Forex Update - USD

The US dollar has continued to trade in a firm 1.2526-1.2544 range against the EUR and a 119.57-119.78 range against the JPY as the combination of risk seeking carry trades, US inflows and Fed resilience causes further USD shorts to bail.

The housing market has clearly slowed down but so far Fed officials have continued to argue that the fallout into the broader economy will be contained. Indeed with former FOMC Chairman Greenspan arguing last week that the housing market slowdown was now stabilising, the markets are scaling back their interest rate cut expectations.

Yesterday ten year bond yields increased further to 4.74% having been as low as 4.54% in September.

In addition Dallas Fed President stuck to the Fed script about the near term economic outlook arguing that he was comfortable with the current stance of policy but that if inflation pressures were to rise again then the Fed would take additional measures.

Today, the September 20 FOMC minutes and a speech and Q&A session by Fed dissenter Lacker (16.30GMT) are likely to be the focus. We expect the minutes to provide further insight into Fed officials' thinking on the degree of cooling in housing and the overall economy.

Fed Chairman Bernanke has already gone on record estimating that housing would directly subtract about a percentage point from the annualized pace of growth from the second half of this year and into the next.

Also the weekly mortgage application purchase index will be watched today for signs that the housing market is indeed stabilising. We expect the index to rise slightly to in early October 52.4 from 50.5 in early September.