Forex Update - USD

The US dollar strengthened across the board overnight, with the pro-growth currencies AUD, CAD, NZD and JPY all taking a hit.

Equity markets were flat overnight, but we suspect that global growth expectations have suffered in light of yesterday's soft machinery orders in Japan.
A shift in yield differentials can explain the rise in USDJPY, with Japanese 2 and 10-year yields down by a hefty 7 and 6 bp respectively, while US 2 and 10-year yields rose by 2 and 3 bp.

Fed President Poole (a non-voter) described the economy as "robust" rather than "fragile", although he did concede that the economy could have a "weak quarter or two".

Paulson's speech on Wednesday could be quite key in assessing the significance of this weekend's G7 and IMFC deliberations. At this stage it would be fair to say that despite his extensive background in dealing with China, the market is not clear on how actively he intends to push currency reform, and we would concede that there is possibility of disappointment on this front.

The other big event for this month (and opportunity for disappointment) is the Schumer-Graham bill, with Schumer quoted in the wires as saying that he is "very serious" about forcing a vote this month on the bill.

Trade balance for July is due at 1230 GMT and the market forecasts a widening in the trade deficit to US$65.5 bln versus US$64.4 bln in June.