By DailyFX - US Dollar. After starting the New Year on a weaker footing, the dollar has managed to recuperate some of last week's losses....

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The recovery however was far from broad
based since the dollar only managed to register gains against the Euro, British
Pound, Swiss Franc, Australian Dollar and the Canadian Dollar. Against the Japanese
Yen and New Zealand Dollar, the greenback lost ground once again. With no major US
economic releases on the calendar, except for consumer credit late in the day, the
dollar simply benefited from profit taking by dollar bears, softer oil prices and
another strong day in the stock market. In fact, even though prices have since
moved lower, today was the first time that we have seen the Dow break above 11,000
since June 2001. Even though the stock market is continuing to move higher, the
prospect for the dollar is not as optimistic. The market continues to believe that
the Fed is shifting to a more neutral policy. Fed Presidents Hoenig and Guynn were
both a bit more cautious with their outlook for US rates. Hoenig, who is a
non-voter this year said that interest rates are near "neutrality" while Guynn who
tried to avoid making any direct comments about interest rates did mention that he
expects the housing market to slow this year. The handing off of the baton will
make Fed speeches even more important this year since the market may no longer
write-off the Fed decision as the Chairman's decision. Through most of Greenspan's
tenure, there was an age old rumor that Greenspan penned the statement before the
actual meeting, even though the decision is suppose to be a majority vote. With the
new leader, the voting process may be more important, especially in the beginning of
Bernanke's tenure. Consumer credit fell for the second month in a row at a time
when the market had originally predicted for borrowing to rebound. This is yet
another piece of evidence that higher interest rates have taken a bite into the
pocketbooks of consumers * a trend we expect to continue.

Euro

The Euro experienced its first meaningful day of losses since the beginning of the
year. Stripping out the dollar component, the move is actually counterintuitive to
the day's developments since the ECB made positive comments while Eurozone economic
data surprised to the upside. The German current account surplus for the month of
November increased to EUR 8.1 billion from EUR6.2 billion. Both imports and exports
fell on a monthly basis, but on an annualized basis, exports and imports increased.
The export sector is still recovering modestly but it seems that the country will be
relying more on domestic demand to accelerate the recovery. This will be even truer
as the Euro continues to rally, since the increased valuation will only make
European exports less attractive. Nevertheless, the retail sector is also improving
with the Eurozone retail PMI index increasing from 50.7 to 52.2. Accelerated
activity was reported in all three of the major countries - Germany, France and
Italy. Even though the market shrugged off comments from ECB member Wellink, his
words is illustrative of where the central bank stands. According to Wellink, "with
given inflation expectations, with the economy getting stronger, the chance of a
rate rise increases." It is only a matter of time when the central bank will raise
rates again.

British Pound

Like the Euro, the British pound gave back some of its recent gains against the
dollar. Despite an up tick in house prices, the growth was the slowest in ten
years. Halifax reported that house prices increased 1.0 percent in the month of
December, leading to an annualized pace of growth of 5.1 percent. The housing
market is recovering gradually, but the growth remains below trend, solidifying
expectations for no changes at Thursday's monetary policy meeting. Tonight's BRC
retail sales monitor should shed additional light on how well the economy is
performing. Retail sales are expected to be particularly strong, rising over double
the previous month. Should this be true, the British pound could resume its rise.

Japanese Yen

Japanese markets were closed for a holiday, but that did not stop the Japanese Yen
from rising for the fifth consecutive day. In fact, the Japanese markets have been
closed for most of last week, which means that foreigners have been fairly bullish
on the Japanese Yen. Finance Minister Tanigaki gave the green light to recent
movements by saying that he believes recent moves in the Yen are "in line with
fundamentals." Asian reserve diversification continues to bolster the Yen.
Thailand, Taiwan, Japan and the Philippines have all recently reported an increase
in foreign investment flows. This has helped to rally not only the stock markets of
those respective countries but also their currencies. China has been a leader in
this talk as they brought the issue back to the forefront with recent comments about
diversifying their reserves away from the dollar.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com
By DailyFX


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