FOREX ASIA UPDATE - USD

The US dollar was stronger overnight on the back of a couple of articles playing down scope for the Fed to cut rates in the near future. Most of the price action occurred during European trading hours, with EURUSD trading to a low of 1.2537 from 1.2617, while USDJPY traded to a high of 119.38 from 118.75.

Treasury yields rose, with the 2-year up 3bp to 4.91% and 10-year up 4bp to 4.83%, while equity markets managed to finish in positive territory despite tighter Fed expectations.

An article by Greg Ip in the Wall Street Journal argued that there are some reasons why the Fed might be on hold for longer than in 1995, when the Fed began its easing cycle FIVE months after the tightening cycle ended. Also a Bloomberg article suggested that the Fed's internal estimate for potential growth had been revised down, the implication being that the US will record higher inflation for any given level of economic growth.

Our basic premise this week has been that the FOMC is unlikely to provide any catalyst for expectations of a near-term Fed easing.

Meanwhile, the carry trade environment has not really deteriorated that badly, and if yields in the US are stable or rising, then we should see some upward pressure on the dollar over the short-term.

Looking ahead the economic calendar is limited to second-tier data on Tuesday, with the weekly store sales indexes and the Richmond Fed manufacturing survey.