Bernanke Kills Any Chance for a Dollar Rally
The US dollar remained weak as Federal Reserve Chairman Ben Bernanke killed any chance for a dollar rally. In his testimony to Congress today, Bernanke commented on the upside risks to inflation but focused more on the downside risks to growth. More specifically, the Fed Chairman expects growth to slow noticeably in the fourth quarter, which confirms his dovishness. If he had done the opposite and focused more on inflation like his counterparts in the Eurozone and Australia, the dollar could have rallied. However he chose to spend his time expressing concern that higher energy prices, tighter credit and continued weakness in the US housing market would lead to softer consumer spending. This coincides with the survey results from 10 of the nation’s largest retailers, 7 of which, including Wal-Mart and Macy’s, reported sales below forecasts. For dollar bears still looking for a recession, the Fed’s acknowledgement that consumer spending could be at risk indicate that they haven’t completely ruled out another rate cut. Although extremely volatile, Fed funds future are now pricing in a 90 percent chance for an interest rate cut next month. We have seen these expectations turn on a dime over the past few weeks so there is only so much credit that we can give to this data especially since we will not be receiving the most up to date retail sales and inflation reports until next week. Rising gasoline prices are becoming a growing problem; over the past 2 weeks, average gas prices according to AAA have increased 15 cents in California. In Santa Cruz, the average price per gallon is $3.37 and in Gorda, California, some drivers are paying up to $5 a gallon. Winter heating bills across the nation are expected to rise as much as 25 percent according to the Energy Information Administration’s latest monthly forecast. As a result, our call for EUR/USD to rise to 1.50 remains intact even though tomorrow’s data has a better chance of being dollar positive than negative. We are expecting the release of trade balance numbers for the month of September as well as import prices and consumer confidence. The recent weakness of the US dollar should help to improve the trade balance and drive up import prices. Consumer confidence however will probably suffer.

3 Reasons for the Euro to Hit 1.50
In terms of the Euro, there are three reasons why we think the currency will continue to rise. First, economic data remains very strong with the German trade balance hitting a 6-month of high in September. Growth in exports to emerging markets like China and Russia are picking up the slack for softer demand from the US. Second, the ECB remains hawkish. Even though they left interest rates unchanged at 4 percent today, unlike Bernanke, ECB President Trichet is still more worried about inflation than growth. The ECB wants to wait for more information before deciding what to do next with interest rates, so don't expect a move in December. For the time being, they are still leaving the door open to raise interest rates in the first quarter of next year. In regards to the Euro, Trichet did not mention the currency at all in his introductory statement. Only in the question and answer session was he forced to address dollar weakness and euro strength. Trichet did his best to dance around the question about exchange rates, repeating his stance that disorderly movements are undesirable and the strong dollar is in the interest of the US. It is not a coincidence then that Trichet avoided talking about the Euro because inflation is still a big problem and they need a strong currency to offset inflationary pressures. The third reason why the Euro will continue to rise and the dollar will continue to fall is because our latest FXCM SSI index is giving a strong signal to buy the EUR/USD for a test of 1.50.

Carry Trades Rebound as Stocks Reverse Intraday
US stocks continue to be extremely volatile with the Dow down as much as 220 points intraday before reversing those losses to end down only 33 points. Unsurprisingly this led to equally volatile price action in the Japanese Yen crosses, which are all up on the day with the exception of AUDJ/PY and CAD/JPY. Last night’s Japanese economic data was mixed and provided little direction for the Japanese yen. Tonight we have the Eco Watchers survey and unfortunately the man on the street probably sees more difficult times ahead. Although Japanese corporations are reporting stronger profits and Tokyo is booming, economic activity outside of the capital teeters on recession. Wage growth remains low, forcing the Bank of Japan to keep interest rates on hold for the foreseeable future.

British Pound: The Strongest of the Bunch?
The British pound hit another 26-year high despite softer house prices, leading indicators and an uneventful Bank of England interest rate decision. The strength of the British pound seems to really be coming from overall demand for high yielding currencies and distaste for the US dollar. Unlike the Eurozone which has actually been reporting stronger economic data, the continual weakness of UK data raises the risk of a sharper slide in the GBP/USD should there be any bit of a dollar rally. Tomorrow we are expecting UK trade data, which is also expected to be weak, but US fundamentals will continue to dominate the currency pair’s price action.

Canadian and Australian Dollars Continue to Lose Ground
With commodity prices basically unchanged, fundamentals have finally taken hold of the commodity currencies. The Canadian and Australian dollars are both softer on the heels of weaker than expected Australian employment numbers and Canadian housing market data. Both housing starts and house prices deteriorated. The New Zealand dollar was the only commodity currency to rally as the unemployment rate fell to another record low. Tomorrow there will be no Australian or New Zealand data released but Canada will be reporting their trade balance for the month of September. The recent strength of the CAD is expected to drive the surplus lower.

Kathy Lien is the Chief Currency Strategist at FXCM.