The better-than-expected Eurozone ZEW economic sentiment survey yesterday set off a bout of nerves for the US dollar as the market juggles between a weakening European economy and a clearly still-anaemic US economy. Over the last few weeks, the market has been reacting to "re-coupling" global economic conditions, which put the poor US economy in good company. But the ZEW survey probably reminded the market that the relative difference between the US and the rest of the world isn't necessarily shifting in favour of the US economy. Additionally, data from the US housing sector continues to suggest the lingering woes from that front. Housing starts came in at 965k in July, falling from the 1084k in June, and permits fell to 937k (consensus 970k, UBSe 950k) from 1138k. The rebound in fuel prices also weighed on the USD. We however do not think the USD relief rally is over. With incremental risk to global growth from weakening growth data from Europe will continue to put a floor on the USD in our view. The US PPI data released yesterday also reminded the market of the lingering inflationary pressure - core PPI rose 0.7% m/m (after 0.2%) in July, well above the 0.2% consensus forecast - although this data would not have captured the full extent of the recent fall in fuel prices. But the US stocks did not savour the hawkish stance in both Federal Reserve Fischer and Lacker's comments yesterday, both calling for the Fed to remain vigilant to keep inflation at bay.

More housing related data is due today with the release of the mortgage applications numbers for the week of August 15. Application data though has deceivingly outperformed actual sales numbers in recent months and are likely to be ignored. Minneapolis Fed President Stern will be interviewed on Bloomberg TV at 1830 GMT.

The August ZEW survey for economic sentiment for Germany and Euro-zone was better than expected - the latter coming in at -55.7 (vs consensus: -65.0, after -63.7) - signalling 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.

On Tuesday, SNB Chairman Roth was on the wires, highlighting that the real sector of the economy is starting to have problems, probably opening a new chapter. He also said that problems in financial markets will continue, and that the financial sector will not add to economic growth as it did in the past. With regard to inflation, Roth said that August could be the peak for inflation, and that the system should be flexible enough in order to contain second round effects at an acceptable level. However, he also outlined that the SNB has to take the necessary monetary decision to fulfil its responsibility for ensuring price stability. Overall the most recent commentary by Roth does not suggest that the SNB will change its neutral stance on monetary policy up ahead, and while steadily weakening growth data also supports the view of no additional tightening by the central bank, the upside in the franc will likely remain limited, especially versus the USD.

As expected, the BoJ decided to keep its overnight call target unchanged at 0.5% on Tuesday. According to the central bank, domestic demand could weaken further on the back of high commodity prices and both downside risks to growth and upside risks to prices remain in tact, supporting the decision to keep rates unchanged. The assessment of the economy was cut again, mainly due to the risk that weakness in the US economy may trigger a recession in Japan. Besides the negative impact of high commodity prices the central bank highlighted weakening export growth as an additional driver of economic weakness. Going forward, we expect expectations on monetary policy to have only limited impact on the JPY for now, while risk sentiment will remain the currency's main driver. According to our risk index analysis a trend towards further risk appetite remains in tact, and this will limit upside in the yen, especially versus the dollar. The carry sell-off has also started to show initial signs of bottoming out and TFX positioning shows that short JPY positioning has picked up again after falling more than a quarter from its recent peak.