FOREX ASIA UPDATE - USD

The US dollar was generally lower overnight after being first hit by the wider than expected trade deficit but recovered some ground following the firmer tone in the October Beige Book report.
The USD closed slightly above the 119.25 low against the JPY and 1.2567 against the EUR, while the US rates were generally unchanged after easing earlier on.
The August trade deficit rose to US$69.9bn from US$68.0bn with the additional cost of fuel imports accounting for US$1.5bn of the rise in deficit from a month earlier.

The October Beige Book report was USD supportive with a more optimistic reports coming from four districts against only two districts noting a cooling off of the economy during the month. This compares favourably to the September report which showed five districts reporting deterioration in activities against none reporting firmer growth.

We have been getting a run of mixed data if not slightly positive this week but we expect the data set to gradually look less USD supportive going forward, with the industrial production, core CPI, housing starts and the Phily Fed - which showed a drastic dip to -0.4 in September - next week crucial.

For now, the dollar is continuing to benefit against low yielding currencies from a very favourable environment for carry trades and from an ongoing retrenchment in Fed easing expectations. The rate markets have erased the rate expectations over the course of the last fortnight to now just price in about 25bp of easing in 2007.

We think there are real risks to the very benign soft-landing scenario that the market is currently picturing. At such high US dollar and Dow levels, one wonders what would happen if the Fed says inflation is no longer an issue and shifts their concern to growth.

Today, we get the retail sales numbers for September, business inventories for August and the University of Michigan Confidence .