FOREX UPDATE - USD

The US dollar traded heavy within a 116.21 to 115.76 range against the JPY.

EURJPY came off further, posting a 149.43 to 148.61 range, preventing EURUSD from breaking higher.

Oil prices stayed mixed but remained below $70 in Asia following the sharp fall, last week.

Looking ahead, we expect market volatility to pick up with the US Congress returning from its summer recess and Treasury Secretary Paulson travelling to Vietnam for the APEC finance ministers' meeting.

Note that there have been a few developments suggesting that emerging market economies are seeking greater flexibility. India announced on the weekend that it will bring forward its plans to implement capital convertibility perhaps as early as this fiscal year.

Meanwhile, China's Vice President Zheng was quoted on Monday saying that the country should seek to reduce its foreign exchange reserve accumulation by increasing imports of "strategically important resources".

The rise in oil prices to a certain extent has reduced the degree of undervaluation of many emerging market currencies, but we still think that the G7/IMF proceedings next week have the potential to encourage a broadly weaker USD. In such an environment, we expect the USD to remain under pressure and the JPY and CHF to outperform the higher yielders.