The dollar and yen surged on Friday. The European sovereign debt crisis worsened and US data on weaker-than-expected private job growth fueled concern about the global economic recovery. Credit spreads widened, commodity prices fell and the cost to protect against defaults in the PIIGS countries and Hungary rose. A Hungarian government spokesperson said speculation of a Hungarian default “isn't an exaggeration.” The S&P 500 index plummeted 37.95 to 1064.88, a 4-month low. The GBP/USD fell below the 1.45 handle. The Australian and Canadian dollars were pressured by the weakening global economic outlook and plummeting commodity prices. The EUR/USD broke the 1.20-handle support and closed at 1.1966, the lowest level since April 2006. Europe's sovereign debt problem is increasing deflation risks and threatening banks' balance sheets. The rising US dollar is also increasing US deflationary pressures and the dollar linked Chinese economy. An appreciating currency intensifies deflationary pressures; thus, being worrisome in an economy like the US struggling with high debt and leverage levels. In 2008 the Federal Reserve ignored the rising dollar demand and let the dollar appreciate. The appreciating dollar led to the collapse in the stock and commodity markets as the surging dollar overvalued asset prices. The bottom in the EUR/USD in early-March coincided with the bottom in stocks. The stock-market recovery was accompanied by a falling dollar that eased the debt deflation. The dollar began to appreciate in December 2009 and except for a little stock-market correction in the beginning of 2010 the dollar and stock market seemed to have decoupled. However, since late-April when stocks reached a 19-month high, the rising dollar has again been pressuring stocks. The appreciating dollar can be viewed as a tightening monetary stance that is threatening the economic recovery as well as the recent stock bull market. US & Canada US nonfarm payrolls rose a less-than-expected 431,000 in May (including a 411,000 rise in government hiring of temporary workers for Census 2010) after a 290,000 increase in April, data from the Labor Department showed. The unemployment rate declined to 9.7% from April's 9.9%. Private-sector payrolls climbed 41,000 in May after a 218,000 rise the prior month. Manufacturing employment grew 29,000 following a 40,000 April gain. Temporary help services added 31,000 jobs and mining payrolls increased 10,000, while construction employment fell 35,000. Average hourly earnings increased 0.3% m/m to $22.57 in May. Average hourly earnings rose 1.9% y/y after April's 1.8% y/y rise. Average weekly hours increased to 34.2 in May from 34.1 the prior month. Canada's employment rose a more-than-expected 24,700 in May, a fifth straight monthly rise, to 17,096,600, after a record 108,700 surge in April, according to figures from Statistics Canada. The unemployment rate remained at 8.1%. Full-time employment rose 67,300 in May to 13,835,700 while part-time positions declined 42,500 to 3,261,000. The participation rate increased to 67.3 from April's 67.2. Average hourly wage growth quickened to 2.4% y/y in May from 2.0% y/y the prior month. Canadian seasonally adjusted building permits unexpectedly increased 5.4% m/m to C$6.68 billion ($6.31 billion) in April after an upwardly revised 12.3% m/m rise in March, data from Statistics Canada showed. The April increase was led by non-residential permits, which rose 32.2% m/m to C$2.80 billion, a third consecutive monthly rise. April building permits jumped 48.2% y/y, a seventh straight year-on-year gain. Canada's Ivey PMI rose for a fifth consecutive month to a higher-than-expected 62.7 in May from 58.7 in April, indicating purchases in Canada's public and private sectors reached the highest level since July 2008, according to data from the Richard Ivey School of Business and the Purchasing Management Association of Canada. The employment index increased to 58.1 from 54.0, showing May employment was higher than the previous month and above the 50 level for the third time since September 2009. The prices index held at 59.2 in May, indicating prices were higher than the prior month. Europe Eurozone seasonally adjusted GDP grew an unrevised 0.2% q/q in Q1 2010, a third consecutive quarterly expansion, after an upwardly revised 0.1% q/q increase in Q4 2009, led by rises in exports and government spending, according preliminary Q1 GDP data from Eurostat. The Q1 GDP rose 0.6% y/y (vs. 0.5% y/y flash estimate), the first year-on-year gain since Q3 2008, following a revised 2.1% y/y Q4 contraction. Exports rose 2.5% q/q in Q1, a third successive quarterly rise, after a 1.7% q/q increase in Q4, while government spending climbed 0.6% q/q following Q4's 0.0% q/q. Business investment fell 1.1% q/q in Q1, an eighth straight quarterly fall, after a 1.3% q/q decrease in Q4. Household consumption expenditure declined 0.1% q/q following a 0.2% q/q Q4 increase. UK house prices fell 0.4% mm sa to £167,600 ($242,249) in May after a 0.1% m/m decline in April, a Halifax report showed. May house prices rose 5.2% y/y. People's Bank of China Governor Zhou Xiaochuan said policy makers will observe the economy after the Chinese manufacturing PMI showed slowing manufacturing activities. “There are many factors” that might have attributed to May's slowing manufacturing growth, Zhou said, adding that “the impact of what happened in Europe might not have been that fast.”

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