US Dollar Softer On Treasury Yields and Homebuilders Confidence
The US dollar succumbed to softness in the session as treasury yields continued to move lower in New York. Reaching a five year high of 5.32 percent last week, US fixed income benchmark yields have pared back considerably to trade at 5.14 percent following the release of lower than expected inflation figures on Friday. With consumer price pressures slightly less than expected, considerations of a more stable economy and unchanged interest rates are fueling dollar bearishness at the moment, especially against the Euro and British pound. Incidentally, exacerbating the day’s pullback was lower than expected homebuilding confidence. Hitting the lowest point in almost 16 years, confidence in homebuilding continues to worsen as a result of the previous subprime fallout as mortgages are now harder to come by. The notion has also affected construction with builders cutting back on production as well as slashing prices in order to thin out existing inventory. Ultimately, the momentum from both is likely to reverberate continuously, setting the theme for the week. With the thin schedule of data left for the next four sessions, the dollar is likely due for a bout of selling until a firm base can be established.

Japanese Yen Still Soft, USDJPY Targeting 124.00?
After the Bank of Japan left rates steady at 0.50 percent last week and signaled that policy tightening isn’t likely in the near-term, the Japanese yen has continued to weaken as USDJPY inched towards 124.00. The only economic news from the region did little to add to price action, as the Cabinet Office’s monthly economic report maintained that the world's second-largest economy is “recovering.” The government upgraded its outlook on consumer spending, saying that it was “picking up” from “showing signs of picking up.” Nevertheless, Hiroko Ota, Japan’s Economic and Fiscal Policy Minister, said that the upturn in private consumption remains fragile, noting that spending “isn't that strong as wage growth has stalled.” Furthermore, the Cabinet Office reported “weakness in industrial production in some sectors” as a slowdown in the US has led demand for Japanese products to wane. Overall, it is clear that fiscal and monetary policy officials remain optimistic about the future of the Japanese economy, but expansion is far too frail to even consider rate normalization, and this sentiment alone should keep carry trades widely in play.

ECB Weber Confirms Hawkish Bias For Euro
Things were relatively quiet on the European front as economic data was far and few between in the overnight and New York sessions. Notably, Swiss industrial production made headlines as the report for the first quarter dropped more than consensus expectations. Declining by 4.7 percent, the monthly assessment helped to drag the annualized figure lower, still supported at 7.3 percent for the month. The report was subsequently followed by reassuring comments from the Swiss National Bank’s Chairman Roth, stating that the “Swiss economy is competitive”. However, the central bank head did note that initial concerns are arising due to the depreciation of the currency, likely to spur inflationary pressures as it props up prices for global imports. Notably, carry trade rhetoric was absent, helping to exacerbate franc softness on the day. The story was quite different in Europe. The Euro gained against the dollar and yen in the session following hawkish commentary by the European Central Bank’s Weber. Noting that risks to inflationary pressures remain to the upside, Weber noted that tighter monetary policy that may be implemented will not pose a danger to overall growth. The sentiment of higher consumer prices was echoed by ECB President Trichet as he spoke in Montreal, Canada. “The sudden emergence of fast growing economies in the global economy is exerting upward pressure on prices.” The case for higher rates boosted speculation and the Euro, helping buyers beat the 1.3400 figure in the New York morning.

British Pound Breaks 1.9800 Ahead Of BOE Minutes
The British pound cleared 1.9800 in early European trading today with the help of a pick up in Rightmove house prices. The housing indicators gained 0.8 percent in the month of June, leading the annual rate up to 13.2 percent and signaling that while mortgage approvals have fallen amidst higher interest rates, property values continue to accelerate at the quickest pace in nearly three years. The big event risk for the British pound this week comes on Wednesday, when the minutes of the Bank of England’s June meeting will hit the wires. The danger in the release lies in how the central bankers voted, as just a few votes for a rate hike in June could lead to speculation of policy action in July. BOE policy makers tend to have no problems speaking out against the majority, but when über-dove David Blanchflower votes for a hike (as he did back in May), you have to believe that the central bank’s hawkish stance won’t be quick to fade. Nevertheless, if we see that the decision to leave rates on hold was unanimous, traders will be betting that July will yield a steady hand as well.

New Zealand Dollar Holds Above 0.7500 Despite RBNZ Intervention
Though the Reserve Bank of New Zealand has yet to confirm it, rumors have been swirling in the markets that the central bank intervened in the FX markets after NZDUSD plunged 50 points at the opening of yesterday’s Asian session. However, their attempt was to no avail as the pair crept higher and ended the New York session just below 0.7550. Once again, the markets have proved that carry trades remain the name of the game. Meanwhile, elevated commodity prices kept the Australian dollar buoyant as well, despite a failed test of 0.8450 during early European trading. The Canadian dollar was not quite as fortunate ahead of Tuesday’s CPI data, with USDCAD holding above 1.0700. The Bank of Canada’s core measure is forecasted to ease back to 2.3 percent from a four year high of 2.5 percent, which may quell some concerns of policy tightening next month. Nevertheless, as long as the figure holds above the Bank’s 2.0 percent target, a rate hike to 4.50 percent will be very likely on July 10th and could keep USDCAD at depressed levels.

Kathy Lien is the Chief Currency Strategist at FXCM.