The dollar strengthened overnight as weak data from the Eurozone and Switzerland reinforced the trend of slowing global growth. A decline in the commodity space also helped the dollar. US CPI and initial jobless claims both came in higher than expectations, though neither had a significant impact. The dollar moved the most versus the euro and CHF (1.4825 and 1.0929, respectively, at the time of writing). US equity markets ended the day positive, oil fell below $115/bbl and gold went below $810/oz. Minnesota Fed President Stern commented that the economy will likely continue on a slow growth path until credit conditions improve, and inflation, absent a resurgence in commodity prices, would go lower. Ahead tomorrow, a couple of economic data releases. The Empire State Manufacturing Survey (UBSe -4, -4.9 previously), Net Long-Term Treasury Intl Cap Flows ($67bn previously), Industrial Production (UBSe 0.2%, 0.5% previously) and the U of Michigan Consumer Sentiment Index (UBSe 63, 61.2 previously) will be released.

At -0.2% (cons. -0.2%, previous: 0.7%) Q2 GDP in the Eurozone was released in line with market expectations. This shows the economy has shrunk quarter-on-quarter for the first time since 1995. Although the number confirmed market consensus, our economists refer to the weak details. At -0.3%, both France and Italy were unexpectedly contracting, while at 0.1% q/q Spanish GDP beat market consensus of 0.0%. However, our economists also expect Spain to follow France and Italy. Overall the growth outlook is expected to deteriorate further and falling trends in PMIs and business sentiment will likely keep the outlook on growth under pressure. In Germany, at -0.5% (cons. -0.8%, previous: 1.5%) Q2?GDP was released above consensus, but grew quarter-on-quarter at the lowest level in 5 years. German Economy Minster Michael Glos said that the financial market turmoil, the high oil price, and a weak dollar having an impact on Germany. According to the German Bundesbank high energy costs crimped consumer spending in the second quarter of 2008, and he also highlighted that the German economy should overcome that dip in coming months. On inflation, CPI for July was revised to the downside from 4.1% y/y to 4.0% y/y, and this will likely come as some comfort to the ECB, as it could suggest that inflation has peaked around 4.0%. Our economists highlight that if inflation has indeed peaked, and with GDP contracting, there will be room for the ECB to soften its stance further. Overall we expect the trend of weakening growth conditions to continue up ahead, and wile investors focus is increasingly shifting from inflation to growth, this will continue to weigh on the single currency. Hence we remain of the view that the EUR remains a sell on rallies, especially versus the greenback.

The yen regained some ground on the commodity currencies as commodity prices decreased. The yen itself is enjoying calmer waters as interest in the carry trade remains weak and our margin positioning data has shown a significant retreat, with aggregate positions down by more than 20% since reaching its peak last month. However, JPY gains have also been limited as repatriation away from Japan offset carry unwinding. Thursday's Ministry of Finance data showed foreign investors sold Japanese stocks for the seventh consecutive week, pointing to continued deterioration in growth expectations. No data is expected today.

CAD Manufacturing sales (UBSe 1.0%, 2.7% previously) and new motor vehicle sales (UBSe 0.5%, 1.1% previously) will be released tomorrow, in what has been a relatively light data week. Lower readings should continue to focus attention on downside risks to the economy. We continue to target USDCAD at 1.05 in 1m and 3m.

In figures released yesterday, Swedish industrial production registered a surprising 0.6%m/m gain, but the annualised rate fell faster than expected, coming in at -1.5%y/y. Last month's data was also revised to show a 2.3% decline, vs. 5% originally. The figures continue to point to ongoing weakness in Swedish output, largely driven by weakening demand both internally and externally. However, the strong gains in headline inflation over the past few months will remain the top priority for the Riksbank. In Norges Bank's policy statement yesterday, it was noted that the Riksbank may hike rates in September, and this is limiting downside in EURSEK. Nevertheless, on the economic front, Swedish growth is expected to underperform, but with the correction in ECB expectations in full swing, we remain cautious before chasing a clear directional bias in the cross. Tomorrow Norwegian trade balance will be released and the market is looking for a slight increase to NOK 38.5bln.