LONDON, June 1 (Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.
The U.S. dollar has risen almost 7 percent from three-plus year lows hit in February and is up about 2 percent for the year. But the rally looks awkwardly timed, with the U.S. trade deficit near its biggest in a decade and President Donald Trump risking a trade war, with import tariffs on some of his country's closest allies.
That should put markets' focus squarely on Wednesday's report on April's international trade balance. If the deficit widens to the expected $51.3 billion, it would be close to February's $57.7 billion - the biggest gap since October 2008.
Much of the dollar's recent move came after May 3 data showing the March trade deficit had shrunk 15 percent to $49 billion. On the surface a rally seems intuitive. But these are unusual times, with the President going after steel, aluminum and even auto exports from Canada, Mexico and the EU, not to mention China. If the dollar recovery continues it could - counterproductively - make U.S. exports costlier.
Canada and Mexico hit back Friday with levies on U.S. goods, from orange juice to pork, while the EU was set to tax bourbon whiskey and Harley Davison motorcycles.
It might not be too big a leap from tit-for-tat protectionism to competitive, or market-influenced currency depreciation against the dollar - perhaps an unintended consequence of the White House shouting 'unfair' at its partners and kicking off the negative spiral. U.S. allies hit back at Washington's steel, aluminum tariffs Dollar strengthens against loonie, peso after U.S. sets tariffs U.S. trade deficit narrows on exports; jobs market tightening
Italy appears to have averted early elections and its bond yields, that surged to multi-year highs in recent days, have retreated. But with developments in Rome still in the spotlight, a sustained recovery is unlikely.
A coalition comprising the 5-Star Movement and the League is being installed after the anti-establishment parties agreed to substitute a eurosceptic initially proposed as economy minister.
But the parties have big spending plans that will challenge EU fiscal rules; among other issues, they have spooked markets by mooting the issuance of securities to clear state payment arrears -- many see the plan as a way to introduce a parallel currency to the euro. How Italy's mini-BOT "parallel currency" would work Rome alone: five key questions for the euro
Europe's bank shares, hard hit by Italy's bond selloff and euro break-up fears, enjoyed a rally as Rome averted snap elections. But the turbulent times have revealed some cracks.
If Italy's new government proceeds with big spending or plans for mini-BOTs, effectively a parallel currency, its debt rout may resume, alongside selling of shares and bonds of banks with Italian exposure. French lenders stand out here: BNP Paribas's exposure to the Italian sovereign is a quarter of its core capital buffer while Credit Agricole's is 14.3 percent.
Second, money markets are hinting at signs of funding stress; 3-month Euribor -- the rate at which eurozone banks lend to each other -- has risen to nearly six-month highs. But French banks may be driving Euribor rises too, a Bank of America Merrill Lynch report said, noting that French lenders, which raise a lot of U.S. dollar funding, may have been driven into euro markets by the recent rises in LIBOR-OIS spreads.
Meanwhile, credit default swaps for European banks have soared, with Credit Agricole and BNP Paribas trading at one-year highs.
Finally, there are concerns about Deutsche Bank. The lender's shares have slumped and bonds and CDS have jumped after reports the Fed considers the bank's U.S. operations as "troubled". Deutsche Bank gets ECB, key investor support as S&P questions strategy Italy and other euro zone sovereign and bank CDS surge
Another nail-biting week lies ahead for Turkey: Monday brings an inflation print that may show that the recent currency rout has exacerbated stubbornly high, double-digit price growth.
Then the central bank meets on Thursday to decide on interest rates after administering a 300 basis-point emergency rate hike in May and launching a simplified interest rate framework on June 1.
The bank is caught between President Tayyip Erdogan -- a self-styled enemy of interest rates who also faces elections on June 24 - and markets that want higher rates in order to combat inflation.
The lira has risen off record lows plumbed in May but remains 18 percent below end-2017 levels. Next week's policy meeting could clear the path for it to recover or relapse.
Turkey central bank says to return to single rate, lira rallies Turkish lira recovery stalls after three-day streak, eyes turn to inflation Turkish central bank says simplifies policy, repo to be policy rate
India could join the growing club of emerging market central banks that are tightening monetary policy - on Wednesday it may deliver its first interest rate hike in nearly 4-1/2 years.
A rate rise on June 6 is far from a given. While inflation is above central bank targets and the rupee is this year's worst Asian performer against the dollar, analysts predicted that worries about economic growth and the impact of $80-a-barrel oil on consumers would keep the Reserve Bank of India on hold.
But on Thursday, India surprised markets with a GDP print that was its strongest in two years. Now, against the backdrop of a growth rate faster than China's and risks of a fresh flare-up in global trade tensions, Indian policymakers may join their peers in Indonesia in putting a floor under their currencies. Indian economic growth hits highest rate in almost two years- India c.bank seen turning hawkish in June, raising rates in August –
Reporting by Alden Bentley in New York, Vidya Ranganathan in Singapore, Kit Rees, Karin Strohecker, Claire Milhench and Dhara Ranasinghe in London; Compiled by Sujata Rao; Editing by Toby Chopra