**Treasury Report Update:

As we accurately predicted, the Treasury opted for the "Middle Ground" in their FX report. They refrained from branding China as a currency manipulator, but harshened their stance on the country. They nodded to China's previous move on July 21 and the slight appreciation in the Yuan since 2005. Some positive comments were also made about initiatives and promises by Chinese President Hu and Premier Wen, suggesting that they may have been trying to gain political favor with China. Clearly politics is the bigger factor at this point.

However, as expected they appeased their political constituents by criticizing China for making "far too little progress" and that they will "closely monitor" any developments. Should China not deliver any more moves, they could still be designated in November. In the meantime. the dollar is rallying modestly as traders betting on China being branded cut losses.

Treasury Secretary Snow also reiterated the Administration's strong dollar policy, but judging from the government's protectionism measures, they are probably just paying lip service to a policy they have long not cared much for.

**Fed Comments:

The Federal Reserve delivered its much expected 25bp interest rate hike today, bringing rates up to 5 percent. To the shock of the market, the Fed did not tone down the FOMC statement significantly. They repeated that "some further policy firming may yet be needed" which suggests that Bernanke may be regretting his previous comments for a pause and probably feels that the dollar has sold off enough for the time being. Unfortunately traders tend to forget that a weak dollar also boosts inflation pressures by making imports more expensive, so the Fed is walking on a very fine tightrope. They are very close to being done with interest rate hikes but unfortunately today's rate hike is probably not the last. We still have two more CPI readings till the June meeting and as the Fed has said in their statement, the extent and timing of further increases will be data dependent. Should data worsen, the uses of the words "may yet" gives them flexible to pause if needed, but for the time being, they are still hawkish.