US Dollar Resumes Its Descent Ahead Of NAR Existing Home Sales
The US dollar steadily lost ground today against nearly all of the majors – with the exception of the Japanese yen – as the forex markets remain overwhelmingly bearish on the beleaguered currency. The release of the Richmond Fed manufacturing index did little to help the greenback, as the gauge of overall business activity for factories unexpectedly declined to a five month low of -5 from 14. The drop was led by weakness in shipments and new orders, as domestic demand appears to be waning. Meanwhile, the inventories component fell back as well, suggesting that manufacturers don't expect orders to rebound in the near-term. The release of the National Association of Realtor’s existing home sales index on Wednesday could be particularly perilous for the US dollar, as the figure is anticipated to have fallen back 4.5 percent to a nearly six-year low of 5.25M. While such a weak figure will not come as much of a shock to investors, the NAR release will serve as a broad barometer for the entire housing market, as existing homes make up approximately 87 percent of the sector. With sales plummeting, the numbers of homeowners that are forced to default have gradually increased. Furthermore, the American Bankruptcy Institute, a nonprofit research group, reported on Tuesday that consumer bankruptcy filings have increased almost 23 percent from a year earlier. Clearly, homeowners are becoming increasingly distressed when it comes to repaying their debts, suggesting that withering disposable income will leave consumption likely to take a hit next. While this is certainly bearish for the US dollar, US equities may take the news to heart as well as a reminder that the woes of the credit markets are not quite over yet, and as Federal Reserve Governor Randall Kroszner said recently, "The recovery may be a relatively gradual process and these (credit) markets may not look the same when they re-emerge."

Euro: Ready To Retake Record Highs Once Again?
The Euro resumed its uptrend, despite the fact that industrial new orders from the Euro-zone were released slightly below estimates at 5.1 percent. While the sector continues to perform well, output has started to slump to a slower pace of growth. The high value of the national currency is just starting to crimp investment demand in the region, but the real effects of the Euro’s strength may not been reflected in trade data for several months, as many producers may be hesitant to pass through the actual exchange rate in fear of weighing down demand. Nevertheless, profit margins can only thrive for so long under those conditions, and the practice is unlikely to continue for much longer. Looking ahead, manufacturing PMI is anticipated to fall back slightly – in line with the industrial new orders release – while services PMI is forecasted to be a bit more resilient as domestic demand remains buoyed amidst tight labor market conditions. Furthermore, the ECB's José Manuel González-Páramo will speak in the morning, and any hawkish commentary will help maintain the Euro’s bid tone.

British Pound Rockets Higher on Demand for Yield
While we typically reserve the term “high-yielder” for currencies like the Aussie and Kiwi, the British pound – whose overnight lending rate sits at 5.75 percent – has seen some of the same demand. In fact, Cable has recouped almost all of Monday’s losses, though the 2.0500 level has provided some resistance for the pair. Despite the softer-than-expected inflation figures we saw last week, traders are increasingly feeling assured that the Bank of England has no intention of cutting rates in the near-term, especially as Q3 expansion was much better than expected at an annual rate of 3.3 percent. However, past performance is rarely indicative of future results, and GDP figures are no different. The CBI industrial trends survey unexpectedly dropped to an index reading of -6 led by weaker exports, suggesting that the strong British pound is weighing on foreign demand. With domestic demand likely to wane in the face of higher interest rates and exporters impacted by the appreciation of Cable, Q4 GDP may not be as resilient as in previous quarters.

Japanese Yen: Still Ruled By Risk Aversion Trends
The Japanese yen weakened throughout the day as US equities regained traction. As we’ve mentioned previously, the status quo commentary in the G7 communiqué effectively gave carry trades the green light to continue higher. With investors feeling more comfortable in riskier assets, currencies like the Japanese yen are very likely to suffer as economic data plays almost no role in directionality. Furthermore, the sole factor that could fuel sustained gains would be if the Bank of Japan were to become staunchly hawkish. True, they have made no secret their desire to continue on with rate normalization, but with prices remaining in deflation and consumption still very weak, higher interest rates would only be detrimental to the health of the Japanese economy. As a result, pairs like EURJPY and USDJPY are likely to remain closely correlated to global equity flows.

Commodity Dollars: Canadian Retail Sales Surge, Will Aussie CPI Follow Suit?
The commodity dollars gained against the greenback with the help of Canadian retail sales, which were surprisingly strong as healthy labor market conditions helps fuel domestic demand. Tonight the focus will turn to Australia, as Q3 inflation is anticipated to remain fairly strong at 0.9 percent from the quarter prior and 2.1 percent from the year prior. With the RBA still considered hawkish – but unlikely to raise rates before year-end – hotter than expected CPI data could keep the bullish tone in the Australian dollar alive and well. On the other hand, a decision by the RBNZ to leave rates steady - as expected - could lead the New Zealand dollar to sell off slightly.

Kathy Lien is the Chief Currency Strategist at FXCM.