The dollar fell moderately Wednesday after the FOMC interest-rate decision to keep its benchmark rate at 2.0%. The Fed expressed concerns on rising inflation and inflation expectations; however, not suggesting any imminent interest-rate hikes despite its assessment that downside risks to growth have 'have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.' Sterling was supported by a stronger-than-expected CBI retail survey. The yen was little changed at the important 108-resistance.

The EUR/USD rose after Fed did not suggest any action to contain inflation but instead seems to think it would go away by itself. 'The Committee expects inflation to moderate later this year and next year,' the Fed said. This is in contrast to ECB President Jean-Claude Trichet's testimony to the European Parliament that the ECB was on a 'heightened state of alertness' over inflation, indicating at least one imminent rate hike. The EUR/USD has strong support at the 1.54-handle and resistance in the 1.58-area. If the resistance is broken, a test of the all-time high at 1.6018 is possible.

Financial and Economic News and Comments

US & Canada

• US durable goods orders were unchanged in May at $213.6 billion following April's revised 1.0% m/m drop and March's 0.2% m/m decline, the Commerce Department said. Excluding aircraft and other transportation, durable goods orders fell 0.9% m/m in May. Orders for nondefense capital goods excluding aircraft, a key gauge of future business spending, declined 0.8% m/m in May after rising 3.1% m/m in April. Overall, the May flat number after two consecutive monthly declines is another sign of slowing US economic growth.
  

• US new-home sales fell 2.5% m/m in May, the fifth decline in six months, to a seasonally adjusted annual rate of 512,000, a huge 40.3% y/y drop, data from the Commerce Department showed. Sales were weakest in the Northeast and West and better in the Midwest and South. Inventories of unsold homes rose to a 10.9 months' supply at the current sales pace from a 10.7 months' supply in April. The median new-home sales price in May fell 5.7% y/y to $231,000.
  

• The Federal Reserve left its target for the federal funds rate unchanged at 2.0%, as expected, citing inflation risks from rising energy prices. 'Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased,' the Federal Open Market Committee showed concerns on rising inflation over slowing growth in a statement accompanying the decision. 'The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high,' the Fed said. Dallas Fed President Richard Fisher dissented from today's decision, preferring a rate increase.
  

Europe

• Eurozone new industrial orders increased 2.5% m/m in April after falling 1.2% m/m in March, Eurostat reported. Industrial new orders rose 11.7% y/y.
• The CBI UK distributive trades balance rose to -9, following May's balance of -14 and April's weak -26, the Confederation of British Industry said.
• European Central Bank President Jean-Claude Trichet left open the option of increasing interest rates again after July to contain rising inflation. 'I said that we could increase rates by a small amount in order to secure a solid anchoring of inflation expectations,' Trichet told the European Parliament. 'I didn't say that we could envisage a series of increases. That being said, of course we never pre-commit.'
• Bank of England Deputy Governor John Gieve said the worst is not over for the UK economy, which will weaken for the rest of 2008. 'What started as a very marked turndown in the commercial property market is now spreading into the housing market, and we expect a downturn in economic activity over the rest of this year,' Gieve said in Prospect magazine's July issue. 'So the worst is definitely not over in that sense.'
  

Asia-Pacific

• Japan's exports increased a more-than-forecast 3.7% y/y in May after rising 3.9% y/y in April, data from the Finance Ministry showed.
• Japan's corporate prices accelerated in May. Corporate goods prices surged 1.1% m/m and 4.7% y/y, and corporate service prices increased 0.2% m/m and 0.6% y/y in May, the Bank of Japan said.
  

FX Strategy Update