The dollar was lower versus other key currencies but flat against the yen Monday following further signs of US economic weakness and G-8 finance ministers' weekend meeting that stopped short of calling for a strong dollar. The G-8 focused instead on the rise in commodity prices and the risks this poses to the global economy, keeping the spotlight on global inflation concerns. The relationship between the low US Fed funds rate and rising commodity prices is very strong (see the June 10 report), but there was no suggestion from the G-8 or the US on higher US interest rates. The yen traded little changed at the technically important 108- handle.

The EUR/USD rose above the 1.54-handle as European inflation accelerated to the highest in 16 years in May making it unlikely the European Central Bank will lower interest rates any time soon. Continued weakness in the NY Fed manufacturing and US housing market is likely to delay a necessary Fed tightening to prevent escalating inflation pressures. The pair is likely to continue to trade between the 1.54-support and 1.58-resistance.

Financial and Economic News and Comments

US & Canada

• The NY Fed manufacturing index dropped to -8.7 in June, a faster pace than forecast, led by declines in orders and sales, from -3.2 in May, data from the Federal Reserve Bank of New York showed. A reading less than zero signals a manufacturing contraction in NY. The new orders index declined to -5.5 from -0.5. Shipments dropped to -6.5 from 4.6. An unfilled orders measure declined to -10.5 from -4.4. The inventories index improved to -2.3 from -6.5. The employment measure was 1.2 in June, from 1.1 in May.
  

• The NAHB US housing market index unexpectedly fell to 18 in June, matching a record low, from 19 in May, the National Association of Home Builders/Wells Fargo said. The June number, below 50 indicating poor housing-market conditions, signals the housing slump may worsen.
  

• The Treasury International Capital report on foreign capital flows showed net buying of $115.1 billion in longterm US securities in April, after purchases of $79.6 billion in March, excluding non-market flows, the Treasury Department said.
• Richmond Federal Reserve Bank President Jeffrey Lacker said downside risks to US economic growth have 'diminished,' signaling reversal of previous interest-rate cuts. While the danger of a more rapid slowing in growth 'has not entirely disappeared, my sense is that such downside risks have diminished appreciably,' Lacker said in Spartanburg, South Carolina. 'And just as easing policy aggressively in response to emerging downside risks made sense, withdrawing some of that stimulus as those risks diminish makes eminent sense as well.'
• The G-8-the US, Japan, Russia, Germany, France, the UK, Italy and Canada - stopped short of calling for a strong US dollar and stuck to its practice over the weekend of not making a joint comment on currencies when central bankers are absent. 'The world economy continues to face uncertainty, and downside risks persist,' G-8 officials said in a statement on June 14 after a meeting in Osaka, Japan. 'Elevated commodity prices, especially of oil and food, pose a serious challenge.'
  

Europe

• European consumer inflation rose a stronger-than-expected 0.6% m/m and 3.7% y/y in May, the highest yearly rate in the 16-year history of the series, the Eurostat reported. The core inflation rate rose 0.2% m/m and 2.5% y/y.
  

Asia-Pacific

• China's industrial-production rose 16.0% y/y in May from 15.7% y/y in April, the statistics bureau said. The number matched forecast.
  

FX Strategy Update