FOREX ASIA UPDATE - USD

The US dollar strengthened overnight against all major currencies and in particular against the Swiss franc.

It appears that as the second week of the new year continues without drama, investors are feeling assured enough to return to the carry trade, helping to push USDJPY higher.

US crude prices dropped by US$2 to a 1-1/2 year low overnight of US$53.88, before settling at US$55.64/bbl, still down 45 cents on the previous session's close.

Meanwhile, measures of risk aversion have dropped further, with the Vix index now at 11.91 and EURUSD and USDJPY currency implied vols drifting lower on reduced demand.

The improvement in payrolls reported on Friday has contributed to the reduction in risk aversion this week. However, payrolls are a lagging indicator of the economy and in recent times have proved vulnerable to spectacular revisions.

Economic data was second tier overnight, and of greatest interest were reports that the issue of currency manipulation has surfaced again in Congress.

Two Republican congressmen have proposed legislation they call the Currency Harmonization Initiative through Neutralizing Action Act (CHINA).

The act would impose automatic tariffs on any country that is labeled a manipulator by Treasury (currently, the manipulator label carries no automatic sanction).

This will likely be a hot topic in Congress over the coming months.

We still expect US activity data ahead of the March 27-28 FOMC meeting to turn negative, contributing to both lower US yields and higher macro policy uncertainty.

The next key data release in the US is retail sales on Friday.

Looking ahead and Fed's Moscow speaks at 1730 GMT, but is unlikely to depart from the standard offering that inflation remains a concern. President Bush speaks on his Iraq strategy tomorrow morning Asia time (Wednesday evening US time). The BoE and the ECB announce rates on Thursday.