The dollar ignored the results of the latest Federal Reserve Loan Officer Survey, which showed an acceleration in the rate of tightening lending standards across the board in every category, with expectations of further tightening ahead, due to the moves in oil overnight. Instead, the dollar strengthened against the major currencies, falling below 1.49 against the EUR, as oil dropped to a session low of $112.72/bbl before closing below the previous close around $114.5/bbl, and equity indices ended the session in positive territory.

We think the current turn in the dollar signals a sustained reversal is under way. We have already been favoring a stronger dollar (3/12m forecast of 1.53 and 1.40) and we believe the dollar should hold onto its gains in the near-term, too, due to worsening growth expectations outside the US, the outlook for yields, falling commodity prices and strong capital flows. When looking at EURUSD, the expected yield differential has continued to shrink. The OIS market is looking for the 3m rate differential to shrink to 114bp from the current level of 225bp, helping the USD. Rate adjustments are reflecting moderating growth expectations and have moved also in favour of the US dollar against the AUD, NZD and CAD. Falling commodity prices also help the dollar. Note, rising oil prices have hurt the US as this economy is still more dependent on oil while the economy is less energy efficient than their G10 counterparts. The effects also work in reverse with falling oil bringing relief to the US consumer and producer. Easing inflation expectations would be a great help to the Fed, too. On capital flows, we note that Treasury holdings at the Fed rose by an astounding $25.6B in the latest week, and the 3-week rise in treasury holdings is an eye-popping $57B.

Ahead today, trade balance data (-$59.8bn previously) and the July Federal Budget statement (UBSe -$105bn, -$36.4bn previously) will be released.

It will be a busy week in terms of data releases in the Eurozone. After the ECB kept rates on hold and ECB President Trichet highlighted that downside risks to growth, we expect growth data to continue impacting investor sentiment. Inflation readings due throughout the week may raise more alarm bells within the ECB but we expect signs of further easing in inflation expectations to temper any prospect of a rebound in rate hike expectations. In addition, the ECB's July Bank Lending Survey showed that banks tightened their lending requirements for the fourth consecutive quarter and consumer credit also tightened. The decline in the credit cycle suggest that growth will be sluggish up ahead and this week's GDP releases out of the Eurozone will likely confirm such conditions. The first estimate on Q2'08 GDP will be released on Wednesday, and our economists expect a considerably weaker reading than the market. Industrial production, due on Wednesday, will be watched to assess activity levels and our economists expect a disappointing outcome. Growth data is therefore expected to confirm the view that further tightening in rates by the ECB is unlikely. The final CPI reading for July, due on Thursday, is expected to be confirmed at 4.1% y/y. Under such conditions we see only little scope for any sustainable EUR recovery in the week ahead.

Canadian Housing Starts data disappointed, coming in at 187k (UBSe 215k, 218k previously), further confirming Canadian economic weakness. Previous data included the unemployment rate for July, published last Friday, which fell to 6.1% from 6.2% and net change in employment, which came in well below expectations at -55k. Look for merchandise trade data to be released later today (UBSe $5.6bn, $5.54bn previously). Lower oil helped further support the pair and with the recent shift in rate expectations, we revise our USDCAD 1m and 3m forecasts in FX Perspectives.

Inflation data released overnight showed underlying CPI surging to 2.9%y/y, vs. expectations of 2.6%y/y. Headline inflation also came in much higher than expected at 4.3%. The underlying rate represents the first time since Q3 2002 that core inflation has surged above Norges Bank's long-term target of 2.5%. This will dash hopes of Norges Bank, which had been looking for some loss of momentum in underlying inflation readings but it is clear that current trends may not be enough to avert further tightening. However, we expect a move in September rather than on Wednesday, where expect rates to remain on hold. Also, this week will see the release of a series of activity numbers out of Norway and we expect further signs of an economic slowdown to transpire. We expect the market to continue moving towards a relative growth exchange rate determination structure, and Scandinavian currencies are expected to suffer. The NOK was one of the few currencies the EUR managed to rally against last week and we maintain our 1m- and 3m-forecasts of 8.10.

The RBA released its Statement on Monetary Policy on Monday and the tone confirmed that the central bank is looking to begin its easing cycle - first established in a press statement accompanying last week's on-hold rate decision. However, while acknowledging that domestic demand was slowing, the statement continued to highlight the significant stimulus from the terms of trade as well as the stimulus from tax cuts, which take effect from July 1. Such caveats are a limit to the extent that the market can expect rate cuts by year-end. AUD has traded lower due to not only a stronger dollar but also due to falling global growth expectations and pessimism on the RBA rate outlook. Monday's China trade surplus for July was wider than expected on the back of stronger exports. Such data should be watched carefully because it could cause at least a partial rethink on current pessimistic global growth sentiment. We are considering buying AUD against another currency with similarly slowing domestic demand, partly on the view that China FDI flows to Australia could prevent the currency from falling out of bed.