FOREX EUROPE UPDATE - USD

The dollar was again mixed overnight, sliding against the EUR in a range of 1.2957-1.3002 while remain firm against the JPY in a range of 121.15-121.40.

The dollar was initially buoyed yesterday in light of even more strong data from the US: December inflation numbers meanwhile met expectations with 0.5% headline and 0.2% core prints and housing starts and housing permits rose 4.5% and 5.5%, respectively, while weekly jobless claims falling 8k to 290k.

However, rumours of a military confrontation in the Persian Gulf late into the London session prompted a wave of EUR buying and the dollar lost most of yesterday's gains.

In policy speeches yesterday, Fed Chairman Bernanke avoided discussing the near-term economy or monetary policy, sticking to the fiscal outlook.
Going beyond these numbers, we remain concerned that macro-economic signals will start to look less pleasing once the boost from the mild weather fades, highlighting instead the trickle-down effect of the weaker housing prices.

What was interesting overnight was the failure of yields to maintain the early rise which took the 2-year notes to within a whisker of 4.95%, before reversing to end the day at the lows.

Additional concerns may come from details of China's foreign reserve management reform - details of which are expected to emerge from the crucial Financial Reform Work Meeting over the weekend.

The risk environment continues to show resilience with JPY crosses remaining in a bid tone throughout the Asian session today and with considerable good news already priced into the dollar we do not believe there is much scope for the currency to make further gains.

Ahead today, we expect little change in the Michigan sentiment index in early January after 91.7 in all of December.
We would pay special attention to the home-buying conditions sub-index within the survey for signs of any moderation to the recent pick up in the housing market conditions following recent jumps in the HMI and mortgage applications.
Fed Presidents Lacker (1300GMT) and Hoenig (1815GMT) are scheduled to speak on the economy today.