The dollar fell against its rivals Thursday following yesterday's FOMC misguided decision to keep its target for the federal funds rate unchanged at 2.0% without any indication of when the easy monetary stance will be removed. Despite recessionary conditions in the US, the Fed should hike rates, as the negative real fed funds rate just leads to commodity inflation and stagflation. Stocks fell 3%, commodity prices rallied and gold surged the most in 16 months. The euro rose to the highest level since June 9. The yen and Swiss franc rallied as risk aversion rose on plunging equity prices. After rallying for several days, the Australian and Canadian dollars fell on carry-trade unwinding as investors reduced high-yielding assets.

The GBP/USD broke the downtrend going back to November 2007 on speculation the Fed won't rush to raise borrowing costs to curb inflation and on Bank of England Governor Mervyn King's comments that despite rising inflation now, 'we will ensure it falls back to the 2 percent target.' Four BOE policy makers testifying with King said they considered raising rates this month after UK inflation reached a decade-high. There is strong resistance at the 2.00-handle, but the penetration of the downtrend implies higher rates. If the resistance at 2.00 is broken, the pair will rally to the 2.05 area. Our short GBP/USD stopped out and we lowered the stop for the EUR/USD.

Financial and Economic News and Comments

US & Canada

• The US real GDP was upwardly revised to a 1.0% q/q annual growth rate in Q1, in line with consensus expectations, versus the 0.9% q/q previously estimated, data from the Commerce Department showed. The real GDP rose 2.5% y/y. The largest upward revisions were for consumption (adding 0.8 points to real GDP growth rather than a prior estimate of 0.7) and business investment (adding 0.1 points to real GDP growth versus a prior estimate of zero). The largest downward revision was to inventories, which were flat in Q1 (versus a previous estimate that they added 0.2 points to real GDP growth). The largest drag on the real GDP was home building (subtracting 1.1 points from growth). Excluding housing, the real Q1 GDP grew 2.1% q/q and 3.6% y/y.
• The price index for personal consumption expenditures excluding food and energy (core PCE price index) rose at a 2.3% annual rate, which is above the Federal Reserve's preferred range of 1.5%-2.0%.
• Today's GDP report also included revised data on corporate profits. Corporate profits after taxes fell 7.8% q/q, a sharper decline than previously estimated. Profits declined 3.6% y/y.
• US initial jobless claims were unchanged but remained elevated at 384,000 after seasonal adjustments in the week ended June 21, after revised down 2,000 to 384,000 the prior week, the Labor Department said. A special factor was an additional 4,000 unadjusted flood-related claims from Iowa. The 4-week average of new claims rose 2,250 to 378,250, the highest level since October 2005, from the previous week's revised average of 376,000. Continuing claims, remaining higher than three million for a ninth-straight week, rose 82,000 to 3,139,000 in the week ended June 14, the highest level in more than four years. The overall figures show continued weakness in the US labor market.
  

• Existing home sales rose 2.0% m/m to an annual rate of 4.99 million in May, narrowly beating consensus expectations, from April's 4.89 million annual pace, data from the National Association of Realtors showed. Existing home sales fell 15.9% y/y. Sales were up in the Northeast, Midwest, and West, but down in the South. By type of home, sales increased for both single-family units and condos/co-ops. The median price of an existing home rose to $208,600 in May (not seasonally adjusted) but declined 6.3% y/y. Single-family home prices fell 6.8% y/y. Inventories of homes declined 1.4% in May to 4.49 million available for sale, which represented a 10.8-month supply at the current sales pace following April's 11.2-month supply. 'We expect home sales will continue to stabilize over the long-term,' said NAR economist Paul Bishop. 'Stabilization in home prices can only occur with buyers returning to the market, so we are encouraged by rising home sales, particularly in distressed markets.'
  

Europe

• UK total business investment fell a more-than-expected 1.8% q/q in Q1 2008, after decreasing 1.85% q/q in Q4 2007, according to figures from the Office for National Statistics. Total business investment rose 4.5% y/y in Q1, up from the expected 3.7% y/y increase, but lower than the 5.3% y/y jump in Q4 2007.
• Bank of England Governor Mervyn King told lawmakers in testimony to the Treasury Select Committee he is confident that inflation will fall back to the government's 2% target. However, he warned that before price growth slowed, rising food and energy prices were likely to push inflation above 4% this year. He said an economic slowdown was needed to ensure inflation returned to the goal in the next year or so. 'Although inflation is rising now, we will ensure it falls back to the 2 percent target,' Kind said, adding that higher interest rates would be needed as a result.

Asia-Pacific

• The Bank of Japan is concerned that rising energy and raw-materials costs may crimp spending. 'Even though capital spending and personal consumption remain solid, we need to carefully watch whether weakening of the spending mechanism will hurt domestic demand,' BOJ policy board member Seiji Nakamura said.

FX Strategy Update