By DailyFX - US Dollar - Dollar bulls are cheering as the greenback strengthened against all of the major currency pairs today. At first...

... glance it seems that the dollar has rallied because of stronger US economic data and a less hawkish ECB President.

however, these are
not the only reasons. Interestingly enough, many interbank traders are reporting
that the central banks of South Korea, Malaysia, Taiwan and Singapore have all
bought US dollars today. Although none of these central banks confirm intervention,
after Thailand's intervention last week, it is not surprising that other Asian
central banks have also become concerned about their currency's recent appreciation
against the dollar. This goes to show the difficult decision that Asian central
banks are facing. First off, they need to gradually diversify out of dollars to
properly manage their increasing trade with other countries while at the same time,
they need to make sure that their currency does not appreciate too much against the
dollar that they risk hurting their export sector. Although we cannot gauge how
much intervention was made, we do know that these banks tend to have deep pockets.
Of course, today's economic data certainly played a role in boosting the dollar.
Jobless claims increased from 292k to 309k, which is 6k less than the market's
forecast. Despite the smaller non-farm payrolls reported last week, the labor market
seems to be off to a good start in 2006. The trade deficit for the month of
November narrowed from -$68.1 billion to -$64.2 billion. This was a nicer rebound
than the market was initially anticipating, thanks to a record level of exports and
a fall in imports. Many analysts however are attributing the improvement to the
lower value of oil prices which is a factor that could reverse itself in the
following months as oil prices move back above $60 a barrel. Import prices also
fell 0.2 percent in the month of December, which takes away some of the market's
immediate inflation pressures. Meanwhile the monthly Federal budget surplus also
jumped higher from negative $2.9 billion to positive $11.0 billion, helping to
allusive some of the market's twin deficit concerns. Should tomorrow's retail sales
and producer price figures also come in positive, riding off the coattails of
today's momentum, we could see the EUR/USD back below 1.20.

Euro
Part of the reason why the dollar rallied so much today was because of US data, but
the reason why the Euro was the biggest percentage loser against the dollar today
had to do with the European Central Bank President's less than hawkish comments.
Although the market had not expected the ECB to raise interest rates, the recent
trend of stronger economic data did compel most traders to expect hawkish comments
from the ECB. However once they realized that he left out the word "vigilant" from
his comments, they sent the EUR/USD on a nosedive. As we have mentioned in many
prior instances, this is an expectations market and today, the market had "expected"
Trichet to at bare minimum, match the comments he made following the December
monetary policy meeting. Instead to the market's dismay, he said that the ECB will
remain pragmatic. According to Webster dictionary, to be pragmatic means to be
"practical" and to be vigilant means to be "alertly watchful." Therefore, it seems
that the hawkish central banker has become a bit less hawkish. The timing is quite
surprising since as recently as January 9th, Trichet was quoted saying that central
banks need to be "vigilant" with inflation and in late December he said that when
dealing with inflation, "prevention is better than a cure." His shift in stance
probably has to do with his outlook for growth risks and concern about the rise in
the Euro.

British Pound
Like the Euro, the British pound also lost ground against the dollar. Unlike the
Euro however, the move was far smaller. As expected, the Bank of England left
interest rates unchanged at 4.50 percent. Perhaps to the benefit of sterling bulls,
the BoE does not make any comments when they leave monetary policy unchanged. Data
was also positive for the pound. Industrial production increased 0.6 percent during
the month of November while manufacturing production increased 0.4 percent. Both
were in line with expectations and suggest that the manufacturing sector may be
showing gradual signs of recovery. However, before getting too excited, the sector
still requires further observation since November's rise only covered half of the
previous month's decline. Meanwhile, the Financial Times has a great article on UK
productivity that is worth reading. Their conclusion is that productivity has been
overlooked and could very well be one of the factors contributing to Britain's
current economic weakness.

Japanese Yen
After seven consecutive trading session of losses, the dollar has finally managed to
rally, albeit modestly against the Japanese Yen. Comments continue to come from
various members of the Japanese government. Ministry of Finance members Hosokawa
and Abe both expressed concern about the fluctuations in the Yen and that they are
watching the currency's moves closely. The possibility of Asian central bank buying
has helped to spur gains, but otherwise trading in USD/JPY remains very quiet. The
recent strength in the Japanese Yen reduces the likelihood that the Bank of Japan
will be able to tighten monetary policy anytime soon. Yen strength hurts the export
sector, which filters into overall economic growth. Therefore, for the time being,
the Yen still remains one of the market's preferred funding currencies for carry
trades. If this is really the case, then USD/IJPY could very well find support near
current levels.


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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