USD Slumps as Oil Spikes

The dollar tumbled across the board in the Thursday session on the heels of a rally in oil, which jumped to its highest level in 2 ½-weeks to $121.94 per barrel. The spike higher in crude prices was prompted by a combination of heightened geopolitical uncertainty stemming from Russia's decision to halt cooperation with NATO and warnings that Saudi Arabia may scale back its recent increase in production amid declining prices. The move higher in oil sent the greenback lower, falling near the 1.49-level against the euro and 108.10 versus the yen.

The US economic reports released today saw improvements in both weekly jobless claims and the Philadelphia Fed manufacturing survey. Weekly jobless claims improved to 432k, down from 450k a week earlier. Meanwhile, the Philadelphia Fed manufacturing survey was better than expected at -12.7 in August, versus calls for an improvement to -14.0 from -16.3 in the previous month. The July leading indicators deteriorated to -0.7%, compared with -0.1% from June.

Traders will look ahead to tomorrow's speech by Fed Chairman Ben Bernanke slated for 10:00 AM. His speech will be closely scrutinized for hints on future policy moves and any indications of support for troubled Fannie Mae and Freddie Mac.

GBP Bounces on USD Weakness

Cable rallied to 1.8780 amid weakness in the greenback. The sterling rally will likely be short-lived particularly heading into the Friday session with the 2nd release of UK GDP due out. The data are seen revealing further downward revisions to the growth rate of the UK economy in Q2, down to 0.1% from 0.2% in the previous quarter and at 1.5% versus 1.6% in the year prior. The sluggish figures will likely reinforce sentiment that the UK economy is headed toward a recession and that the Bank of England's next move may be a rate cut. The recently released minutes from the BoE's last meeting offered a dovish stance, acknowledging that inflation momentum may have eased given lower oil and commodity prices. We expect the sterling to continue to extend losses, with our interim target at 1.84.

USD Eases on Data, Oil

The dollar continued to relinquish its gains versus the majors in Tuesday trading, falling to 1.4791 against the euro and giving back the 110-handle versus the yen. Rebounding oil and commodity prices, combined with more evidence of deterioration in the US housing market prompted further profit taking in the greenback. Crude oil edged up to a session high of 116.12 but closed at 114.31 while spot gold recovered above the $800-level to $810/oz.

The economic reports released earlier in the session saw housing starts slump by 11% to 965k units for July, down from 1.066mln units a month prior. Building permits reversed the16.4% increase from June, sinking by 17.7% to its lowest level in 17-years at 937k units, down sharply from 1.138mln units previously. Meanwhile, producer prices firmed in July as core PPI increased to 0.7% up from 0.2% a month earlier and 3.5% compared with 3.0% from the previous month. Headline producer prices shot up to 9.8% versus 9.2% from a year earlier.

The next batch of US data are slated for release on Thursday, including weekly jobless claims, leading indicators, and the Philadelphia Fed manufacturing survey. Weekly jobless claims are seen easing slightly to 433k, down from 450k, while July leading indicators are estimated to worsen to -0.2% from -0.1%. The Philadelphia Fed manufacturing survey is expected to improve to -14.0, from -16.3 from July.

JPY Recovers Despite BoJ

The yen regained footing against the dollar, recovering to a session high at 109.53 despite a bleak outlook from the Bank of Japan. The BoJ, as expected, left monetary policy unchanged. However, in the Bank¡¯s economic outlook, it described the economy as ¡°sluggish¡± with BoJ Governor Shirakawa adding that ¡°the timing of an economic recovery is likely to be delayed slightly longer than initially expected¡±. The economic assessment was also downgraded to ¡°weakening¡± by the Cabinet Office, stressing that ¡°attention should be given to further downside risks that could stem from developments in the US economy, the stock and currency exchange markets and oil prices¡±.

USDJPY trades near 109.70, with support seen at 109.50, followed by 109 and 108.50. Subsequent floors will emerge at 108, followed by 107.70 and 107.45. On the topside, interim resistance starts at 110, followed by 110.30 and 110.70. Additional ceilings will emerge at 111 and 111.50.