The US dollar was under pressure again overnight as oil rose above US$122/bbl, with EURUSD reaching a high of 1.5595 from a low of 1.5502, while USDJPY traded down to 104.02 from 104.87. Equity markets managed to rise in the session, while 2-year Treasury yields fell by 5bp to 2.38%. Fed's Fisher said overnight that it would take a lot for him to be convinced that the Fed should cut rates further. He also said that he was pleased with the dollar rebound as it signals increased confidence in the Fed's determination to tackle inflation. House Speaker Nancy Pelosi said that Congress should move quickly to approve a second fiscal stimulus bill to support the economy. However, fiscal stimulus is a double-edged sword. From one perspective it raises demand for capital in the economy, putting upward pressure on yields and thereby induces capital inflows. From another perspective, it is negative for the currency as increased spending by the government raises risk premiums on US Treasuries. On balance, we would view a fiscal stimulus package as positive for the currency if it reduces the need for the Fed to cut rates. EURUSD may trade modestly higher in the near term barring any significant developments out of ECB President Trichet's press conference on Thursday. However, in principle we think macro developments are supportive of the dollar continuing to strengthen and we target EURUSD at 1.47 over 3 months. Our justification is that the policy rates will head significantly lower in the UK, the Eurozone and New Zealand in the coming months, allowing the dollar to rally. Ahead today the pending home sales index is due out at 1400 GMT. Our economists forecast another decline of 1.5% m/m following the 1.9% m/m decline recorded in February.

There is some attention this morning on a Yomiuri Shimbun article from Sunday suggesting that the government may consider tax exemptions on un-repatriated capital held offshore by Japanese companies. A recent survey by the Economy, Trade and Industry Ministry found that Japanese companies had accumulated at least Y12 tln in earnings as of fiscal 2005. The report is reminiscent of the US HIA flows that many believe supported the dollar at end-2005. This is worth monitoring, and for now we target USDJPY at 100 over 3 months based primarily on financial market volatility remaining elevated and supporting the yen. Do note however that Japanese margin traders appear to have resumed tentatively shorting the yen over the past 2 weeks in response to the recent improvement in risk appetite.

The RBA kept rates unchanged at 7.25% as was expected, however, the AUD still managed to decline as the bank clearly maintained a neutral bias. The RBA noted 'widespread' price rises in recent quarters but also pointed to 'evidence accumulating' that demand is slowing and that there has been 'substantial tightening in financial conditions'. The RBA believes that slowing domestic demand will cope with inflationary pressures but will 'review' its outlook if necessary. We raised our 1-month forecast for AUDUSD to 0.9400 prior to the announcement due to the recent improvement in risk appetite. We have also raised our NZDUSD forecast accordingly to 0.7850. On a 3-month view we think that a stronger dollar coupled with slowing global growth and slowing domestic demand should put downward pressure on both currencies, and we still target AUDUSD at 0.9100 over 3 months. We are still more bearish on NZD and target AUDNZD at 1.21 over 3 months. The RBNZ noted this morning in its Financial Stability Review that banks are curtailing credit. Tomorrow morning, both NZ and Australian employment are due. There is labour hoarding at present, so we are unlikely to see a significantly weak result in either economy.

Euro area services PMI's came in at 52, on Tuesday, marginally above flash estimates of 51.8. Germany increased strongly, France was weaker than expected and Spain and Italy remained below the 50 threshold. Eurozone inflation prints last week finally showed some easing in price pressures, but the hawkish ECB were quick to remind markets the central bank's base case has not changed. While the Governing Council is likely waiting for downside trends in prices to develop, the speed of deterioration in data is perhaps unexpected and we expect Trichet to voice greater concern about growth at this week's meeting. Zone-wide retail sales numbers and German industrial orders data is due later today and further downside may see industry become more vocal about the need for rate cuts. We are looking for the euro to stay soft against the dollar and the pound.

Canada's Ivey purchasing manager's index fell to 57.6 in April, from 59 in March, and below expectations of 57.6. In the details, the employment sub-index rose for the fourth consecutive time in a row. Prices paid jumped to 80.7 from 68 - the highest level since the index was established in 1999. Bank of Canada, in their last Monetary Policy Report, suggested that "some further monetary stimulus will likely be required," precisely how much may depend on incoming data. Today's piece of data will give support to those looking for very modest easing at best. Labour market data for April is due Friday and is expected to show an unchanged unemployment rate. We are looking for the CAD to do well amid healthy appetite for risk and prospects of weak but stable conditions in the US. We maintain our 1-month forecast for USDCAD at 0.9700.

The final release of April services PMI was revised down to 50.4 from 52, the series' 5-year low, and against market expectations for a revision to 51.7. The details of yesterday's PMI survey showed some easing in the output price index, which fell to 55.2 from 56.2. However, the input price index rose to 67.3, its highest level since the records started in 1996, from 66.2 in March. The credit crunch has affected the UK services sector along with the financial sector, and our economists expect more weakness in economy to come in the months ahead. PMI surveys are important gauge of activity for the MPC, and today's result will not come unnoticed by the BoE's Committee which will meet this week. While we and the consensus are looking for rates to remain unchanged at 5.00% this Thursday, further weakening in the economy will prompt the BoE to cut rates in June. We maintain our bearish view on the pound, however we also think EURGBP upside is limited and advice to sell rallies. With this week's BoE rate decision likely on hold, while investors continue to reprice their expectations of the ECB policy ahead, risks to the pound are to the upside. Our short-term tactical trade recommendation is short EURGBP at 0.7857 with a target of 0.75.

Swiss CPI for March fell to 2.3% y/y, in-line with market expectations and down from 2.6% the previous month. The decline is also in-line with easing price pressures seen across the Eurozone for March. A high inflation print has forced the SNB to push back rate cuts needed to contain growing pressures on the economy, but amid improving risk appetite the franc has failed to benefit from higher yields. We acknowledge that there is some firm support for the current rally in risk appetite, and adjust our 1m-EURCHF forecasts to 1.64 to reflect this view. However, in the medium term we still expect safe-havens to remain in demand and keep our 3m-forecasts unchanged at 1.58. Swiss unemployment rate is due on Thursday.