FX Update : USD

The US dollar's slide continued with little reprieve overnight, trading in a 1.3184-1.3218 range against the EUR and 115.58-116.29 range against the JPY.

Despite a good day for carry trades generally, and a rebound in US equities, the market seemed to be on a hunt for stops and barriers, and generally softer US data also weighted on the USD- daurable goods for October declined by 8.3% m/m, far worse than market expectations of -5% m/m, while consumer confidence for November also disappointed at 102.9 versus consensus of 106.

EURUSD eventually broke 1.3200 late in the US session. The NZD was the strongest currency overnight, while JPY was under some pressure, indicative that the appetite for carry trades remains.

The market also chose to shrug off hawkish comments from Treasury Secretary Paulson, who said a "strong dollar was in the US' interest", and Fed Chairman Bernanke's warnings that core inflation remained "uncomfortably high".

Overall US yields finished lower in response to the weaker data, with the implied yield on the December eurodollar contract down by 4bp. With last week's dollar selloff having been largely driven by a speculative selling in relatively illiquid conditions, markets are looking for fundamental catalysts to supply more fuel for the move.

Most likely catalysts for further USD weakness in our view would be either a breakdown in the broader carry trade environment or a shift in US rate markets to more definitively price near-term Fed easing. In the coming weeks though, we expect data to increasingly provide support for our view that the Fed will cut rates at its March meeting, and we look for the environment for carry trades to steadily deteriorate as volatility rises and risk appetite normalizes.

GDP for Q3 is due out at 1330 GMT, and the market expects a rise of 1.8% annualized, versus the 1.6% in the advance estimate.