The dollar rose against most key currencies Wednesday following better-than-expected data on US productivity and unit labor costs as well as Federal Reserve Bank of Kansas City President Thomas M. Hoenig's comment that serious inflation pressures may prompt Fed interest-rate rises. The euro and pound were pressured by weak economic data ahead of their central banks' rate decisions Thursday. The European Central Bank and the Bank of England are expected to maintain their benchmark interest rates at 4% and 5%, respectively. The yen rose modestly against the dollar and gained in the cross trades as US stocks fell.

The EUR/USD declined on Hoenig's comment, falling eurozone retail sales, and better-than-forecast US productivity and unit labor costs. However, the pair did not penetrate the 1.54-area support. If this support is broken, the pair is likely to fall to 1.49.

Financial and Economic News and Comments

US & Canada

• US productivity accelerated at a 2.2% q/q annualized rate in Q1 2008, the Labor Department said, more than expected and following a downwardly revised 1.8% q/q increase in Q4 2007. Productivity rose 3.2% y/y, the biggest gain in almost four years. The data suggests US firms adjusted to the economic slowdown by shedding workers and cutting back on hours worked.
• US Q1 2008 labor costs climbed at a less-than-expected 2.2% q/q annualized rate, after rising 2.8% q/q in Q4 2007, the Labor Department said. Labor costs increased just 0.2% y/y, the least since Q2 2004. Hours worked declined 1.8%, the biggest drop in five years. Hourly compensation rose 4.4%. Real compensation, adjusted for inflation, increased just 0.1%.

• US pending home sales fell a less-than-forecast 1.0% m/m to 83.0 in March, as declining prices and tougher loan rules discouraged buyers, following a revised 2.8% m/m drop in February, the National Association of Realtors said. Sales dropped 21.7% y/y. The extent of an expected recovery depends on better access to affordable loans, NAR chief economist Lawrence Yun said. 'Things are beginning to improve, but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas,' Yun said

• US consumer credit rose by $15.3 billion in March to $2.56 trillion, more than forecast and the biggest monthly rise since November, after increasing an upwardly revised $6.5 billion, the Federal Reserve said. March's consumer-credit jump indicates the economic slowdown has forced US consumers to accumulate credit-card and other forms of debt.
• Federal Reserve Bank of Kansas City President Thomas M. Hoenig said serious inflation pressures may prompt Fed interest-rate increases. 'There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,' Hoenig said late Tuesday in a speech in Denver.

Europe

• UK factory production unexpectedly declined 0.5% m/m in March, following a 0.4% m/m gain in February, the Office for National Statistics said.
• The Nationwide UK consumer confidence index fell from 77 in March to 70 in April, the least since the survey began in May 2004, Nationwide Building Society reported. The measures of present situation, expectations, and spending fell to 65, 74, and 65, respectively.
  

• European retail sales fell 1.6% y/y in March, double the forecast and the most since 1996, as rising fuel and food costs sapped consumer spending, the European Union's statistics office said. March retail sales declined 0.4% m/m.
  

Asia-Pacific

• The yuan's gains have slowed since the beginning of April, after rising 4.2% in Q1, the fastest since a dollar peg was scrapped in 2005.
  

FX Strategy Update