By DailyFXUS Dollar - A dose weaker economic data and surprisingly dovish Federal Reserve meeting minutes have validated to traders that the most recent spate...

... of dollar weakness may be merited.

European and Australian traders have returned from their extended holidays
and are back in the markets, which mean that they have had a chance to express their
own views. Judging from today's price action, especially at the onset of the London
open, it appears that those traders are siding with the consensus set by Japanese
and US traders yesterday. The first piece of inflation numbers released this
morning did not paint the bullish picture that dollar bulls were hoping for.
Headline producer prices did rise on the back of increases in energy costs, but core
price growth remained subdued, rising by a less than expected 0.1 percent. This
indicates that many companies still face a limited ability to increase prices at the
same pace as input costs may be rising. The fear of dollar bulls is that we may
have the same scenario in consumer prices, which would then validate the more dovish
comments seen in today's release of the FOMC minutes from the most recent Fed
meeting, which was also Bernanke's first. To the surprise of the market, in sharp
contrast to the more hawkish FOMC statement released last month, the minutes show
that Fed members were actually more dovish. Their lengthy discussion of the housing
market slowdown indicates that aside from many analysts, policy officials are also
concerned about the potential impact of housing on the economy. Today's report of a
7.8 percent drop in housing starts, a 12 percent drop in single family homes to 16
month lows and a 5.5 percent drop in building permits are solid signs of a sector
that is beginning to falter. However, most worrisome to dollar bulls was the fact
that Fed members felt that an end of rate rises was probably near and some even
warned against tightening too much. This is definitely more dovish than the market
was expecting and should give analysts that were calling for 5.5 to 6 percent rates
a good reason to back down. Yet, broadly speaking, inflation is still a big concern
given the new record high in energy prices, so we should still see at least one or
two more rate hikes, making 5 or 5.25 percent rates the most likely top. Comments
from Fed President Yellen today further validate a call for a more near term end to
the tightening cycle.

Euro

Dollar bearishness has sent the Euro to fresh year to date highs. As we mentioned
yesterday, if prices manage to hold above 1.2350, the next level of major resistance
is not until 1.25. There were no economic releases from the Eurozone this morning,
leaving the speech by ECB member Caruana the only reference point for Euro traders.
Like many central bankers before him, Caruana warned of the inflation risks posed by
higher oil prices. It seems that he is concerned about second round effects and
believes that policy is "still not very restrictive." The nominee for Otmar
Issing's seat on the central bank's six member council seems to hold the same view
as the current central bankers who have been calling for a tighter bias. Juergen
Stark said that the bank needs to show "great vigilance" in curbing inflation and he
felt that even in spite of recent rate hikes, rates are still low enough to spur
growth. The economic calendar tomorrow still contains little Eurozone data, which
means that for the time being, the single currency's fate remains in the hands of US
dollar traders.

British Pound

The British pound extended yesterday's massive gains against the dollar despite
mixed housing market figures. The RICS house price index reported a sharp fall in
the month of March from a downwardly revised 16 percent to 13 percent, which is also
the first decline that we have seen in the index since last May. In contrast, the
Rightmove House price report for the month of April showed a 1.1 percent monthly
increase in prices. Although the annualized pace of growth was slower, the number
is still robust and suggests that April may have been a better month for the housing
market than March. Tomorrow, we are expecting the release of the minutes from the
monetary policy meeting held earlier this month. If you recall, the central bank
left interest rates unchanged and have done so for the eighth consecutive month.
The balance of votes is expected to be held steady with Nickell once again voting in
favor of lowering rates. The number of votes will be 8 instead of 9 at the meeting
following a recent resignation by Lambert.

Japanese Yen

Yesterday's moves in the Japanese Yen were repeated today with the currency selling
off against all of the majors except for the US dollar. The market is still looking
to the Chinese President's visit for more direction. Treasury Secretary Snow was on
the wires talking about how the Yuan will be apart of bilateral talks with China and
that he felt China has not let its currency move enough. The Japanese Yen is being
punished by yet another record high in oil prices. The country relies heavily on
imports to meet their energy needs. It is speculated that given the rise in crude
prices, the Bank of Japan will probably notch higher their CPI forecasts in their
annual outlook report due on April 28. If this is true, then the market will
perceive the higher inflation forecasts as the central bank taking a closer step to
raising interest rates.


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


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