By DailyFX - US Dollar - It almost feels like a holiday today with the US dollar fluctuating within a tight 45 pip trading range...

... against the Euro over the past 24 hours.


The dollar's range
against the Japanese Yen and British pound was slightly larger, but even so, most of
the action was over before the London close. With no US economic data scheduled for
release today, dollar bulls found a bit of comfort in the hawkish words from Fed
President Pianalto. Repeating last week's comments, she was relatively positive on
the economic outlook and suggested that the weak fourth quarter GDP figures on
1/27/06 will most likely be revised higher. Speeches from the Federal Reserve are
the market's major focus this week and in particular, Federal Reserve Chairman Ben
Bernanke's semi-annual testimony before Congress on Wednesday and Thursday.
Although Bernanke has pledged "continuity with the policies and policy strategies on
the Greenspan Fed," there could be many new changes under his regime. As a clear
speaking book smart former Princeton Economics Professor, Bernanke has been known to
be a straight shooter. It will be interesting to see how Bernanke balances the
outlook of the economy with market expectations. It is no secret that Printing
Press Ben is known far more as an inflation dove and in an environment where traders
are bumping up their expectations to 5 percent rates, the market has set the bar
high. Therefore what will be most important is Bernanke's view on the risks to the
housing market. With energy prices sliding, the risks that it poses to economic
growth are also waning. If Bernanke sees greater upside risks for both growth and
inflation, then dollar bulls have their green light for 5 percent rates.
Alternatively, if his dovish nature gets the best of him, Bernanke could be a bit
more conservative, talk about how the outlook is uncertain and risks still exist,
which could cause dollar bulls to leave the market dejected. If so, then we could
have a bottom established in the EUR/USD.

Euro

There were two major developments for the Euro today and the currency barely budged,
ending the trading session virtually unchanged. Amidst growing political conflict
with the US, Syria has announced that they were switching all of their reserves to
Euros from dollars. Syria has said that they have "billions of dollars." According
to the CIA Factbook, Syria's reserves of foreign exchange and gold as of 2004 are
approximately $5 billion. Compare that to Japan's reserves of $610 billion in the
same period and we easily realize why the market shrugged off Syria's announcement.
There have also been rumors today that Iran could switch to Euro reserves as well to
protect their foreign assets. In 2004, Iran had approximately $30 billion foreign
reserves, which is considerably more than Syria but far less than Japan and China to
be consequential. What the market should be keeping an eye on instead is Iran's
plan to open a new International Oil Bourse which would trade oil in Petroeuros
instead of Petrodollars. As the world's third largest holder of oil reserves,
Iran's move could pave the way for other countries to offer oil denominated in
Euro's in order to compete with Iran. Looking ahead, there are a lot of reasons why
countries within the Eurozone and Russia would prefer to trade oil in Euros over
dollars. The volatility in the US dollar and the cost of converting currencies
could make Petroeuros particularly attractive. Of course there are many political
barriers that need to be overcome, but oil priced in both dollars and euros appears
likely over time. Although this news should have been positive for the Euro, it was
offset by a more pressing concern that the Bird Flu has hit the shores of the
European Union. Italy, France, Greece and Bulgaria have all reported outbreaks in
swans or other birds. For countries that already have huge budget issues, Bird Flu
not only means damage to the poultry industry, but also higher costs needed to
combat and isolate the outbreak.

British Pound

After one day of respite, the British pound lost ground against the dollar once
again. Although inflation data was slightly positive with producer input prices
rising 1.8 percent (market expected 1.2 percent) and output prices rising 0.4
percent (market expected 0.2 percent), the disappointing house price survey and flat
leading indicators report with a downward revision for the prior month stripped the
pound of any possible gains. Data from the UK continues to be mixed, but the market
is also treading carefully ahead of the Bank of England's Quarterly Inflation report
due on Wednesday.

Japanese Yen

The dollar is slightly weaker against the Japanese Yen thanks to a larger than
expected current account surplus and solid industrial production figures. Strong
investment income helped to boost the current account balance but on the flip side,
the trade balance increased less than expected. The market continues to focus on
speculation about when the Bank of Japan will lift its quantitative easing policy.
BoJ Governor Fukui was on the wires again talking about the country's "abnormal"
monetary policy framework. However, governmental pressure continues to keep the
central bank's hands tied and in our opinion, a March and even April rate hike could
still be unlikely.


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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