The dollar gained against most key currencies Thursday as oil prices eased and an unexpected drop in US jobless claims spurred optimism that the Federal Reserve is done lowering interest rates. Sterling was higher after UK retail sales fell less than forecast. The Australian dollar fell modestly following yesterday's break out of its recent trading range. The Canadian dollar declined on modest retail sales gains. The yen and Swiss franc fell on increased carry-trade demand.

The USD/JPY was higher in its recent trading range as US stocks advanced modestly. The pair is highly correlated to the US stock market that is also in its trading range and consolidating earlier gains. There is support in the 102-area and resistance in the 106-area.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims dropped last week while continuing claims stayed above three million for a fourthstraight week. Initial claims fell a larger-than-expected 9,000 to 365,000 in the week ended May 17, the Labor Department said. However, the 4-week average of new claims rose 5,000 to 372,250, slightly higher than a month ago. Continuing claims were unchanged at 3,073,000, a 4-year high, in the week ended May 10. The figures suggest some stability in the labor market this month, but the trends indicate more trouble ahead.
  

• US house prices fell 1.7% q/q in Q1 2008 after declining 1.4% q/q in Q4 2007, the Office of Federal Housing Enterprise Oversight reported. Prices fell 3.1% y/y compared to Q1 2007. Prices declined 0.4% m/m in March. The OFHEO index is based on repeat sales of homes mortgaged through Fannie Mae and Freddie Mac.
• Canadian retail sales increased a less-than-expected 0.1% m/m in March, following a 0.8% m/m decline in February, Statistics Canada reported. Sales rose 4.6% y/y. Sales at new car dealers advanced 0.3% m/m and sales at gasoline stations gained 0.7% m/m in March. Those increases offset declines in clothing, building and outdoor home supplies and general merchandise stores

Europe

• UK retail sales fell a less-than-expected 0.2% m/m in April after dropping the same amount in March, the Office for National Statistics said. Sales rose 4.2% y/y.
• UK business investment fell 1.4% q/q in Q1 2008 but rose 3.7% y/y compared to Q1 2007, the statistics office said.
• European Central Bank Governing Council member Christian Noyer said financial crisis is not over and risks 'still remain high, and tensions remain on the monetary market. But it is true that we see encouraging signs.' The foreign exchange market is currently volatile and variations between currencies are 'abnormal and very dangerous for the global economy,' he said.
  

Asia-Pacific

• Japan's exports rose a stronger-than-expected 4.0% y/y in April as shipments to Asia and emerging markets helped offset slowdown in US exports. However, imports rose 11.9% y/y as oil prices surged to a record, narrowing the trade surplus by 46.3% y/y to ?485 billion ($4.7 billion), the Finance Ministry said. Exports to the US fell 9.1% y/y, while exports to China rose 14.1% y/y in April.
  

FX Strategy Update