FOREX ASIA UPDATE - USD

The US dollar has continued to firm, with EURUSD extending its decline to lows around 1.3076.

The CAD was the weakest currency overnight, losing out due to a rout in energy prices, with benchmark Nymex crude oil futures closing at US$58.32/bbl, not too far off 52-week lows of US$54.86/bbl.

Indeed commodity prices in general have collapsed and the Dow Jones AIG Commodity Index is now down 4.4% on the week.

The drop in commodity prices is further reducing global inflation pressures and US 2 and 10-year yields are down by 6 and 7bp respectively.

However, we should note that it wouldn't take much for concerns over Iran to cause oil prices to rise again, with President Bush warning that he does not see peace with Iranians developing nuclear weapons.

The dollar's better tone seems consistent with a market environment which is pricing relatively little risk of near-term Fed easing and which continues to favour higher yielding currencies.

We continue to expect US data going forward to show increasing signs of labor market weakness and this is key to realizing our expectation that the Fed will cut rates at its second meeting of the year in March.

Data in line would probably not be decisively weak enough to set markets off on a new round of Fed rate cut speculation, and we might need to wait for confirmation from more minor releases later in the month before we start to see dollar downside accelerate.