expects inflation rates to return to positive territory by the end of the year. Trichet anticipates the average growth level to be at zero or just beneath in 2010.