By DailyFX - US Dollar. On the first day of trading in the month of April, we have seen quite a bit of volatility in...

... the currency market.

The dollar had a very mixed day against the
majors as it lost strength versus the Euro, British pound and Japanese Yen, but
gained strength against the commodity currencies (AUD, NZD and CAD). The sell off
against the majors took off after the much weaker than expected Institute of Supply
Management report. The manufacturing sector is showing signs of waning strength
with the ISM index falling from 56.7 to 55.2 last month. Although this still
suggests that the sector is expanding, traders were really hoping for activity to
accelerate and were forecasting for the ISM index to rise to 57.7. Ahead of this
Friday's non-farm payrolls report, the dip in the employment index was also
worrisome. After last Tuesday's hawkish FOMC statement, the market was really
looking for the stronger data to back up Bernanke's view that the slowdown in the
fourth quarter was only "temporary." However, with manufacturing activity
weakening and the housing market delivering yet another piece of bad news, traders
began to doubt the new Fed Chairman's optimism. According to the National
Association of Realtors, pending home sales fell 0.8 percent in February. This
follows the 10.5 percent drop in new home sales reported last week. Although
construction spending ticked higher, it remains questionable how much longer this
can be sustained with interest rates driving mortgage rates higher. Not all news
was bad news today however. The prices paid component of the ISM report jumped to
66.5 from 60.9 indicating that inflation is still prevalent, giving the Fed a good
reason to continue increasing interest rates. However, even so the turn in the
dollar is significant and we expect more weakness than strength in the days to come.
Meanwhile the commodity currencies are seeing a strong liquidation. The New Zealand
dollar continues to be hit with the unwinding of long term carry trades. The
Australian dollar has sold off in sympathy.

Euro

The Euro gained strength today primarily on the back of dollar weakness, but the
rise in the region's manufacturing sector purchasing manager's index also instilled
a bit of confidence in the Euro itself. Economic growth continues to improve in the
region with German, French and Italian manufacturing activity all accelerating last
month. In fact, activity in Germany jumped from 55.8 to 58.1, a 5.5 year high.
Despite strikes in France, activity increased from 52.2 to 54.6 while Italy, the
usual laggard, also saw its manufacturing index rise from 55.1 to 55.5. We are
expecting a lot of data from the Eurozone this week, most of which are expected to
highlight improving economic activity. Even so, the market is expecting the
European Central Bank to leave interest rates unchanged this Thursday. Although ECB
officials have been extremely hawkish and most analysts are calling for three to
four more rate hikes this year, the actual bouts of tightening are predicted to come
in a more orderly manner * once every quarter for the next three quarters. The
reason for the more tempered rise comes off of the ECB's fear of causing a sharp
rally in the Euro by being too aggressive. The central bank knows that much of the
region's recovery has come from the weakness in their currency and they will take
active measures to prevent excessive strength. However even if the central bank
leaves interest rates unchanged, that will not prevent them from making more hawkish
comments which could still keep the Euro lifted. Meanwhile Switzerland also
reported strong PMI numbers with its own manufacturing index rising from 60 to 65.2.
The market had anticipated a dip, but the Swiss economy continues to outperform
expectations.

British Pound

Like the Euro, the British pound was driven higher by dollar weakness, but unlike
the Euro, the pound did not benefit from stronger economic data. In fact, unlike
its major counterparts in the rest of Europe, manufacturing activity in the UK grew
at a slower pace last month. On a day when surprises are plentiful, the contraction
in the manufacturing sector came as a shock to many. The diverging economic
performance in Europe and the UK has pushed EUR/GBP to the highest level since July
2005. The Bank of England is scheduled to meet and decide on interest rates this
week. Economic data having been quite mixed over the past few weeks with the housing
sector stabilization and inflation still consistent with price stability, the
central bank is expected to leave interest rates unchanged at 4.50 percent once
again. In fact, as long as data is mixed, the BoE will probably continue to leave
monetary policy unchanged.

Japanese Yen

A weaker Tankan report had prompted a sell off in the Japanese Yen throughout the
Asian trading session. The currency recovered quite impressively however once Europe
joined the markets. The index measuring the sentiment of large manufacturers dipped
to 20 from 21 while the index for non-manufacturers remained unchanged at 18 in the
first quarter. Despite the decline, manufacturing activity still remained solid in
the first quarter. Taking a look at the price action in the NZD, we see that carry
trade liquidation remains a predominant theme with traders buying back their short
yen positions.


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

FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in
these materials. FXCM, L.L.C.® does not warrant the accuracy or completeness of the
information, text, graphics, links or other items contained within these materials.
FXCM, L.L.C.® shall not be liable for any special, indirect, incidental, or
consequential damages, including without limitation losses, lost revenues, or lost
profits that may result from these materials. Opinions and estimates constitute our
judgment and are subject to change without notice. Past performance is not
indicative of future results