The US dollar survived the US bank-reporting period relatively unscathed last week, regaining some ground versus the yen and closing just short of the 104-mark, or the highest in seven weeks. Risk aversion, as reflected in the VIX index, has continued to fall to its lowest levels this year, helping the S&P 500 to its highest close since the opening week of the year. Fed fund futures have almost completely eliminated the probability of a 50bp cut in US rates at the next FOMC meeting on April 30. But the market environment has not turned decisively positive for the dollar. Despite some stability in US housing market indicators, relative data performance between the US and Eurozone has continued to favour the latter at the margin. While US existing home sales increased for the first month in seven in February and the NAHB Housing Market Index stabilised, the US economy is probably moving into the second wave of macro weakness with job losses accelerating and consumption likely to hurt. Our economists expect the US April employment report to show a larger 100k decline in payrolls from the 80k decline in March and another 0.2 percentage point rise in the unemployment rate to 5.3%, underscoring this weakening jobs trend. The unemployment number is expected to peak at 6% by the final quarter of the year. The current environment still makes the USD susceptible to global risk appetite, unless Eurozone data deteriorates. But leading indicators for Europe's big economies have not yet rolled over, and price pressures in the EU continue to mount. This means the ECB has shown little interest in loosening monetary conditions, leaving EURUSD at very elevated levels. We remain short EURUSD targeting 1.52 as a trade recommendation.

There are no data releases scheduled for the US on Monday. The Fed is scheduled to offer US$50 bln 28-day credit through their "Term Auction Facility" (TAF) to depository institutions with the results of the auction out on Tuesday. Fed officials Evans (1300GMT) and Kroszner (1730 GMT) are scheduled to speak, but we do not expect their speeches to discuss the economy or policy. The data calendar remains light for the rest of the week, ahead of the FOMC meeting next week. March existing home sales out on Tuesday is expected to reverse some of the February gains (UBS and consensus: 4.930M, after 5.030M in Feb). New home sales on Thursday probably fell too (UBS and consensus: 585k, after 590k). Durable goods orders are also due on Thursday (UBSe: -0.5%, cons: 0.1%, after -1.1% in Feb and -4.4% in Jan). The April Michigan sentiment index is due on Friday (UBSe: 63.2, consensus: 63.5).

The euro has stayed supported by still-resilient Eurozone data, with price pressures not abating. At +4.2% y/y, German March producer prices growth outstripped both the consensus for +3.8% and February's +4.0% rate, and were at their highest level since end-2006. But with a significant amount of the upside in prices attributable to supply-side pressures, the risks on European consumer sentiment and growth from the high inflation and rates linger. The current elevated EURUSD levels would quickly become unsustainable if we begin to get weak Eurozone data. This week, advanced April figures for manufacturing and services PMI surveys are due on Wednesday. The IFO business climate index will be out on Thursday. Despite its recent resilience we expect the index to have declined in April. A number of ECB board members will be speaking this week and we pay particular attention to Trichet on Thursday and Weber on Friday. As economic data starts to slowly turn, we expect the central bank commentary to start assigning more weight to downside risks for European economies going forward.

USDJPY has risen sharply, largely on the back of an improvement in risk appetite, but also aided by a continued deterioration in Japan's economic situation, coupled with the Fed last week showing more signs of concern over the inflationary impact of the sharp Fed rate cuts to date. On Friday, the BoJ's branch managers' report showed eight out of nine regions in Japan have downgraded their assessment of the economy, primarily due to weak corporate activity. In other more positive developments, consumer confidence for March rose slightly to 36.7, but is still at relatively low levels. Our economists estimate that consumer confidence in Q1 fell by 2.3 points to 36.5, which is the lowest level in five years. The economy is gradually deteriorating but there is little sign yet that the BoJ is considering cutting rates. CPI inflation for March is due on Thursday, and we see upside risks on the back of soaring energy prices. Risk sentiment is the main driver of yen and we are not convinced that the improvement in risk appetite is sustainable. As such we continue to target USDJPY at 100 over 3 months.