EURUSD traded in a 1.4672-1.4765 range while USDJPY stayed within 109.72-110.11 in New York. WTI prices dipped only briefly following the higher-than-expected inventory build, posting a 112.61-117.03 range. At $813, gold failed to respond to increasing physical demand with investor sentiment staying soft. Stocks traded sideways with the Dow ending the session marginally positive, up 0.6%. In economic news, the US mortgage applications purchase index fell 0.4%w/w to 314.0 in the week of Aug 15. The trend of the purchase index remains weak, having been a poor guide to home sales since late 2006, showing much less weakness than sales in 2007 and much more weakness than sales so far in 2008. Still, it has shown net weakening recently. In other news, Fed President Stern said he cannot let firms like Fannie, Freddie fail; he added that the too-big-to-fail issue must be addressed in a calm market, not during turbulent times. The GSEs had another 25% drop on the day.

We view recent gains in the US dollar as sustainable. Against the backdrop of housing market-related concerns, worsening growth expectations outside the US, the outlook for yields, soft commodity prices and strong capital flows are all dollar-supportive. Flows have benefited US Treasurys and US equities. Note, our recent results form our Equities for FX Monitor showed increased demand for US equities. At USD 0.17bn (vs. USD -1.58bn the week before), equity-related US capital flows turned positive, led mostly by repatriation of funds by domestic clients.

Ahead today, Initial Jobless Claims, Leading Indicators and the August Philly Fed Index are due. At 430K, UBS is more optimistic on claims than consensus estimates of 440k (prior 450k). In contrast, at -15, we expect the Philly Fed to marginally undershoot consensus estimates of -12.6 (prior -16.3).

The BoE Minutes from the August meeting were released overnight and a 7-1-1 vote split was revealed, in line with expectations. David Blanchflower voted for a cut, citing downside risks to growth were greater than the inflation problems. Tim Besley voted for a hike, arguing that a pre-emptive increase will help anchor inflation expectations. Most other members believed the current BoE position is appropriate, and that a slowdown in activity is necessary to create spare capacity need to ensure that inflation returned to target. However, the market was unimpressed as the minutes confirmed the contents of the inflation report, which placed a greater emphasis on downside risks in the medium term than previous official releases. The MPC's forecast had inflation above the 2% target for the majority of the forecast horizon, but is set to fall below that level at the key 2-year mark before proceeding on a downward path under both constant and market rate assumptions. Weak data in the run-up to the meeting, despite clear inflation risks, has led to greater emphasis on downside risks and the prospect of excess capacity emerging in the economy.. In other data, the CBI industrial orders balance fell to -13 after -8, below expectations of -12. Our economists note that this 7-year low figure echoes recent readings from the PMI manufacturing survey, which has fallen into recession territory. The pound has weakened against the dollar amid the broader rally in the greenback but we continue to expect EURGBP downside in the medium term. Upcoming GDP releases should show the UK economy continuing to just marginally outperform the Eurozone and the market is expected to price in further deterioration in the currency union's economy.

European Services and Manufacturing PMI's are due, we and the market are looking for ongoing weakness in the forward looking indices. The OIS market continues to look for ECB easing of 40bp over the next twelve months. This expectation was hardly changed over the last week. On Tuesday, the August ZEW survey for economic sentiment for Germany and Euro-zone, released Tuesday, was better than expected - the latter coming in at -55.7 (cons. -65.0, previous -63.7) - which signalled that market participants were not as negative on the European and German economy as before, specifically due to recent declines in oil and EURUSD. Inflation expectations also declined in the survey and many participants expect no further ECB hikes. However, the ZEW survey for the current situation in Germany came in well below expectations (-9.2 vs. UBSe 10, 17 previously). Also, the figures are still low compared to previous recessionary levels and recent economic data has been weak. We note however that our economists believe the ZEW is not a reliable indicator of German GDP and believe economic data will continue to deteriorate. German PPI data came in as well (2.0% m/m, UBSe 0.7%). We expect the euro to remain weak, in light of easing inflation expectations and expectations of continued economic weakness in Germany, EU's growth engine.

The BoJ cut its assessment on exports and output in its monthly economic report. The overall economic assessment was also cut, as the central bank warned that growth would stay sluggish on the back of high energy costs and slowing export growth. It also warned that output would stay relatively weak for the time being, while exports would grow only modestly. The release is unsurprising given the latest releases and does not bode well for tomorrow's merchandise trade report. Weakness in global growth has led to a sharp drop in Japanese exports, even in economies which have seen solid performance amid G10 weakness, especially Asia. Japan's data points to an unfavourable environment for growth currencies, but the recent selloff in commodities and the high-yield bloc also seems excessive. We look for a stable USDJPY reading in the medium term as weak growth and a correction in the carry unwind offset each other in markets.

Canadian retail sales rose by 0.5%m/m in June (consensus +0.4%m/m, UBSe +0.4%m/m); Ex-autos sales increased by 1.4%m/m (consensus +0.6%m/m, UBSe +0.7%m/m). Price-related gains in gasoline station sales (+4.2%m/m) were a key contributor to this month's overall increase in sales. In its last monetary policy report, the BoC highlighted that CPI could exceed their target, while peaking only in Q1?09, with higher commodity prices the driver. Note, the target range established by the Bank of Canada and the federal government extends from 1 to 3 per cent. Hence, there will be a major focus on Thursday's CPI release, which is expected to come in at an elevated 3.40% y/y after 3.10% y/y previously. Long-term inflation expectations derived from inflation linked bonds have eased to 2.5% from 2.7% along retreating oil prices. There is a risk that the market is already positioned for a strong CPI release, and we are looking for USDCAD to consolidate with our 1month forecast staying at 1.05.