By DailyFX – US Dollar – The US dollar is extremely weak and with each passing day, it seems to weaken even further. Most… … recently, the market has been hoping for a strong
non-farm payrolls report that would save the dollar,

but they were grossly disappointed when payrolls came in far below even the most pessimistic analyst's
expectations. The market was looking for 200k jobs to be created in April, but
companies only added 138k jobs, which was the slowest pace of job growth since
October. Furthermore, the March figure was also revised lower from 200k to 211k.
This caused the Euro to break above yesterdays high and in the insightful words of
our technical analyst, “we will for the first time ever have 17 of the last 20 days
as gains.” Today's report is particularly disappointing because every other
economic figure leading up to the release such as ISM and durable goods had pointed
to strength. The inability to meet up to those expectations suggests that US growth
may be hitting a brick wall. However, before jumping the gun and calling for the
Fed to pull the plug at the next meeting, it is important to note that inflationary
figures within the report indicate that wage pressures are beginning to assert
themselves. Average hourly earnings rose by 0.5 percent, which was the fastest pace
of growth in five years. Overall, the report allows the Federal Reserve to be a bit
more flexible and gives them a reason to slow down their tightening cycle if
necessary. However at this point, it does not draw away from the fact that they are
still expected to raise interest rates by a quarter of a point to 5.00 percent next
week. Anything beyond that becomes dependent. Aside from the Fed rate decision,
there are a handful of important US data due for release including retail sales and
the trade balance. Additionally, the market is already chattering about what could
come out of the US Treasury's semi-annual report on FX manipulation which is also
due for release next week. No date has been set and at this point it is unclear
whether the US will brand China as a currency manipulator. If you recall a few
months back, we had talked about how the Treasury was commissioning various banks to
do research on how the market would respond if they named China as currency
manipulator which suggested at the time that they were seriously considering it. In
addition, so far China has not budged on their exchange rate policy and Chinese
President Hu's visit to the US yielded little results. However, relations with
China have been mixed lately and both countries are at odds on the whole Iran issue.
Therefore the US knows that citing China is a symbolic move, one they may or may
not be ready to make at this point.

Euro – Over the past three weeks, the Euro has had an extraordinary run. As much as
we may be compelled to say that the move is becoming overextended, both technically
and fundamentally, it is still very strong. In addition, back in 2003 after the G7
meeting in Dubai, the strength in the EUR/USD persisted for 4 full months, with only
a brief retracement that lasted no longer than two weeks. The latest post G7 rally
in the Euro has lasted for only two weeks and even though it has already captured 42
percent of the 2003 move, the comments made at this G7 meeting is probably more
significant than the one made back in 2003. At the time, the G7 simply called for
more flexibility in exchange rates, while this time around they named China
specifically. In addition, there are a lot more pressures weighing on the dollar at
the moment with the possibility of the US exerting even more pressure on China to
revalue the Yuan. Therefore we caution against prematurely calling for a bottom in
the dollar without first seeing any clear fundamental or technical reasoning. In
the week ahead, there are a lot of European economic data due for release including
retail PMI figures, German GDP and CPI, Eurozone GDP, along with German and French
industrial production numbers. The central bank has already endorsed further Euro
strength by remaining hawkish on Thursday. Therefore the market will be looking at
the data for confirmation, especially since the ECB has already said that more
aggressive moves would be data dependent. Meanwhile it is worth noting that the
Swiss National Bank also remains hawkish. SNB Blattner was on the wires earlier
this morning explicitly talking up the need for further monetary policy tightening.

British Pound – The British pound ends the week higher against both the US dollar
and the Euro. It is not often that we see economics trump politics, but the Queen's
currency continued to gain ground despite poor results from yesterday's local
elections and a major cabinet reshuffling. It seems that Blair is trying to make a
desperate move to revive his popularity after the Labour Party lost control of 18
local authorities while the Torries gained 317 extra councilors. Clearly, he is
trying to avoid being forced to step down at all costs. Whether or not the cabinet
reshuffling will do the trick remains to be seen, but even members of his own party
are now calling for his resignation. In the week ahead, the most anticipated event
will be the Bank of England's Quarterly Inflation report due on Wednesday. As we
have mentioned this past week, the market expects the central bank to notch higher
their inflation forecasts, which would put them one step further away from lowering
their interest rates again.

Japanese Yen * To the surprise of the market, the Japanese Yen was the day's biggest
mover. Although the dollar weakened against all of the majors after the non-farm
payrolls report, the second leg lower in the Yen was triggered by comments from Bush
Administration officials who expressed the government's displeasure with Japan's
attempts to reinterpret the G7 statement. We have been reporting comments from
Japanese Finance Minster Tanigaki who recently said that the market misinterpreted
the G7 statement and that it did not call for a dollar decline. He has also become
concerned about the yen's rise and has said that the gains are becoming excessive.
Additionally, the yen also gained ground on rumors that in order to avoid being
branded as a currency manipulator, China could surprise the markets by revaluing
their currency early next week. Though unlikely, it is not completely out of the
realm of possibility since China has a track record of revaluing their currency at
politically advantageous times.

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
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