Despite the fact that there is not one single economic release on the G-3 calendar
today, the EUR/USD climbed more than 140 points in Asia and… … early European trade as
dollar bearish sentiment intensified throughout the currency market. By 11:00 GMT
the EUR/USD pair was trading at a new four month high of 1.2285. As the new year
progresses a tectonic shift of mood appears to be taking place in the currency
market with traders no longer paying attention to dollar positive interest rate
differentials which were the cornerstone of dollar bullishness throughput 2005 and
again becoming concerned about runaway US trade and fiscal deficits * a theme that
could create extreme dollar bearishness in 2006.

Nowhere is this change of focus more evident than in the latest snippets of
Fedspeak. Last week San Francisco Fed President Janet Yellen hinted that the Fed was
nearing the end of the rate hike cycle and would become far more “data dependent” in
making its future decisions. Today, New York Federal Reserve Bank President Timothy
Geithner noted that “”The plausible outcomes (from massive US deficits) range from
the gradual and benign to the more precipitous and damaging.”

If, as Ms. Yellen suggests the Fed will begin to be more sensitive to US economic
data, the news for dollar longs in the near term may only get worse. Most of the
estimates on the US calendar this week are expected to show lower comparisons with
periods prior which could add even more downside pressure to the greenback.
Furthermore, the Housing ATM, that has fueled much of US consumer spending may be
finally running out of cash. As we wrote in our weekly piece, “Why do we keep
harping about this subject practically every week? Because for all intents and
purposes Housing is the US economy these days. It is responsible not only for the
vast majority of the nation's wealth creation since 2001 but also its marginal
income, as US consumers in the absence of meaningful wage gains resorted to tapping
their home equity loans to the tune of nearly 1 Trillion dollars in 2005. So if
housing declines it is very difficult to see how the dollar would not follow. It may
happen of course * the FX market can always surprise you * but for now we think this
may be the key story to follow as 2006 begins to take shape.”

By DailyFX