By DailyFX – Dollar Extends Slide as Leading Indicators Fall for Third Month,Merkel's Ability to Tackle Reforms in Germany Remains in Question,Pound Rallies on Strong… … Consumer Spending Numbers

US Dollar

The dollar extended its losses today as the greenback continued to trade between a
1.1875-1.2125 trading range against the dollar. It will be interesting to see if
the recent trend of lower lows and lower highs will remain the prevailing theme in
the EURUSD. If that is the case, we could see the currency pair's rally exhaust
around the 1.2050 level. Economic data released from the US today was very mixed *
leading indicators dropped for the third consecutive month as weaker confidence,
higher jobless claims and rising energy prices weighed on the outlook for the
overall economy. The Conference Board even admitted, “we could be in for slower
economic growth through the end of the year.” The Philly Fed index however painted
a different picture. The index jumped from 2.2 to 17.3, beating the market's
expectation of 10.0 with across the board improvements in all of the report's
underlying components. Taking a more closer look at today's price action, the push
higher in the EURUSD did not occur until the late afternoon session when stops were
triggered at 1.20 and the stock market took a big tumble later in the day. With no
significant economic releases expected tomorrow, there may not be meaningful
catalyst to push the dollar lower. Only consumer confidence is worth watching but
at this point, a weaker reading is all but expected.

Euro

Despite a fall in the morning after disappointing trade data, the Euro managed to
end the day higher against the dollar. After carrying a surplus of EUR7.9 billion
in July, the Euro-zone posted a EUR2.6 billion deficit in the month of August,
crushing expectations of a smaller yet maintained surplus of EUR2.2 billion.
Although Eurostat did not release an official sector breakdown of the figure, it
stated that the energy deficit grew strongly for the first seven months of 2005.
Meanwhile Italy released some surprisingly positive data today. Consumer confidence
in the country rose to 105.3 in October, 1.2 higher than expected. Industrial
orders and sales both grew in August despite expectations of a slowdown. Orders
grew by 1 percent, not nearly as much as the 3.6 percent in July but still showing
growth. Sales grew by 6.6 percent, considerably better than July's 1.9 percent.
These numbers were boosted by a weaker Euro spurring demand in Europe and in turn
allowing for growth in the manufacturing sector. In politics, the future of Germany
still remains uncertain as Merkel introduced broad ranging tax cuts over the next
four years. This poses the question of whether the new grand coalition really has
what it takes to confront the need for economic reforms rather than trying to put
band-aids on hoping for some sort of improvement.

British Pound

The pound shot higher today thanks to some positive data out of the UK. Retail
sales figures for September gained 0.7 percent, beating expectations of 0.3 percent,
the second consecutive rise. Although premature, this gain signals that the
slowdown in consumer spending may have reached its end. These stronger than
expected numbers, along with yesterday's Bank of England minutes release that showed
no discussion of an interest rate cut, stifled speculation of another interest rate
cut at the next meeting in November. Also announced today was a rise in the M4
money supply by 0.6 percent higher than expected at 1.4 percent in September. M4
lending also rose more than expected in September to 15.6 billion, well above the
expected 11.4 billion or the previous month's 7.9 billion. Public borrowing this
September was at a record for that month at 11.8 billion, well above the forecasted
10.3 billion. Some of the borrowing was due to an expansion of public sector
investment, particularly for school buildings, but much was driven by higher
interest payments on government debt. Chancellor to the Treasury Gordon Brown says
he intends to lower public borrowing significantly by the end of the fiscal year in
April; however he faces a difficult task as borrowing peaked in the last year and a
weaker than expected economy eats into tax revenues. It is speculated that Brown
will miss his fiscal targets and will be forced to raise taxes or reduce spending in
the budget for next year.

Japanese Yen

With only one relatively ignored economic release today, the yen stayed rather
stagnant against the dollar, unlike its counterparts. The solo release for today
was Japanese convenience store sales, which decreased 0.3 percent from September
2004, the 14th straight drop, after falling 1.3 percent in August. Most of the drop
is assumed to be due to inclement weather. The yen was pulled in a slightly weaker
direction on comments from Bank of Japan Governor Fukui who stated he felt there was
little risk in staying with the current extremely loose monetary policy until
inflation returned. As the seven year deflation in Japan appears to be ending,
speculation built that the Bank of Japan could tighten policy as soon as next year.
Governor Fukui warned that a change in policy of quantitative easing would probably
not coincide with a change in interest rates however. Vice Finance Minister Koichi
Hosokawa also stated that the ministry was watching the yen closely and would take
action as necessary as Japan dislikes currency volatility and has intervened to
contain it.

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