FOREX EUROPE UPDATE - USD

The US dollar remained firm overnight, trading in a 1.2932-1.2967 range against the EUR and a 120.70-121.19 range against the JPY.

The dollar barely moved against the euro and yen last week as data continued to send mixed signals on the direction of the economy.

GDP growth was stronger at 3.5% y/y while non-farm payrolls for January rose by 111k- less than market expectations of a rise of 150k. Revisions higher to payrolls of earlier months offset the weakness in January, and after a brief drop the USD swiftly rallied to end the week on a firm note.

Also on Friday, the University of Michigan consumer sentiment index for January (final) rose to 96.9 from 91.7, but less than market expectations of 98.0. The resilience of the US economy have surprised many market observers but we continue to expect the dollar to remain under pressure as recurring themes such as expected Fed easing, diversification concerns and the housing market slowdown begin to transpire towards Q2.

The Fed chose to keep rates on hold last week and issued a less-hawkish than expected statement and signalled risks to the economy remain to the downside. There are few data this week, with only the non-manufacturing ISM, Q4 unit labour costs, and weekly jobless claims of note. There are however plenty of Fed speakers, but only Philadelphia Fed President Plosser is speaking specifically on the economic outlook.

We may need to wait for Bernanke testimony next week to get more clarity from the data-dependent Federal Reserve.

Secretary Paulson also has several appearances in Congress relating to the fiscal 2008 budget, and markets will listen for any further comments on currencies ahead of this weekend's G7 meeting. With the Fed outlook likely to remain stable in the week ahead, and the carry trade environment likely to improve, the dollar should be able to trade well this week.

Ahead today, non-manufacturing ISM for January is due at 1500 GMT. The market expects 57.0 from 56.7 in December.