The US dollar weakened overnight against the euro by around 0.7% and 0.9% against the yen and, while holding steady against the AUD. EURUSD traded from a low of 1.5708 up to a high of 1.5865, while USDJPY traded from a high of 102.68 down to a low of 101.50. Risk sentiment deteriorated broadly, causing both equity markets to fall and bond markets to rally, while oil prices rose to a record high on an unexpected rise in inventories. Market expectations for a near-term easing rose, with the OIS markets pricing in 36bp of rate cuts at the April 30 meeting, versus 30bp as of yesterday's early Asian trading.

Fed official comments were not sufficient to drive significant changes in Fed policy expectations. Dallas Fed president Fisher suggested additional Fed easing may have limited effects given the gridlock in the financial system, while Fed Gov Kroszner suggested that the Federal Housing Administration could help ease stress in the housing market. Fed Chairman Bernanke spoke, but his comments were limited to the importance of financial literacy. On the data front, the mortgage application purchase index jumped 8.1% w/w to 384.7 in the week of April 4 after a 11.8% w/w decline in the previous week. Wholesale inventories were reported up sharply again in February, rising 1.1% after an upward revised 1.3% in January (was 1.0%). The rise in whole sale inventories could be the result of expectedly weak demand, consistent with a deteriorating economy.

We think the US dollar will strengthen from current levels over a multi-week time horizon, but the upcoming G7 meeting is unlikely to provide support for the currency. We think the G7 will focus on restoring financial stability, and comments on FX markets will be left unchanged. A large majority of our respondents in a poll on FXWeb expect commentary on FX to at least reflect the very significant moves in the markets of late. Note that the final press conference for the G7 meeting on April 11 is at 1045 GMT. We continue to target EURUSD at 1.55 and 1.47 in 1 and 3 months respectively.

Ahead today, February trade balance data and April (the week of April 5) initial jobless claims is due at 1230 GMT. Mr Bernanke is scheduled to speak on 'President's Working Group and Financial Stability Forum Reports' at 1700GMT. He is scheduled to release prepared remarks and take questions from the audience.

The Bank of Japan voted unanimously overnight to keep rates on hold at 0.5%, citing tensions in financial markets and a slowing economy as its main concerns. This was expected by the market as recent indicators such as the Q1 Tankan survey point to significant risks for the economy. Although inflation has started to tick higher, our economists believe the need to support the economy remains the top priority amid the uncertainty, and we now look for a hike in the second quarter of 2009. We also look for stronger growth in 2009 (calendar year) as residential investment growth may surprise to the upside. Meanwhile, Masaaki Shirakawa has been appointed the new BoJ governor as his nomination has been approved by both the Upper and Lower houses of Parliament. His confirmation marks an end to the deadlock seen since mid-March which led to two post-Fukui nominees being rejected. However, the government's nominee for vice-governor, Hiroshi Watanabe, failed to receive approval from the Upper house, where the majority DPJ has rejected all candidates with a Ministry of Finance background. Japan can now look ahead to Friday's G7 meeting with a functional BoJ leadership and full cooperation with global central banks to tackle the credit crisis. Shirakawa has pledged to be a governor with a neutral bias but markets still see risks of BoJ easing sometime this year.

The UK's Nationwide Building Society reported another drop in its measure of consumer confidence. It said the March reading was 77 from 78 in February, which represents a new survey low (since May 2004). In other news, The UK CBI's chief, Richard Lambert, called for the BoE's MPC to cut interest rates 25bp on Thursday. He said although it was a difficult decision, with inflation expected to pick up in the near term, the requirement to unfreeze the lending markets and support the wider economy were greater priorities. Halifax reported yesterday that the house price inflation dropped 2.5% in March, while house prices rose only 1.1% on an annual basis against the estimated 2.4% rise. The annual fall in Halifax house prices is the largest drop since September 1992 and is consistent with similar surveys measuring house price inflation: Nationwide's measure of house prices showed a drop in each of past five months. Housing slump concerns will intensify as the credit crunch continues to weaken the economy. Today, a UK mortgage lender announced it is to withdraw 100% mortgage offering as the bank continues facing higher funding costs, the last of major UK lenders to do so. On Thursday the BoE will decide whether to reduce its bank rate. While the current financial market environment suggests a more aggressive half point rate cut may be needed to counteract further housing market fallout, expectations of higher inflation concerns should limit the move to 25bp. The pound is continuing to slip across the board and is approaching the key 0.80 level against the EUR. Nevertheless, we remain cautious of further downside in the GBP as the majority of bad news has been already priced in by the market. Our 1m and 3m EURGBP targets remain at 0.78 and 0.76 respectively.

ocus for the Scandinavian investor today will be on the Norway March CPI release at 7:30 GMT. The headline inflation rate has been at its highest levels since the beginning of 2002 maintaining the Norges Bank on a hawkish note. In its latest Monetary Policy Report the central bank pointed that rates may be raised again - to 5.50%, which our economists are also forecasting. We believe rising policy rate and Norway's relative immunity from the global credit crunch will provide the krone with support further ahead. In Sweden, March industrial production and unemployment update are due at 7:30 GMT. We continue to expect the economy in Sweden to slow at a faster pace than its neighbour's economy. The rates in Sweden have likely passed its peak and the OIS is pricing in about two rate cuts in the next twelve months. We maintain our NOK bias and believe NOKSEK to trend higher.