The dollar fell against most key currencies Thursday after European Central Bank President Jean-Claude Trichet said the ECB is on 'heightened alertness' and may raise interest rates in July. The euro rose against all major currencies. The yen and Swiss franc fell on increased carry-trade demand as the US equity market rallied. The Canadian dollar pared its loss after a report showed Canada's PMI rose. The New Zealand dollar fell the most in almost five months after Reserve Bank of New Zealand Governor Alan Bollard said he was 'likely' to lower interest rates from a record high. The Bank of England and the European Central Bank, as forecast, kept benchmark interest rates at 5.00% and 4.00%, respectively. The FX market awaits Friday's employment report for May.

The EUR/USD, unable to penetrate the 1.54-handle support, rallied following Trichet's hawkish comments on inflation. There is resistance in the 1.56-area. The pair may develop a top and go lower; however, the downward momentum is lost as the ECB announced a possible July rate hike

Financial and Economic News and Comments

US & Canada

• US initial jobless claims unexpectedly dropped 18,000 to 357,000, a 6-week low, in the week ended May 31, the Labor Department said. The four-week average of the initial jobless claims fell for a second-straight week, by 2,750 to 368,500; however, remaining above levels seen in 2007 and at the start of 2008. Continuing jobless claims fell 16,000 to 3,093,000 in the week ended May 24; nevertheless, remaining above three million for a sixth-straight week. The four-week average of the continuing jobless claims rose to a 4-year high, suggesting it takes longer for the unemployed to find new work. The overall figures signal some improvement in the labor market ahead of Friday's job report.
  

• Federal Reserve Bank of Richmond President Jeffrey M. Lacker raised concerns of the Fed's rescue of Bear Bear Stearns, saying lending programs the Fed has created to combat the credit crisis distort private markets, encourage risky behavior, and could endanger the Fed's independence. 'The danger is that the effect of recent credit extension on the incentives of financial market participants might induce greater risk taking, which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central bank lending,' Lacker said at the European Economics and Financial Centre, London, England.
• Federal Reserve Bank of Philadelphia President Charles Plosser also warned that the Fed's actions can distort markets and prices and 'effectively subsidize risk-taking by systemically important financial institutions.' 'Policy interventions in financial markets run the risks of increasing moral hazard and inhibiting efficient price discovery,' he told the Society for Financial Econometrics in New York City. 'Moreover, interventions intended to quell instability can, by creating moral hazard, actually make instability more severe in the long run,' Plosser said.
• Canada's building permits surged a more-than-expected 15% m/m in April. The value of permits issued by municipalities rose to a 6-month high of C$6.4 billion ($6.27 billion), Statistics Canada reported. Permits for multiple-unit housing soared 40% m/m to C$1.9 billion, the highest since December 2005.
• The Ivey purchasing managers' index rose more than forecast to 62.5 in May from 57.6 in April, according to the survey by the Ivey School of Business in London, Ontario. The data indicates Canadian business and government spending accelerated in May as a reading above 50 means purchasing increased.

Europe

• The European Central Bank, as expected, kept its benchmark interest rate at 4.00%. ECB President Jean- Claude Trichet said the ECB is on 'heightened alertness' and may raise interest rates next month on inflation outlook. 'It's not excluded that, after having carefully examined the situation, that we could decide to move our rates by a small amount at our next meeting,' Trichet said at a press conference in Frankfurt after the ECB rate decision. 'I don't say it's certain. I said it's possible,' he said.
• The Bank of England held its key interest rate at 5.00%, as forecast.
• Germany's manufacturing orders unexpectedly declined 1.8% m/m, dropping for a fifth month in April, the Economy Ministry in Berlin said. The monthly decline adds to evidence that economic growth in Germany is slowing. Manufacturing orders rose 4.0% y/y.
  

Asia-Pacific

• Reserve Bank of New Zealand Governor Alan Bollard said he may lower interest rates from a record this year, triggering the biggest fall in the New Zealand dollar in five months. 'Our forecast is consistent with the possibility of a rate cut in the third quarter,' Bollard said.
  

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