Dollar strength exploits further escalation of risk appetite as the lower yielding currencies of AUD and CHF under-perform across the board. Friday??™s unexpected increase in US new home sales to 6.69 mln boosted the dollar across the board and further reduced pessimism with the fallout from the sub-prime lenders. The dollar retains most of its gains versus JPY, EUR, GBP, CHF and CAD amid expectations that this morning??™s new home sales will rebound after January??™s 17% slump. More below.

The highlight of this week will once again be the Fed as Chairman Bernanke is scheduled to speak on the economic outlook before the Joint Economic Committee on Wednesday, where he will likely be questioned on the mortgage sub-prime fallout and the likelihood that these problems will filter into the average consumer and the general economy. The nature of the issue at hand should create a heated performance by lawmakers speaking on behalf of their affected constituents, and is expected to subject Bernanke to the highest degree of pressure and questioning since assuming the Fed Chairmanship. His appearance will be especially contentious in the event that today??™s new home sales sow renewed declines.

The 10 am EST release of US new home sales for February is expected to show a rise to 990k, after 937k in January. The inherent volatility of the report is likely to bring about renewed surprise. Considering the current upward bias in the dollar following the upside surprise in existing home sales, a rebound past the 1.0 mln mark in new home sales could trigger further dollar strength and lift 10-year yields past the 4.60% level.

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