The dollar fell to a one-month low below the Y80 level versus the yen in early morning trade with the Japanese currency bought on the back of heightened risk aversion reflecting falls in Asian share prices. The USD was also weighed down by remarks from Fed Chairman Ben Bernanke, the tone of which reinforced market expectations that US interest rates will remain extremely low for some time to come.

Speaking at a conference, Bernanke gave a downbeat assessment of the economy, saying that growth has slowed. At the same time though there was no suggestion of further stimulus to reaccelerate growth ~ some in the market have recently started to speculate about the prospect of another round of quantitative easing (QE3). Given the current concerns about the US economy markets will be paying close attention to this evening’s release of the Fed’s latest Beige Book, which will form the basis for discussion at the end June FOMC meeting.

The yen also saw modest gains versus the euro, as the dollar managed to hold up versus the single currency overnight, though the euro remains close to recent highs as markets focus on interest rate differentials rather than eurozone sovereign risk. Markets will be looking to this morning’s release of detailed Q1 eurozone GDP for insight in terms of the likely pace of growth over the current quarter.

The euro was largely flat against sterling later yesterday and overnight after reaching one month highs of close to Stg0.895p earlier in the day as sterling was weighed down by disappointing UK economic data. According to survey evidence from the BRC overnight, heavy discounting by UK retailers led to a fall in shop price inflation in May. However, there was evidence that food prices remain under upward pressure.

Economic Data Releases

Wednesday: JPN: Trade Balance, April (expect -JPY380bn, previous JPY240bn); GER: Trade Balance, April (expect EUR14.9bn, previous EUR18.9bn); Industrial Production, April (expect 0.2% MoM and 10.2% YoY, previous 0.7% and 11.2%); EC: Eurozone GDP, Q1 r (expect 0.8% QoQ, previous estimate 0.8%); US: Fed’s Beige Book.