www.dailyfx.com .. The big question on the minds of traders today was whether the solid...

... jobless claims
that we have been seeing, increasing help wanted ads, lower Challenger layoffs and
a recovery in the manufacturing sector would be enough to grant us +180k job growth
in the month of July. Today, we learned that not only did we add 207k jobs last
month, but the payroll data for the month of June was also revised higher from 146k
to 166k. After 2 months of disappointments, we are finally seeing a month of
surprise, which is helping the dollar to rally.

This is extremely positive going into next week's Federal Reserve monetary policy
meeting, which is the next major event on the agenda. As far as we stand, there is
nothing stopping the Fed. A quarter point hike to 3.50% has already been priced
into the market. Today's blockbuster report makes 4.00% almost a certainly with
the Fed possibly even overshooting to 4.25%. Normally the Fed would probably stop
at 4.00%, but the conundrum in long-term rates will tempt them to raise interest
rates beyond what may be appropriate. The longer long-term rates remain low, the
longer the Federal Reserve has to continue raising interest rates. With the rate
hike mostly priced in though, all eyes will be on the FOMC statement. For the time
being, this is a good reason for euro bulls to take profits after the explosive
gains this week.

However, the dollar rally may be short-lived. With oil prices solidly above $60 a
barrel, the Fed may also upgrade the risks for inflation. Right now consumers are
somewhat shielded from the skyrocketing cost of oil because they have the capability
of lowering consumption and opting to car pool or use mass transit as oil prices
rise. However, once the weather starts turning cooler and everyone needs to get
their heaters running once again, $60 oil may be too much for the average consumer
to bear. At this point, the Fed will probably be done tightening, there should be
alot of uncertainty surrounding Greenspan's departure, along with his possible
successor and consumers may be hit with a cost that they cannot avoid. Taken
together, this could be disastrous for the US dollar


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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