The 100-member parliament approved the budget amendments in the first reading with 68 votes for and 10 votes against, and the proposal will now face a second reading June 17.

The preliminary approval by lawmakers comes amid increasing speculation that the recession-hit Baltic nation will need to break free from its currency peg to the euro and devalue the lat as debt soars. The economy is forecast to contract by 18% this year, the fastest rate in the European Union.

International lenders agreed to an International Monetary Fund-led EUR7.5 billion rescue package in December, conditional on limiting public-sector expenditure to 5% of GDP.

Prime Minister Valdis Dombrovskis said that adoption of the budget amendments in the first reading was only the first step, and the government would keep working in the proposals for further reduction of expenditures, BNS reported.

Earlier Thursday, a spokeswoman from the IMF said Latvia’s government is making progress in addressing its escalating budget deficit, but more steps must be taken.

“The government’s budget is a first step, and there is more work to be done,” said Caroline Atkinson, the IMF’s director of external relations.

The IMF and EU have missions in the country reviewing the economic program, and Dombrovskis has said the country needs the second portion of the loan by early next week.

Latvia’s central bank has said it will maintain the stability of the national currency until it can adopt the euro.

Higher stocks encourage position taking out of the dollar, a major funding currency. The Dow Jones Industrial Average was recently up about 28 points on the day.

The euro had already recovered earlier from a one-week low against the U.S. unit, $1.4070, after the market got past the day’s key economic events.

It was sold off on a broad rebound in the buck from a 2009 low, as traders took profits on the recent rally in riskier assets and with a return of some caution. A sharp dip also came on rumors, since denied, that U.K. Prime Minister Gordon Brown would resign.

However, overall, currencies are trading inside a very narrow range ahead of the much awaited May U.S. payrolls report to be released Friday.

Thursday afternoon in New York, the euro was at $1.4174 from $1.4145 late Wednesday. The dollar was at Y96.48 from Y95.97, according to EBS. The euro was at Y136.75 from Y135.73, and the U.K. pound was at $1.6136 from $1.6283. The dollar was at CHF1.0692 from CHF1.0715 Wednesday.

Mixed signals in remarks by European Central Bank President Jean Claude Trichet, after the bank left interest rates unchanged at 1.0%, had little impact on the common currency.

Trichet stressed that euro zone policy makers are already thinking about exit strategies from easing mode. He also said that the ECB isn’t considering expanding its EUR60 billion covered bond purchase program, or any other non-standard easing measures.

This helped to boost the euro against the U.S. unit, as the Federal Reserve is seen as possibly expanding its Treasury purchases.

However, Trichet was very cautious on the euro zone’s growth outlook. He also spoke on the importance of a strong dollar policy in the U.S. in response to a question on the euro’s three-month rally.

The Bank of England also voted to keep rates unchanged Thursday, as expected.

Elsewhere, emerging markets in Europe were shaky Thursday. Assets continued to feel the fallout from Latvia’s escalating financial crisis, particularly the Hungarian forint and Polish zloty.

Signs that Latvia’s economic woes are worsening have prompted speculation that authorities could be preparing to drop their currency’s peg to the euro, despite repeated official denials.

The Latvian central bank Thursday said it will maintain the stability of the national currency until the euro can be adopted.

A European Commission spokesman said earlier Thursday that European Union and International Monetary Fund officials are currently in Latvia “assessing the situation.”

Bank-lending rates in Latvia rose to record highs Thursday, a new sign of a growing liquidity shortage.

Swedish banks, which are heavily exposed in the Baltic region, saw their stock prices recover heavy losses Thursday after the Swedish government pledged support to any Swedish banks running into trouble. But the Swedish krona remains near the low end of its recent trading ranges against the dollar and euro after falling sharply Wednesday.