FOREX EUROPE UPDATE - USD

The dollar fell to one-month lows against the yen overnight in Asia on the back of strong Japanese GDP and consumption numbers.

USDJPY traded in a range of 119.77-120.78 while EURUSD was a little stronger in a range of 1.3130-1.3149.

Yesterday's flat US retail sales reading (0.0% m/m, cons. 0.3% m/m) and Fed Chairman Bernanke's interpreted-as-dovish testimony hurt the dollar across the board. US yields are also down by 7 bp for both the 2 and 10-years, while the equity markets rallied on the reduced fears that the Fed could tighten policy later in the year.

Bernanke noted that core inflation has moderated, although it is still "elevated" and "the rate of resource utilization is high." On growth, he noted downside risks from housing but also that spillover effects have been limited and "some tentative signs of stabilization have recently appeared in the housing market." Bernanke certainly did not give any indication of near-term easing, and our economists note his comments are consistent with Fed policy staying on hold pending a clear break in the data.

The implied yield on the Dec 07 Euro$ contract fell by 8.5bp yesterday on the back of his testimony. We expect US economic weakness to continue to transpire in the coming weeks, and effects of a housing slump on consumption will become more pronounced. Meanwhile, the market will also be wary of the carry environment given the higher chances the BoJ will embark on a tightening path after this morning's firm Japanese GDP data.

Bernanke testifies again at 1500 GMT. Data releases due today include NY Fed Empire survey and weekly jobless claims at 1330 GMT, the TIC report for December at 1400 GMT, the Philly Fed at 1700 GMT and home builders' February housing market index at 1800 GMT.