By DailyFX - US Dollar.The US dollar extended Friday's gains thanks to some positive comments from Fed President Fisher.As we begin the new...

... week, the market is very optimistic about
interest rates with the Fed fund futures contracts now putting the odds for a March
hike at 90 percent and another hike in May or June at 60 percent. Confirming US
Treasury Secretary Snow's recent comments, Fisher who is a non-voting member of the
FOMC this year, believed that the dismal 1.1 percent growth that we saw in the
fourth quarter will most likely be revised higher. If this is really the case, then
some of current dollar optimism is justified. Meanwhile President Bush announced a
$2.7 trillion budget for the 2007 fiscal year which begins in October. In his
projections, the deficit is expected to shrink from $360 billion predicted for this
fiscal year to $355 billion. Although the Bush administration still has plans to
halve the budget deficit by 2009, the fear that interest expense could increase due
to rising financing costs has some believing that the projections may be a bit too
optimistic. One of the market's major focuses this week will be Thursday's $14
billion dollar reissuance of 30-year bonds, which has been necessitated by budget
deficits. Strong demand expected at the auction could keep the dollar bid with one
wrinkle - the demand for longer dated bonds has also caused a deeper yield curve
inversion with the 2-10 spread widening to 3.3 basis points. This has perked up the
radar for some recession watchers. However, we know that the market is very much
siding with the dollar at the moment, since it managed to shrug off any geopolitical
risk that could be stemming from the IAEA's recommendation of Iran to the UN
Security Council about its nuclear program.

Euro

With across the board disappointments in Eurozone economic data and hawkish comments
from the Federal Reserve, it is no surprise to see the Euro weaker for the second
consecutive trading session. Bloomberg's retail PMI index for the entire Eurozone
slipped below the 50 expansion/contraction threshold to 49.7 for the month of
January. Even though French retail PMI took the biggest dive from 51.5 to 46.2, a
slowdown in the expansion was also seen in Germany (51.7 to 50.4) and Italy (53.7 to
53.2). Consumer spending in Europe has only recently showed signs of a recovery.
The latest fall in the index suggests that once again, consumers are not spending.
Yet the disappointments do not stop there. German factory orders also fell 1.6
percent in December, bringing the annualized pace of growth to 3.9 percent. This
was far below the market's 6.0 percent yoy forecast. Some optimists were
downplaying the weakness citing significant strength in the past 3 months of
releases. Either way, today's data releases puts to question whether the economy
can really withstand another rate hike. Yet this all doesn't seem to matter since
ECB President Trichet pretty put his stamp of approval on a March rate hike last
week. Which means that for the time being, losses in the Euro could still remain
limited.

British Pound

The British pound took a rather deep slide today as various newspapers talked up the
need for another rate cut by the Bank of England. The Evening Standard called for
another rate cut this week while the UK Sunday Times highlighted the division within
the UK's Monetary Policy Committee. The Bank of England however will most likely be
keeping interest rates unchanged again at 4.50 percent. The big question that will
not be answered until the minutes of the meeting are published on February 22 is
whether any other member will join Steve Nickell in voting in favor of another
interest rate cut. Kate Barker has the potential to shift sides as she recently
described the interest rate decision as finely balanced, adding that "there are
question marks about whether the pace of growth is going to prove strong enough."
If she does, we could see a new down leg in the British pound.

Japanese Yen

Surprisingly, the Japanese Yen was the only currency pair that managed to hold
relatively steady against the US dollar. After the past two week's rally that
extended from 114.16 to 119.39, we are finally seeing what may be signs of
exhaustion below the psychologically important 120 level in USD/JPY. The only piece
of economic data released today was leading economic indicators which increased to
80 percent from 54.5 percent. The accompanying coincident index also jumped from 70
percent to 100 percent. Views on the economic outlook has been relatively upbeat
lately but that has done little for the Japanese Yen with the government's fierce
opposition to increase interest rates forcing the Yen to struggle to register any
gains. Therefore the Bank of Japan's monetary policy meeting later this week should
be a nonevent even if consumer confidence and household spending come out stronger
later this week.



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