The dollar sharply rallied against the euro and sterling, reversing yesterday's losses and climbing to 1.39 versus the euro and 1.6242 against the sterling. The 10-year Treasury note edged up toward the 4% level, reflecting underlying fears of forthcoming rate hikes, while the major US equity bourses slid by nearly 1%.

Traders analyzed the US twin deficit data released earlier in the session. The April trade deficit was slightly higher than expectations, edging up to $29.16 billion, from an upwardly revised $28.5 billion from March. US exports slid to its lowest level in 3-years, falling by $2.2 billion to $121.1 billion, while imports fell by $2.2 billion to $150.3 billion. The US Treasury released the May budget deficit earlier, revealing a record $189.5 billion deficit - higher than forecast and up from a $165.93 billion budget deficit a year earlier. The 2009 fiscal deficit climbed closer to the $1 trillion at $991.95 billion.

The Federal Reserve's Beige Book said economic conditions in the 12 Fed districts either remained weak or worsened through May. The report saw five districts acknowledging the downward trend beginning to show signs of moderating while some districts said there are nascent signs that job losses may be moderating. The Fed said districts mostly saw prices at all stages of production to be generally flat or falling, with the notable exception to downward pricing pressures is the widely reported increase in the price of oil. The Beige Book also noted that retail spending remained soft and that real estate markets continued to deteriorate in all districts.

The economic calendar for Thursday consists of May retail sales, weekly jobless claims, and business inventories. The upbeat consumer confidence survey from yesterday bodes well for retail sales with improved sentiment likely to result in increased consumer spending. The headline May retail sales report is expected to reverse a 0.4% decline in April to improve by 0.2%. The core retail sales figure is seen increasing by 0.3% in May, improving markedly from a 0.5% decline in the previous month. Weekly jobless claims are expected to improve to 615k, down slightly from a week earlier at 621k. Lastly, April business inventories are expected to post a 0.8% decline, improving marginally from a 1.0% decline in March.

Yen Slips ahead of GDP

In the coming session, Japan's revised Q1 GDP will be released, with consensus estimates looking for a slightly improved 15% annualized decline from the previous figure of 15.2%. The quarterly figure is estimated to remain unchanged, revealing a Q1 economic contraction of 4.0% on the quarter. The data will reiterate current challenging economic conditions facing the world's second largest economy. Also to be released on Thursday will be capacity utilization, industrial output and consumer confidence.