The U.S. dollar is consolidating this week's losses against most of the major currencies on Friday; trading with a firmer bias within Thursday's trading ranges as the general forces weighing on greenback remain intact.

The negative news stream around Europe's sovereign debt crisis moderating at the same time, though that short-term rates differentials have swung against the dollar and there has been heightened concern over a string of disappointing US economic data.

The yen has under performed this week, slipping almost 1% against the dollar. This reflects the unwinding of cross positions, the stabilization of interest rate differentials, return of the risk appetite and, perhaps, some concern about the outcome of this weekend's upper house election. The Australian dollar was the best performer, gaining almost 4% against the US dollar -- encouraged by supportive indications from the RBA minutes and a strong jobs report that strengthens the conviction that the rate hike cycle is not over.

Canada reported incredibly strong jobs growth (93.2k vs 20k expected) sending the Canadian dollar sharply higher and reinforcing expectations of another BOC hike late this month. Global equities are enjoying one of their best weeks of the year if not longer.

The MSCI Asia-Pacific Index rose 0.9%, capping off a 4% weekly advance. Particularly noteworthy, South Korea's Kospi advanced 1.4% even though the central bank surprised by delivering a 25 bp rate hike. China's Shanghai Index led the advance in the region with a 2.3% gain. Gains were broad based, with basic materials, consumer services and technology sectors leading the way.

European bourses are mostly higher, though they appear to be struggling to sustain the early momentum and the breadth of the gains seems to be narrowing. Most markets are up 5%-6.5% higher on the week, though Spain's IBEX 35 is up a little more than 9% this week. Major bond markets are a bit lower today, generally extending this week's losses. Of note the US 10-year yield moved back above 3% yesterday. U.S., Japanese and German 10-year yields rose 6-8 bp this week.

In Europe, the Spanish bonds were the hardest hit with 10-year yields up 23 bp on the week despite what was thought to be favorable reception to the bond syndication. Note that the US-German two-year spread has continued to widen in Germany's favor. Over the past month there has been a 44 bp swing and the past week accounts for about a quarter of the move.

Currency Markets:

One of the key talking points today will be the fact that late yesterday's the US Treasury issued is review of the currency market and found that while the yuan was under valued, China was not guilty of manipulation. The report was due out in April and was postponed ostensibly in anticipation that China was going to move shortly. It moved in June ahead of the G20 meeting. China's gamesmanship yielded rewards. Congressional leaders took exception and hearings have been promised.

The Obama Administration is making a wager that this Congress will not be able to cobble together enough support to effectively overturn Treasury's decision. However, in fairness, Treasury recognized that it is still not clear how far and how fast China will allow the yuan to adjust. It kept the door ajar as well by indicating the next review will be out in October, which coincidentally is ahead of the November election. For the record, the dollar strengthened every so slightly on the week against the yuan (CNY6.7730 from CNY6.7716 last week).

The yuan has strengthened about 0.8% since the decision to break the dollar peg. No matter how much China allows the yuan appreciate it is unlikely to satisfy the critics some of whom talk about as much as a 40% misalignment. From an economic point of view, the focus on a nominal bilateral exchange rate makes little sense. Note that next week China reports a string of economic releases, including Q2 GDP, CPI, trade and new yuan loans. A picture of a slight cooling in the economy, with still firm inflation (3.3% expected in June after 3.1% in May) and a large, even if not accelerating, trade surplus.

Sterling's resilience today is impressive. The U.K. reports simply dreadful May trade figures. A deficit of GBP8.1 bln compares with expectations of a GBP7 bln shortfall following April's revised GBP7.4 bln deficit (was initially -GBP7.3 bln). Exports rose a minor 0.2% while imports rose 2.4%. The roughly 30% drop in sterling on a trade-weighted basis since 2007 has not translated into better trade figures, but it has been arguably a factor behind the higher UK inflation.

That said, the U.K. reported today that producer prices unexpectedly fell in June for the first time in over a year. The 0.3% fall contrasts with expectations for a 0.0/+0.1% consensus forecast. Oil products, scrap metal and food prices account for the weakness in input prices. Raw material prices as a whole fell 0.2% for the second consecutive month. It gives some hope that consumer prices may be near a crest themselves. The U.K. reports June CPI figures on July 13. The consensus is for the year-over-year pace to ease to 3.2% from 3.4%. Cable has spent the week in a broad sideways market, arguably nesting before taking another leg up. Key support is seen in the $1.5080 area, but it probably will require a break of $1.50 to really undo the constructive tone.

Japan goes to the polls to vote for the upper house this weekend. No single party has enjoyed an outright majority since the late 1980s. The DPJ is in a coalition with the PNP. Arguably since broaching the issue of a consumption tax hike, Prime Minister Kan has seen his support wane.

It is not clear that the DPJ and PNP can retain a majority. Together they have 66 uncontested seats, which includes one independent who often votes with the coalition. It needs 56 seats to secure a majority of 122 seats. Kan has set the goal for the DPJ at 54 seats. He may be disappointed and some polls warn that the PNP might not win an additional seat. If it does, its influence in the coalition is likely to increase and that is important because it is opposed to a hike in the retail sales tax.

A loss of a majority could also see the PNP's influence enhanced. A significant defeat could see calls for Kan's resignation. It would also seem to risk the fiscal austerity thrust of Kan's government. Some local press accounts warn that Ozawa, previously the DPJ Secretary General and kingmaker, may re-emerge as a powerful force is the DPJ does poorly.

Some press reports are playing up the cost of the Swiss National Bank's massive intervention. Since the Swiss franc has continued to strengthen, the euros the SNB bought are worth less when they are converted to francs. But the converting to francs is an accounting exercise. The loss is unrealized and does not have to be realized. This is true for other countries that have accumulated reserves--like China and Japan.

Such assessments confuse central banks for private sector participants. It is possible, however, that the SNB diversifies some of its euro holdings into other foreign currencies, with the dollar and sterling possible candidates.
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