The dollar fell against most key currencies Thursday on surging commodity prices as well as risks for a US recession indicated by the Conference Board US LEI dropping a more-than-expected 0.7% in July. Oil prices jumped nearly 5% as geopolitical tensions increased amid the Russian-Georgian conflict. The Australian and Canadian dollars rose as gold and oil surged. The European currencies gained as the dollar's momentum slowed and the other major currencies reduced their oversold conditions.

The USD/JPY declined following the last days' failing attempt to penetrate the 110-area resistance. The pair broke the short-term uptrend pressured by continuing credit-market worries and a report Lehman Brothers failed to raise capital. The development in the US equity market is crucial to the USD/JPY direction. If the stock market decline continues, the USD/JPY will likely break the 108-support.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims fell for a second consecutive week, declining 13,000 to a seasonally adjusted 432,000 in the week ending August 16, the Labor Department said and revised the previous week's jobless claims data down 5,000 to 445,000. The 4-week moving average of new jobless claims rose 7,250 to 445,750, the highest since December 2001 and above the 400,000 mark typically seen as recession territory, from the prior week's revised average of 438,500. Continuing jobless claims in the week ending August 9 fell 17,000 to 3.362 million; however, remaining at elevated levels. The 4-week moving average of those continuing claims increased 66,250 to 3.330 million, remaining at levels typically associated with recessions, from the preceding week's revised average of 3.264 million. The unemployment rate for workers with unemployment insurance was unchanged at 2.5%.

• The Conference Board US leading economic indicators index, having dropped two out of the last three months, fell a more-than-forecast 0.7% in July to 101.2. The 6-month change in the index was -0.9%, with widespread LEI weaknesses. Meanwhile, the composite index of coincident indicators edged up 0.1% in July to 106.8 and the composite index of lagging indicators increased 0.4% to 112.1. 'Taken together, the current behavior of the composite indexes suggests that the risks for further economic weakening in the near term remain elevated,' the Conference Board said. Overall, we believe the US economy is entering or already in a recession. The LEI fell to -3.3% y/y in July from -1.9% y/y in June. As illustrated in the chart, a level below -2% y/y is typically associated with recessions (see yellow areas).
  

• The Philadelphia Fed general business activity index rose to -12.7 in August from -16.3 in July, indicating manufacturing in the Philadelphia region contracted for a ninth straight month, the Federal Reserve Bank of Philadelphia said. The new orders measure increased to -11.9 in August from -12.1 in July. The shipments gauge rose to -3.3 from -8.0. Readings below zero indicate contraction, while positive numbers point to growth. While price pressures remain, they were slightly less widespread compared to recent months; the prices-paid measure fell to 57.5 in August, the first decline in four months, from July's 75.6. The pricesreceived gauge declined to 27.0 from 28.8.

• Canada's consumer prices rose 3.4% y/y in July, the highest annual inflation rate since 2003 due to a surge in gasoline prices, Statistics Canada reported. The CPI rose 0.3% m/m. The core CPI, which excludes gasoline and seven other volatile items, rose 1.5% y/y and 0.1% m/m in July. With most of July's CPI increase tied to energy prices, which have fallen in the past month, the high headline rate may not affect the Bank of Canada's ability to lower interest rates to support Canadian economic growth.

Europe

• Royal Bank of Scotland Group Plc's eurozone composite index unexpectedly rose to 48.0 in August after 47.8 in July, Reuters Plc reported, based on a survey of purchasing managers by Markit Economics. Readings below 50 indicate contraction. The eurozone manufacturing PMI increased to 47.5 in August after 47.4 in July while the services PMI declined to 48.2 from 48.3. The figures indicate eurozone manufacturing and service industries contracted for a third month in August and there is a risk that the eurozone economy will contract in Q3.
  

• UK retail sales unexpectedly increased 0.8% m/m in July led by discount stores after falling 4.3% m/m in June, which was the biggest drop since at least 1986, the Office for National Statistics said. Retail sales rose 2.1% y/y, the least since February 2006.
  

Asia-Pacific

• Japan's July trade surplus fell more than expected to ?91.1B ($829M), an 86.6% decline due to an 18.2% surge in imports. The fall, a fifth consecutive monthly drop, reflected a near 70% rise in crude oil prices. Mainland China overtook the US as Japan's largest export destination for the first time last month. Exports to China surged 16.8% in July to their highest level, while exports to the US fell 11.5%, marking an 11th consecutive monthly decline. Overall, shipments rose 8.1%, after falling in June for the first time since 2003, the Finance Ministry said

FX Strategy Update