FX Update : USD

The US dollar remained under pressure overnight, as did the stock markets with the S&P 500 easing 1.4% despite the firm UBS investor optimism survey and anecdotal reports of good holiday weekend sales in the US.

That said, the USD held off the lows against both the EUR and the JPY seen during the Asia session on Monday. The bond market sold off early on talk of the strong weekend sales but rallied back on a sharp decline in stocks, ostensibly on asset reallocation trades from stocks to bonds.

With risk aversion rising - the VIX index jumping more than 20% higher from last week's low to the highest in almost two months - and vols elevated, risk-adjusted returns on carry trades will be squeezed further.

Although for now an extended period of USD weakness is probably back, the same cannot yet be said of carry trade unwinding, given the fact that the USD was slightly weaker against the IDR, INR and ZAR overnight. Remain long EURUSD and Short USD/JPY as a trade recommendation.

We have a busy data and event schedule today for the US market, with Treasury Sec Paulson speaking on the markets at 0900GMT in London, while the Fed's Bernanke (1730GMT), Plosser (1730GMT) and Moskow (2130GMT) are all speaking on the US economic outlook. On the data front, the important existing home sales, durable goods orders, Conference Board consumer confidence and the Richmond Fed manufacturing survey are all due for release later today.