The dollar traded soft against the euro (1.5651-1.5750), and weakened more against the yen (106.77-107.66). The S&P 500 ended the session down 2.3%, unable to follow the strong sessions in Asia and Europe. Equity volatility rebounded, with the VIX sticking to its uptrend from mid-May. WTI closed flat on the day (136.05) and gold gained 1% ($925).

In economic news, the Mortgage Applications Purchase (MBA) index rose by 6.7%w/w to 365.8 in the week of July 4. Despite the recent rise, it has shown net weakening recently - the four-week average slipped to 350.6 in the latest week from 353.2 in the previous week and 389.1, on average, in Q1. The MBA survey showed a rise in mortgage rates in the week of July 4; 30-yr fixed rates rose 10bps to 6.43% (from a 6.38% average in June); 15-yr FRM rose 4bps to 5.94%; and 1-yr adjustable rates rose 9bps to 7.24%. For consumers, the rising trend in rental payments risks offsetting the positive effects from an accommodative Fed. Accordingly officials have kept warning that "the financial turmoil is ongoing" (Bernanke), and "housing foreclosures may rise for some time" (Paulson). We remain USD bears, looking to sell USDCHF and USDJPY rallies towards 1.05 and 108, while targeting 1.60 in EURUSD in one month from now. Our 3-month forecast remains bearish for EURUSD assuming that US data stabilises while weakness in European data and peaking inflation by early Q4 2008 will be enough for the ECB to adopt a less hawkish stance.

Ahead today, initial jobless claims are due. Our economists are looking for 359K (cons 395K, prior 404K), noting that temporary plant shutdowns in the auto sector may cause a stronger surge in the not seasonally adjusted rate. Importantly, claims are rising in trend, partly supporting the weak payroll reports from past months.

EUR

The final reading on Q1 GDP was revised down to 0.7% q/q from 0.8% q/q reported initially, while the Q4 reading was revised up from 0.3% q/q to 0.7% q/q. Although GDP growth remains firm, we expect conditions to deteriorate, especially as German growth will unlikely remain a positive counterweight to weaker conditions in the rest of the Eurozone. However, central bankers' rhetoric remains hawkish, and without inflation expectations deteriorating, we do not expect the ECB to apply a dovish stance on monetary policy in the short term. ECB President Trichet spoke to the European Parliament on Wednesday, highlighting that inflation risks have intensified, while economic fundamentals remain sound. Trichet also said that a strong dollar was in the US' interest. The most recent commentary does not imply a change in comments heard earlier this week. We are near-term USD bears, looking for the EUR to go to 1.60 before moving lower.

GBP

We expect the broad-based decline in data of late will keep the BoE on hold at 5%. The CPI moved higher (3.3%yoy), but economic activity has continued to disappoint. House prices have been falling and labor market conditions deteriorated, too. Activity data released on Wednesday showed UK consumers will likely face further pressures on real income in the coming months. The BRC shop price index for June showed a 2.5% gain in prices, up from 1.8% in May. Meanwhile, fixed-rate mortgage rates have hit an 8-year high as loans become increasingly hard to obtain, due to a falling housing market and tight conditions in credit markets. As such, demand for new home purchases will likely continue to fall, compounding the associated wealth and income effects already seen during the current slowdown. In other data, the UK's trade deficit for May came in at GBP 7.5bln, slightly higher than expectations of a GBP7.4 bn and weaker than April's number. Nevertheless the lack of gains in exports will be a concern for the BoE, which is still looking for stimulatory elements for the economy.

SEK

At -1% m/m and -5.0% y/y (previous: -0.3% m/m, 0.2% y/y) industrial production surprised to the downside, displaying a less constructive view on growth. However, this comes as no major surprise to the Riskbank, which has increased its inflation forecasts last week while lowering its growth outlook. We expect the central bank's main focus to remain on price stability for now, keeping tightening expectations firm. The next key event will be consumer prices due to be released tomorrow, and our economists expect CPI to remain elevated at 4% y/y. Under such conditions we expect the SEK to remain firm.

JPY

In data released overnight, machinery orders for May came in much stronger than expected at +10.4% (cons. 5.5%). Core orders also strengthened, rising 5.1% vs. expectations of a 3.4% gain. Nevertheless the government kept its assessment on machinery orders unchanged and expected further weakness. Our economists believe that today's machinery orders result support the view that capital expenditure will start picking up gradually, starting around Q4 this year. However, the figures for the month were also helped by one-off events, and core machinery orders for the entire quarter are not expected to surpass the level of the previous year. The Bank of Japan's view on economic deterioration remains in place and we expect policy to reflect as such. Nevertheless, risk appetite is now being challenged on a regular basis and we continue to expect USDJPY retreating from current levels as the global economy continues to weaken.

AUD

In numbers released overnight, Australian consumer sentiment fell 6.7% in July, much weaker than last month's 2% decline, taking the number to its lowest level since January 1992. In addition, the number of home loans for owner occupiers fell by 7.9% vs. expectations of a 2% drop. The result reflects drops in lending for construction, newly-built and established housing. Total lending for investors also fell 6.8% vs. last month's 1.4% decline. We believe the numbers are a further sign of a gradual correction in Australia's housing market. Although data has been inconsistent, there are undeniable signs of a slowdown and suggests that high interest rates are having an effect. Our economists note that consumer confidence has moved beyond levels normally associated with soft-landings and approaching levels last seen in the 1990/1991 recession. Nevertheless, there are also stimulatory effects in the pipeline and we believe the RBA will maintain its neutral stance for now. The AUD will be more exposed to a collapse in the commodities complex as fears over global growth continue to rise.