Shorting the USD has become de rigueur.  Last night's close above the 1.4700 level encouraged EUR/USD to a high of 1.4764 shortly after the European open.   The risk trade was encouraged by the better tone in stock markets overnight, but as EUR came off its best levels vs the USD this morning so too did the AUD, the CAD and the NZD.

Talk is emerging that the short USD trade is becoming crowded.  The EUR, AUD and the NZD have all hit 12 mth highs vs the USD this month.  Coincident with the weaker USD, the FTSE 100 index is also back at its best levels for a year.  This endorsement of risk is despite the established rhetoric that the shocks that unbalanced the finance system and the global economy after the fall of Lehman a year ago have not yet fully dispersed.  The implication is that asset markets are vulnerable to a correction.  However, this week's better than expected US retail sales and production data have fed the perception that the global economy continues to mend and thus supported the short USD trade.  The use of the USD as a funding currency is, of course, dependent on the relative position of US rates.  This week's cautious economic outlook from Bernanke did nothing to alter the view that US rates will remain low for some time.  Speculation is beginning to emerge that the Fed may be forced into hastening its exit policies, but this talk is difficult to swallow given the very low levels of inflation.  Into the New Year the US rate outlook and the USD will likely find support from projections that the US economic recovery will be faster than that of the rest of the G3.  Near-term the upcoming FOMC meeting will be closely watched for any clues to the timing of a policy change. 

Sterling lost some ground this morning on weaker than expected UK August retail sales data.  Sales were flat on the month, rising 2.1% y/y.  Early this week, BoE Governor King warned that for most businesses and households, the recession will continue for some while.  Today's data are consistent with the idea that high levels of unemployment and lower credit availability will constrain economic potential for some time.  Cable continues to pivot around the USD1.6500 level, EUR/GBP bounced off the 0.8900 level this morning but is holding below last night's close.

USD/JPY has been bias lower this morning but has failed to push below the USD/JPY 90.50 level.  The BoJ confirmed that it sees a moderate path of recovery, but left rates unchanged at expected.  A decline in New Zealand's business PMI to 48.7 in August may encourage the view that NZD strength is damaging the recovery outlook.  USD/NZD posted a high of 0.7158 this morning before edging lower. 

This afternoon, Canadian CPI, US initial claims, housing starts and Philly Fed are due.