FOREX EUROPE UPDATE - USD

The US dollar has stayed weak in Asia, trading in a 1.2686-1.2715 range against the EUR and a 118.33-118.73 range against the JPY this morning.

The USD was further undermined yesterday by US economic data. While new home sales rose in the latest month, the volatile median house price index plunged 9.7% y/y in September, raising fears that the housing market will inflict damage on the broader US economy.

In response US two and ten year yields were both down by 4bp, although the equity markets finished in positive territory, partly aided by a strong bounce in overall durable good orders. Total durable goods orders surged 7.8%m/m versus consensus of 2.0%, but the surge was entirely due to volatile civilian aircraft, and core durable good orders declined on the month.

Overall the USD has been undermined by a combination of a hawkish ECB in response to rising European inflation expectations and concern over the US growth outlook in light of the weak housing data. But the environment for carry trades remains sound and the latest indications this morning suggest that the BOJ will not turn overtly hawkish in its semi-annual Outlook report released on Tuesday.

Q3 advance GDP is due at 1230 GMT and the market expects a 2.0% annualised rate versus the 2.6% growth rate for Q2. The GDP data show how the US economy has slowed as the housing market has weakened. But we don't expect the Fed to cut interest rates until March next year.