They continue to look for "a general US dollar recovery against many G-10 currencies" and maintain that "for H2 2008, the weakness in the US economy has mostly been factored into the dollar, while the deterioration elsewhere should be built in." The dollar may rebound even though the US economy is likely to remain relatively weak. Their end of June, Sept and December euro forecasts remain unchanged at $1.55, $1.51 and $1.48 respectively, but their 2009 forecasts (March, June, Sept, Dec) have been raised to $1.42, $1.40, $1.38 and $1.33 from $1.40, $1.33, $1.30 and $1.28. In dollar-yen, a currency pair where the greenback will not be as buoyant, Merrill's June, Sept and Dec 2008 forecast is now Y103, Y103 and Y102 vs Y102 in all three periods previously. Their 2009 dollar-yen forecasts (March, June, Sept Dec) remain unchanged at Y100, Y98, Y98, Y98.

"The directions of output, inflation, credit growth and bond yields suggest that there is likely to be more pain ahead across the board. The Feds actions will likely succeed in keeping the US from going into a deep recession. However, this monetary easing is more aggressive than historical precedents and will likely spill over into higher inflation, pulling bond yields higher."

Stocks are continue to push higher, with each of the major indices up more than 1%.The materials sector is providing leadership with a solid gain of 1.8%, marking a fresh lifetime high. The sector is the best performing this year with an advance of 8.4%. Agriculture chemical company Monsanto (MON 123.98, +3.59) is providing the biggest boost, up 3%

EUR/USD $1.5300
USD/JPY Y104.00
EUR/JPY Y159.00
GBP/USD $1.9760
AUD/USD $0.9340, $0.9370, $0.9475
USD/CAD C$1.0070

The dollar rose to a one-week high against the yen as an advance in U.S. stocks encouraged investors to buy higher-yielding assets funded in Japan.

The 15-nation euro is overvalued by as much as 20 percent against the dollar, French Finance Minister Christine Lagarde said late yesterday. The Australian dollar fell against the Canadian dollar, the U.S. dollar and the pound as wage growth unexpectedly slowed last quarter.
The dollar erased earlier gains versus the euro, in what analysts said was a knee-jerk reaction to the CPI report.

The yen fell broadly on Wednesday as a benign U.S. consumer inflation report for April raised investors' appetite for risk and was seen giving the Federal Reserve flexibility to deal with an economic downturn.

The unexpectedly slower increase in the consumer price index (CPI) briefly caused traders to sell the dollar, but analysts said it did not alter market views the Fed's interest-rate-cutting campaign was almost over.

Sterling slumped to a near three-month low against the dollar after the Bank of England, in its quarterly inflation report, said British prices would shoot up this year, which many believe may delay interest rate cuts.

Gains extend to $1.5475 in early afternoon, allowing the euro to flirt with morning highs at $1.5487 although flows are said to be lighter now than they were earlier in the day. Earlier lift saw euro stops tripped above $1.5480 area before the pair stalled ahead of offers at $1.5500, interest that remains in place.

``A stronger equity market is helping risk appetite,'' said Fabian Eliasson, vice president of foreign-exchange sales at Mizuho Corporate Bank in New York. ``In the short run, we are going to see higher dollar-yen.'

Stocks are trading off their best levels of the session, but continue to post solid gains.Shares of farm and construction machinery manufacturer Deere (DE 82.82, -7.37) are getting hammered, falling more than 8%. Deere's solid 28% increase in earnings per share fell short of analysts' lofty expectations, which is spurring some profit-taking. Deere is the worst performing stock in the S&P 500; Caterpillar's (CAT 82.53, -1.54) stock is falling in conjunction. As a result, Industrials (+0.5%) are underperforming the broader market.

A net 47% of portfolio managers said the dollar was undervalued in May, compared to 50% in April and 35% in February. A net 28% saw the yen as undervalued in May versus 20% in April and 38% in February and a net 75% saw the euro as overvalued, compared to 71% in April and 62% in February.
In a new poll about commodities, Merrill Lynch asked portfolio managers their view of gold and oil prices. A net 29% of fund managers saw gold as overvalued and a net 52% of managers saw oil as overvalued in May. The poll was conducted May 2-8.

Stocks are posting healthy gains, with nine of the ten economic sectors in positive territory. This session's strength is mostly broad-based, with telecom (+1.5%), financials (+1.4%), consumer discretionary (+1.4%) and tech (+1.0%) all showing early strength.
The energy sector (-0.3%) is a notable laggard as crude prices slip 0.9% to $124.70 per barrel ahead of the government's weekly energy report (14:30 GMT).

Futures have positive reaction to a lower than expected inflation reading (S&P futures vs fair value: +6.7. Nasdaq futures vs fair value: +10.0.). April CPI rose 0.2% month-over-month, compared to the expected rise of 0.3%. Excluding fuel and energy costs, CPI rose 0.1%, compared to the expected 0.2% increase. CPI is up 3.9% compared to last year, and CPI ex food and energy is up 2.3%. Separately, Macy's reported first quarter earnings of $0.02 per share, excluding nonrecurring items, which topped expectations by four cents. The company reaffirmed its guidance for full year 2009, as it expects to earn between $1.85 and $2.15 per share.
In earnings news, Freddie Mac (FRE) reported a smaller-than-expected loss of $0.66 per share, compared to the consensus estimate that called for a loss of $0.93. The company expects to raise $5.5 billion in capital in the near future. Meanwhile, Deere (DE) and Whole Foods (WFMI) missed their estimates, while Electronic Arts (ERTS) came out ahead of expectations.
Crude oil is trading down 0.3% to $125.40 per barrel ahead of the government's weekly energy report.

Dow futures building gains of 50 points now vs losses of 30 seen about an hour ago. Nasdaq futures are up 9 but had been down 4.

The dollar gained against the euro before a government report that will probably show no slowdown in U.S. inflation, boosting speculation the Federal Reserve will stop cutting borrowing costs next month.

The British pound dropped as the Bank of England released its quarterly inflation report.
`A combination of the outlook for a weakening economy and high inflation brings stagflation and difficulty for central bank-policy management,'' Masafumi Yamamoto, head of foreign- exchange strategy for Japan at Royal Bank of Scotland in Tokyo, wrote in a research note today. ``We maintain a bearish forecast'' for the pound.
The yen fell as gains in stocks encouraged investors to buy higher- yielding assets in so-called carry trades.

EUR/USD having posted session low at $1.5395 rose to $1.5450 before retreated to $1.5435. Bids $1.5400/1.5380, $1.5350. Offers $1.5440/50, $1.5475/80, $1.5490/00.

GBP/USD tested $1.9360 before rebounded back above $1.9400. Bids $1.9350, $1.9330, $1.9310/00. Offers $1.9400/10, $1.9450.

USD/JPY reached Y105.45 before stabilized around Y105.30.

Having seeing lows of $1.5396. the rate edged to the lover bound of the offers zone between $1.5440/50. Supply gets stronger between $1.5475/80, with further interest noted between $1.5490/00. Bids remain in place between earlier lows at $1.5396, with interest extending to $1.5380.

FREDDIE MAC:1Q LOSS $0.66 SHARE

The cable is finding difficulty in building above $1.9400, with offers noted to $1.9410/20. Above here we expect progress through $1.9450/60 to prove laboured. Bids remain in place to $1.9350. Below $1.9350 to open a deeper move toward tech support area around $1.9330.

The dollar climbed for a third day against the yen before a government report that will probably show no slowdown in U.S. inflation, boosting speculation the Federal Reserve will stop cutting borrowing costs next month.

The dollar also gained against the euro after French Finance Minister Christine Lagarde said late yesterday that the single currency is overvalued by as much as 20 percent.

A euro exchange rate of $1.55 ``is still at 10 percent, 15 percent, 20 percent above the appropriate fundamentals,'' Lagarde said in Brussels at a meeting of euro-area counterparts.

``The U.S. has been through the worst in terms of negative news, the rest of the world still has the worst to come,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, France's biggest bank. ``We expect the dollar to maintain its recovery throughout the rest of the year.''
The British pound traded at $1.9429 after dropping as much as 0.8 percent yesterday to $1.9419, the lowest since Feb. 21, before the Bank of England releases its quarterly inflation report. The bank held its target lending rate at 5 percent on May 8. The report was scheduled for release at 10:30 a.m. in London.
JPMorgan Chase & Co. pushed back its forecast for a rate cut until July or August from a previous prediction of June because of inflation. Royal Bank of Scotland Group Plc predicted the BOE will keep rates on hold this year, a change from the bank's previous forecast for a cut in July.

`A combination of the outlook for a weakening economy and high inflation brings stagflation and difficulty for central bank-policy management,'' Masafumi Yamamoto, head of foreign- exchange strategy for Japan at Royal Bank of Scotland in Tokyo, wrote in a research note today. ``We maintain a bearish forecast'' for the pound.
The yen fell as gains in stocks encouraged investors to buy higher- yielding assets in so-called carry trades.

Resistance 3: Y106.30Resistance 2: Y105.60
Resistance 1: Y105.40
Current price: Y105.17
Support 1: Y104.30

Support 2: Y103.40

Support 3: Y102.60

Resistance 3: Chf1.0730
Resistance 2: Chf1.0620
Resistance 1: Chf1.0590

Current price: Chf1.0590

Support 1: Chf1.0470

Support 2: Chf1.0400

Support 3: Chf1.0320

Comments: Dollar rises. Resistance comes at Chf1.0590 with a break above will open the way to recent highs on Chf1.0620/25. Strong support is around Chf1.0470, stronger – on Chf1.0400, then – at Chf1.0320.

- House prices are likely to fall further

Resistance 3: $1.9780
Resistance 2: $1.9600
Resistance 1: $1.9500
Current price: $1.9443
Support 1: $1.9400
Support 2: $1.9360
Support 3: $1.9280

Comments: Cable still under pressure. Support comes near yesterday’s lows on $1.9410/00. Below losses may widen to Feb lows at $1.9360. Resistance comes at recent high on $1.9500. Above there is a room for a rise up to $1.9600 and $1.9780.

- MPC not ignoring near-term rise in inflation

- MPC sees slowing demand growth needed this year

- Will take time for credit conditions to improve
- Squeeze from energy, food affecting spending

--Inflation Seen Around 2.25% At 2-Year Point Based On Market Rates
--Inflation Seen Only Slightly Below 2% In 2 Years On Constant Rates
--Implied Market Rates Seen Around 4.6% At End 2008; 4.5% Q2 2009
--Forecast For GDP Somewhat Weaker Vs Feb Rept.; Risks To Downside
--Risks To Inflation On Upside In The Medium Term

- Does not see global economic recovery before 2009.

Resistance 3:$1.5640
Resistance 2: $1.5590
Resistance 1: $1.5570

Current price: $1.5420

Support 1: $1.5400
Support 2: $1.5365
Support 3: $1.5280

Comments: Euro piersed strong support at $1.5430 (yesterday’s lows) and for now remains under pressure. Further sales may widen till $1.5400, $1.5365 and Friday’s low on $1.5280. Monday’s high on $1.5570 is quite a strong resistance. Above the rate may rise to May 6 high at $1.5590 and to the key level $1.5640 (50% of the resent fall from $1.6017 to $1.5280).

EUR/USD $1.5380
USD/JPY Y103.00, Y102.00
EUR/JPY Y159.00, Y164.00
GBP/USD $1.9480, $1.9400.
NZD/USD $0.7660

The dollar gained against the euro before a government report that will probably show no slowdown in U.S. inflation, boosting speculation the Federal Reserve will stop cutting borrowing costs next month.
The Australian dollar fell after a government report showed wage growth unexpectedly slowed last quarter.
Cleveland Fed President Sandra Pianalto, Kansas City Fed President Thomas Hoenig and the Dallas Fed's Richard Fisher said yesterday they're concerned about rising prices.

EUR/USD rose to $1.5480 before retreated to session lows on $1.5421.
GBP/USD tested $1.9460 before it fell back to $1.3890.
USD/JPY rose from Y104.55 to Y105.20.

Today’s focus on US data, including consumer prices. Analysts predict Core CPI rose 0.2% in April.

Stock market fixing:
Nikkei 225 +210.37 +1.5% 13,953.73
Topix +17.26 +1.3% 1,360.05
FTSE 100 -8.70 -0.14% 6,211.90
CAC 40 +22.46 +0.45% 4,998.67
Xetra Dax +24.24 +0.34% 7,060.19
DOW -44.13 -0.34% 12,832.18
NASDAQ +6.63 +0.27% 2,495.12
S&P 500 -0.54 -0.04% 1,403.04
10yr Note +1.3400 +0.355% 3.909%
NYMEX Crude Oil +1.57 +1.26% 125.80
Gold -15.30 -1.73% 869.60

Japan's stocks rose the most in a week after forecasts from companies focused on Asian markets fueled confidence earnings can withstand a slowdown in the U.S. economy.
Nikon Corp. had its biggest gain in five years, while Fujitsu Ltd. soared the most in 17 years. Isuzu Motors Ltd. led automakers higher after saying profit will rise.
Nikon surged 13%, the biggest gain since November 2002, while Tamron Co., which makes interchangeable camera lenses, added 6.3%. The Topix Precision Instruments Index had the biggest gain on the benchmark.
Nikon yesterday forecast annual profit will rise to a record for a fifth-straight year and announced its first share buyback in five years.

European stocks declined as speculation that accelerating inflation will keep central banks from lowering interest rates dragged down financial shares, while energy companies dropped on concern oil demand will slow.
Barclays Plc fell for a fourth day as inflation in the U.K. jumped the most since 2002, while Alliance & Leicester Plc tumbled on writedowns. Royal Dutch Shell Plc and StatoilHydro ASA declined as the International Energy Agency lowered its oil demand forecast.
U.K. consumer prices climbed 3% from a year earlier, compared with 2.5% in March, the Office for National Statistics said today in London. The result was the highest in 13 months and exceeded the 2.6% median prediction of 37 economists.
Alliance & Leicester decreased 10%. The British bank that gets a quarter of revenue from mortgages and savings announced writedowns of 391 million pounds ($763 million).
Credit Agricole SA dropped 5.6% after France's third-largest bank by market value said it may raise 5.9 billion euros in a rights offer to replenish capital as first-quarter profit dropped on subprime-related writedowns.

U.S. stocks closed mix amid Federal Reserve Chairman Ben S. Bernanke said financial markets remain ``far from normal,'' home prices tumbled and the outlook for securities firms' profits worsened. Stocks slipped modestly Tuesday morning as investors weighed Hewlett-Packard's nearly $14 billion acquisition of EDS, Wal-Mart's better earnings and tepid forecast and another record for gas prices.
JPMorgan Chase & Co. and Citigroup Inc. led 28 of 30 banks and brokerages in the Standard & Poor's 500 Index lower after Bernanke said financial companies will have to raise more capital. Bank of America Corp. slipped on a forecast for home- equity loan losses that was wider than its prediction last month. Hewlett-Packard Co. tumbled the most since January on its $13.9 billion purchase of Electronic Data Systems Corp.
Financial shares also retreated after Oppenheimer & Co. analyst Meredith Whitney reduced earnings estimates for Wall Street's biggest securities firms. Bank of America dropped. The second- biggest U.S. lender expects losses to top 2.5% of its $118 billion in loans linked to home values, Liam McGee, president of the company's consumer and small business division, said at a conference in New York sponsored by UBS AG. The bank previously projected a loss rate of between 2% and 2.5%.
Hewlett-Packard dropped. The purchase is the company's largest since the $18.9 billion takeover of Compaq Computer Corp. and will more than double its sales from computer services.
Wal-Mart Stores Inc., the world's largest retailer, declined as Chief Executive Officer H. Lee Scott said there are ``uncertainties'' about the rest of the year.

The dollar rose for the first time in four days against the euro as retail sales excluding autos increased in April more than forecast, raising speculation the Federal Reserve will stop cutting borrowing costs. The U.S. currency appreciated versus the Australian dollar and the Swiss franc as Cleveland Fed President Sandra Pianalto cited the risk of inflation. The yen fell against the Canadian dollar, the South African rand and the Brazilian real as reduced currency volatility encouraged investors to buy higher-yielding assets funded by low-cost loans in Japan.
The pound dropped as much as 0.8%, the lowest since Feb. 21, as London's property market had the most widespread price declines last month in at least 14 years, while inflation in April was the highest since 2002. The Bank of England held its target lending rate at 5 percent on May 8.
Retail sales excluding autos in the U.S. rose 0.5 percent last month, following a revised 0.4 percent increase the previous month, the Commerce Department said in Washington. The median forecast of 74 economists surveyed was for a 0.2 percent increase. Total sales fell 0.2 percent, as economists forecast.
Futures on the Chicago Board of Trade show a 94 percent chance the Federal Reserve will hold its target lending rate at 2 percent at its next meeting on June 25, compared with 86 percent odds yesterday. The balance of bets is for a cut of a quarter-percentage point. There's a 22 percent chance of an increase to 2.25 percent in September.
Fed Chairman Ben S. Bernanke told an Atlanta Fed conference in Sea Island, Georgia, that financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed.

EUR/USD printed lows around $1.5430. Bids around $1.5435/25 helped the rate to rebound to $1.5520.

GBP/USD rose sharply after strong inflation report but soon retreated back to lows near $1.9453, then – to $1.9417. Further rate held near $1.9492.

USD/JPY printed lows near Y103.40 before it rebounded to Y103.80/00.

Today’s focus on US data, including consumer prices. Analysts predict Core CPI rose 0.2% in April.

An afternoon rally sent Japanese stock indices higher Wednesday. The benchmark Nikkei 225 was higher by 164.82 points, or 1.18%, to close at 14118.55 - the highest close in over 4 months. The broader-based TOPIX was also higher, gaining 12.99 points t stand at 1373.04.

Resistance 3: Y106.30
Resistance 2: Y105.40
Resistance 1: Y105.00
Current price: Y104.80
Support 1: Y104.30
Support 2: Y103.40
Support 3: Y102.60
Comments: Dollar rebounds. The nearest resistance is Y105.00 and trend line from Oct 2007 at Y105.40. Support is near Y104.30, then – at Y103.40 with a break under will widen losses to Y102.60.

Resistance 3: Chf1.0730
Resistance 2: Chf1.0620
Resistance 1: Chf1.0580
Current price: Chf1.0560
Support 1: Chf1.0470
Support 2: Chf1.0400
Support 3: Chf1.0320
Comments: Dollar rises. Resistance comes at Chf1.0580 with a break above will open the way to recent highs on Chf1.0620/25. Strong support is around Chf1.0470, stronger – on Chf1.0400, then – at Chf1.0320.

Resistance 3: $1.9780
Resistance 2: $1.9600
Resistance 1: $1.9500
Current price: $1.9443
Support 1: $1.9420
Support 2: $1.9360
Support 3: $1.9280
Comments: Cable still under pressure. Support comes near yesterday’s lows on $1.9420. Below losses may widen to Feb lows at $1.9360. Resistance comes at recent high on $1.9500. Above there is a room for a rise up to $1.9600 and $1.9780.

Resistance 3:$1.5640
Resistance 2: $1.5590
Resistance 1: $1.5570
Current price: $1.5456
Support 1: $1.5430
Support 2: $1.5365
Support 3: $1.5280
Comments: Euro rangebounds, holding a bit higher strong support at $1.5430 (yesterday’s lows). Further sales may widen till Friday’s low on $1.5280. Monday’s high on $1.5570 is quite a strong resistance. Above the rate may rise to May 6 high at $1.5590 and to the key level $1.5640 (50% of the resent fall from $1.6017 to $1.5280).

High Low Close
EUR/USD 1.5564 1.5430 1.5466
USD/JPY 104.90 103.38 104.67
GBP/USD 1.9586 1.9418 1.9452
USD/CHF 1.0556 1.0417 1.0531

EUR/JPY 162.30 160.11 161.89
EUR/GBP 0.7971 0.7912 0.7949
GBP/JPY 204.16 201.52 203.64
GBP/CHF 2.0543 2.0329 2.0488

Change % Change Last
Nikkei 225 +210.37 +1.5% 13,953.73
Topix +17.26 +1.3% 1,360.05
FTSE 100 -8.70 -0.14% 6,211.90
CAC 40 +22.46 +0.45% 4,998.67
Xetra Dax +24.24 +0.34% 7,060.19
DOW -44.13 -0.34% 12,832.18
NASDAQ +6.63 +0.27% 2,495.12
S&P 500 -0.54 -0.04% 1,403.04
10yr Note +1.3400 +0.355% 3.909%
NYMEX Crude Oil +1.57 +1.26% 125.80
Gold -15.30 -1.73% 869.60

06:45 France CPI (April) unadjusted 0.6% 0.8%
06:45 France CPI (April) unadjusted Y/Y 3.0% 3.2%
06:45 France HICP (April) Y/Y 3.3% 3.5%
08:00 Italy CPI (April) final 0.1% 0.1%
08:00 Italy CPI (April) final Y/Y 3.3% 3.3%
08:00 Italy HICP (April) final Y/Y 3.5% 3.5%
08:30 UK Claimant count (April) - -1.2K
08:30 UK Claimant count rate (April) 2.5% 2.5%
08:30 UK Average earnings (3 months to March) Y/Y 3.7% 3.7%
08:30 UK ILO Jobless rate (3 months to March) - 5.2%
09:00 EU(15) Industrial production (March) - 0.3%
09:00 EU(15) Industrial production (March) Y/Y - 3.1%
09:30 UK BoE quarterly inflation report
12:30 USA CPI (April) 0.3% 0.3%
12:30 USA CPI (April) Y/Y - 4.0%
12:30 USA CPI excluding food and energy (April) 0.2% 0.2%
12:30 USA CPI excluding food and energy (April) Y/Y - 2.4%
23:50 Japan Machinery orders (March) adjusted -14.0% -12.7%
23:50 Japan Machinery orders (March) unadjusted Y/Y - 2.4%