By DailyFX - US Dollar. It has been an extremely interesting day in the currency market, with the US dollar gyrating back and forth to...

... the tune of the commodity market.


Commodity prices have
taken a sharp plunge with gold prices down close to $50, the largest drop in nearly
15 years, oil prices down almost $2 while other metals also lost ground. After such
an extensive rally over the past few months, many traders have gone long commodities
and now we are seeing them pull out as they become more risk averse in the face of
increased market volatility. The Federal Reserve’s commitment towards tackling
inflation is seen positive for the dollar and by the same token, negative for gold.
Although commodity prices should benefit from Chinese demand over the long-term, on
a shorter term basis, the correction could deepen. The first dose of US economic
data did was not surprising enough to generate any meaningful move in the dollar.
We watched the buck first rally 30 points, give back all of those gains to lose
another 35 pips and then quietly grind back higher. Producer prices were the first
measure of inflation that we expected this week and the results show that headline
numbers fell short of expectations while core prices came in slightly stronger.
Retail sales were right in line, but it was mildly bullish that consumer spending in
April was revised higher. Ultimately there were no big surprises, but for a market
that was looking for reason to doubt the Fed, the numbers were good enough and did
not give them any reason to change their mind. Tomorrow’s consumer price index is
the week’s most important inflation number and if the Fed is right, core prices
should be stronger. The Fed’s Beige Book will also be released in the afternoon and
we expect the Presidents of the various Fed districts to report results that would
be in line with the central bank’s hawkish stance. Finally, Bernanke stuck
completely to script last night and this morning as he avoids injecting even more
volatility into the markets.

Euro

The Euro has fallen against the dollar for the seventh consecutive day, the longest
stretch of continuous weakness since 2003. German investor confidence fell
significantly in the month of June from 50.0 to 37.8, far below the market’s already
dismal 45.0 forecast. This marks the fifth consecutive month of weakness and
reflects concern that rising interest rates, high oil prices and a strong Euro will
take a big toll on growth. In addition, the government plans on raising sales tax
in Germany next year, which many analysts fear could have a meaningful impact on
spending. Consumer prices for the month of May were confirmed to have grown at an
annualized pace of 1.9 percent, which is slightly below the central bank’s 2.0
percent target. Meanwhile France announced plans that would allow them to keep
their deficit below 3 percent in 2006 and 2007. This is encouraging for the
region’s second largest economy and will force Germany and Italy to work harder at
reining in their own deficits. Tomorrow we expect more inflation numbers from the
Eurozone, but they will have little significance as focus will be almost completely
on the US inflation numbers.

British Pound

The British pound lost ground against both the US dollar and Euro despite firmer
inflation numbers. Consumer prices rose by a more than expected 0.5 percent last
month, brining the annualized pace of growth to 2.2 percent. Core prices were weak
however, with the annualized pace slowing from 1.3 percent to 1.1 percent, the
weakest in 18 months. Giving us a hint of where the Bank of England may stand at
the moment was an early release of the speech Chancellor Brown is expected to make
today. In the speech, he said that the Treasury will remain “vigilant” against
inflation * the 2006 buzzword among central banks. This means they are biasing more
towards raising rates than lowering them. However they still remain far away from
making any changes. Unemployment numbers and earning figures are due for release
tomorrow. The number of jobless claims is expected to dip while earnings are
expected to grow, which if proven correct, should be positive for the British pound.


Japanese Yen

Aside from commodity prices, the events in Japan are also receiving a tremendous
amount of attention today. Bank of Japan Governor Fukui has been embroiled in the
Murakami insider trading scandal. The fund manager was arrested last week. Fukui
admitted that he invested 10 million yen or $87,400 into Murakami’s fund in 1999
before he became Bank of Japan Governor. This scandal has caused a huge slide in
the Japanese equity market and there is even talk that Fukui may be asked to resign.
In all likelihood, this scandal will blow away since Fukui made the investment when
he was working at Fujitsu Research Institute along with other members of the
Institute, before he knew he was going to become Governor. His decision as argued
by many senior government officials including Koizumi were personal and was done
with no knowledge of the future actions by Murakami Unfortunately however it comes
at a bad time when the stock market has already seen a deep slide. If it continues
to fall even further, the bank of Japan will be forced to keep delaying any rate
hike plans in fear of exacerbating the slide.


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

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