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- Euro Gains for Test of 1.4010, But Downside Risks Remain
- British Pound Under Pressure Amid Discord Between BOE's King, Treasury's Darling
- New Zealand Dollar Could Fall If Q1 GDP Results Lead to Shift in Rate Expectations

US Dollar, Japanese Yen Lag as Risk Appetite Sends Carry Trades, Equities Higher
The US dollar and Japanese yen fell this afternoon as risk appetite picked up on reports that the Federal Reserve has decided to scale back some of their liquidity programs, suggesting that conditions have improved. Meanwhile, the Commerce Department said that the final reading of US Q1 GDP was revised up to -5.5 percent from -5.7 percent. However, there weren't many bright spots in the report as changes to the components included revisions in personal consumption to 1.4 percent from 1.5 percent, gross private investment to -48.9 percent from -49.3 percent, exports to -30.6 percent from -28.7 percent, and change in inventories to -$87.1B from -$91.4B.

At the same time, the Labor Department reported that initial jobless claims jumped by 15,000 to a 5-week high of 627,000 during the week ended June 20, while continuing jobless claims rose by 29,000 to 6,738,000 during the week ending June 13. All told, the news runs counter to the optimism surrounding last week's jobless claims and suggests that the next round of US non-farm payrolls will continue to reflect job losses and a rising unemployment rate.

On Friday morning, the Commerce Department is anticipated to say that both personal income and personal spending results for the month of May improved by 0.3 percent. That said, traders should be skeptical of the income result: past increases have been purely the result of rising transfer payments, which include retirement, disability, and employment insurance, while wage and salary compensation has either fallen or stagnated since September 2008. At the same time, the savings rate has surged in recent months, which helps to explain why spending has fallen negative during the past two months. With both demand for and supply of credit still fairly tight, rising savings and lower spending are likely to become persistent trends.

Related Article: US Dollar Weekly Trading Forecast

Euro Gains for Test of 1.4010, But Downside Risks Remain
The euro rallied for a test of 1.4010 against the US dollar today, and while the currency ended the day up against most of the majors, there are longer-term downside risks to consider. Today the International Monetary Fund (IMF) said that Ireland's banks may face up to 35 billion euros in losses through 2010, as GDP there may shrink a cumulative 13.5 percent in the three years through 2010 and banks like the Bank of Ireland and Allied Irish Banks hold massive amounts of bad debts. This has prompted the Irish government to move toward a proposed bad bank called the National Asset Management Agency, which will buy as much as 90 billion euros in toxic property loans, according to Finance Minister Brian Lenihan. However, this is just one example of the sharp deterioration of Euro-zone member countries, and indicates that instability stemming from a one size fits all type of monetary policy enacted by the European Central Bank may only be starting to rear its head.

Meanwhile, the euro held on to its gains from yesterday against the Swiss franc following intervention by the Swiss National Bank. The SNB has said multiple times in the past that they would do so, as an appreciation of the Swiss franc against the euro threatens to increase deflation risks, since the Euro-zone is Switzerland's biggest trading partner.

Related Article: Euro Weekly Trading Forecast

British Pound Under Pressure Amid Discord Between BOE's King, Treasury's Darling
The British pound fell sharply against the US dollar during European trading, but made some headway in the US trading session thanks to a broad revival in risk appetite. There was no UK economic data on hand, but there were signs of turmoil in the relationship between the UK Chancellor of the Exchequer Alistair Darling and the Bank of England. During comments given in front of the Commons Treasury committee, BOE Governor Mervyn King said that he had not been consulted on the Treasury's proposals for regulatory reform and said that the BOE's powers were not as great as its responsibilities to maintain financial stability, stating, ...you, in parliament, must be clear that the Bank of England can only publish reports and make speeches. The discord signals a power struggle between the central bank and government, suggesting that Darling and/or King may be letting politics getting in the way of prudent fiscal governance.

New Zealand Dollar Could Fall If Q1 GDP Results Lead to Shift in Rate Expectations
The New Zealand dollar will face event risk tonight, as upcoming GDP reports are anticipated to show that the New Zealand economy contracted for the fifth straight quarter during Q1 at a rate of -0.7 percent, which could push the year-over-year rate down to match the Q4 1991 low of -2.3 percent. Indeed, the New Zealand economy has been hit hard as demand for exports has fallen, unemployment has climbed, and consumer spending has faltered. As it stand, Credit Suisse overnight index swaps are pricing in a 26 percent chance of a 25bp cut by the Reserve Bank of New Zealand (RBNZ) on July 29, but if New Zealand GDP falls more than expected, speculation of such a move could rise and weigh on the New Zealand dollar.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com