FOREX ASIA UPDATE - USD

Strong housing starts and PPI headlines briefly boosted US yields and the USD, but the effect was short-lived, as markets focused on softer building permits and the fact that PPI jump was mostly automobile price driven.

EURUSD continued to squeeze higher after a brief dip on the data, and rose to a high of 1.3216 from 1.3129, while USDJPY traded a narrower 117.82 to 118.32 range.

As expected, the Treasury declined to label China as a currency manipulator in its semi-annual FX report released overnight. The release was a somewhat lower-key affair relative to the previous report which came out in May.

At that time, the Secretary Snow held a high profile press conference and warned that failure of China to make significant progress by the time of the next report would likely result in the "manipulator" label being used. In contrast, this time around there was no press conference, and, while the report continued to call for more flexibility, some of the more aggressive language was removed.

This is consistent with Paulson's attempt to put the exchange rate issue in a broader context and not make this a primary focus of the relationship.

This leaves the USD more dependent on the economic outlook rather than US official attempts at inducing reforms in Asian exchange rate regimes. In the new year, we expect data to re-enforce market concerns on the health of the US economy, and a rebuilding of Fed easing hopes should keep EURUSD pointed towards upwards.