The USD has taken a pummelling this morning. The USD index has extended the downtrend that has been in place since early June as the dollar slipped vs the EUR, JPY, GBP and the CHF. Following last week’s paper by the Fed’s Bullard in which he suggested that the Fed could yet resort to QE, speculation has appeared that the Fed could announce an increase in its bond purchasing plan as soon as Aug 10.

Worsening the near-term position of the USD vs the EUR is the perceived contrast between the policies of the Fed and the ECB. While there is little risk that the ECB will hike interest rates this year, there is every reason to suppose that ECB President Trichet will this week endorse plans to maintain the ‘normalisation’ in ECB policy (the regular ECB policy meeting is on Thursday). It is probable that the ECB will be encouraged by the recent improvement in economic data stemming from Germany in addition to the uptick in Eurozone CPI to 1.7% y/y as a reason to moderately reduce the easy monetary stance. That said Trichet will be aware that EMU countries such as Greece, Spain and Ireland will see next to no growth this year. Clearly if Trichet were to tighten policy too soon or by too much he could heightened the economic difficulties in the Eurozone periphery and thereby raise the chances of a debt default. While the Eurozone’s fiscal crisis has come off the boil it has not disappeared and the ECB have a difficult balancing act in the coming months. While the contrast between the Fed and the ECB at present suggests that EUR/USD could be squeezed higher, medium-term the outlook for the ECB is far from clear cut.

Broad based US weakness has pushed cable higher this morning, the pound reaching a session high at USD1.5961 before profit-taking set in. The pound has performed less well against the EUR. Despite an initial flurry lower, EUR/GBP has risen back towards the 0.8315 level this morning as profit-taking set in. While yesterday’s surge in the pound was reportedly supported by M&A activity, the recent better tone of the pound has been built on better than expected economic data. PMI services data due tomorrow and production data later in the week have the capacity to inject additional volatility into the sterling crosses.

The yen has performed well across the board today. Declines in European stock indices also suggest that risk is being pared back. Patchy US data and persistent concerns that the pace of China’s economic expansion is slowing continue to cloud the outlook. AUD/JPY declined to 78.11 following weaker than expected Australian retail sales and building approvals data and a slightly dovish statement from the RBA. Ahead of the Aug 21 Australian general election PM Gillard has put economic management at the centre of the election campaign.

Weaker than expected Swiss CPI data this morning (+0.4% y/y) should offset any remaining speculation that the SNB may be poised to hike interest rates as soon as next month. EUR/CHF is climbing higher this morning, pushing against 1.3730.

More fx rhetoric has been reported from Japan with FM Noda talking down the stronger yen. Insofar as the chances of intervention are very slim the comments had next to no impact. The PM also called on the BoJ to do more to stimulate the economy.

US Jun personal income, factory orders and pending home sales are due this afternoon.