FOREX ASIA UPDATE - USD

High-yielding currencies performed strongly on Friday, with the New Zealand dollar gaining the most ground, while the yen was the weakest currency.

EURUSD traded down to 1.3086 from a high of 1.3159 in response to the payrolls data, while USDJPY rose to 118.38 from 117.28.

A rise in yields helped propel the dollar higher, with 2-year Treasury yields up by 11bp from Thursday's close, in contrast to Eurozone 2-year yields, which rose by just 3bp and Japanese yields, which actually declined slightly. Non-farm payrolls were in line with expectations at 97k in February, down from 147k in December (which was revised up from 111k).

Hawkish comments from the Fed with regards to inflation expectations aided the dollar. The Fed's Kohn said that inflation expectations were "critical" and criticised the notion that actual inflation trends lead inflation expectations.

Also on Friday, Fed's Lacker (a non-voting member) said that it was questionable whether current inflation expectations were anchored enough for price stability. Meanwhile, investor appetite for risk was probably aided by comments by Fed's Bies that there was no sign of contagion from the sub-prime lending market.

It is a busy data week in the US with retail sales, CPI, industrial production, and the New York and Philadelphia Fed manufacturing surveys on the calendar. We expect initial jobless claims, released Thursday, to be stable at 330k.

The next key signposts for the Fed will be CPI, released Friday, and the housing market index the following Monday, both of which will likely influence the wording of the March 21 FOMC statement.

We forecast core CPI of 0.2% m/m, a slight decline from the prior month. We do not forecast the TIC series, but our own flow data suggests January saw a slight improvement over weak December flows.

Looking ahead to today, and Fed's Kroszner speaks on "Inflation Dynamics" at 1645 GMT.