How Big of a Loser Was the US Dollar in 2007?
Shorting US dollars was one of the best trades of 2007. However, how bad did the losses in the US dollar really get? The trade weighted dollar index fell 10 percent this year, but against the Euro specifically, the dollar lost 13 percent of its value. It has been a very active year in the financial markets, one that will be written in the history books. In fact, the 2007 subprime mortgage financial crisis already has its own Wikipedia entry. On the last trading day of the year, the dollar is firmer, but that strength is not broad based. The Japanese yen, for example, strengthened against the dollar for the third consecutive trading session. The housing market was the big story of 2007 and it is also the story that we end the year with. In contrast to the sharp drop in new home sales, existing home sales increased 0.4 percent, which is the first improvement in 9 months. The report is not without its flaws, however, as the average sale price dropped 3.3 percent. Existing home sales are still down 20 percent when compared to December, 2006. 2008 could be a major turning point in the global economy. Even though we could still see a few more months of housing market weakness, we believe that the US economy may actually make a recovery in the second half of the year as the rate cuts by the Federal Reserve actually work. The big question is whether the downturn before the recovery will be severe enough to push the US economy into a recession. For our full fundamental and technical outlook of the currency market, read our 2008 forecasts where we explore many of these themes. The financial markets are closed tomorrow in celebration of the New Year. Once everyone returns on Wednesday, the action will begin with manufacturing ISM and construction spending. On Thursday, we are expecting the leading indicators for non-farm payrolls and on Friday, we have non-farm payrolls and service sector ISM due for release.

Euro Rally Ends After Six-Day Winning Streak
For the past six trading sessions, the EUR/USD was on a one way uptrend. Weak US economic data, turmoil in Pakistan and year end repatriation all contributed to the dollar’s weakness. Yet on the last trading day of the year, the mighty buck flexed its muscles and stopped the Euro’s climb. The European Central Bank continues to drain liquidity from the financial system which is good because it means that LIBOR rates are no longer uncontrollably high. Up until the very end of the year, the ECB also continued to remind the markets that they remain hawkish. In a statement released on Saturday, Weber said that rising energy and food prices will keep inflation elevated through the first half of the year. Unless oil prices all of a sudden fall by $10, they will probably hold onto this bias throughout the first quarter of 2008. Although the Eurozone did not release any economic data today, the rest of the week should be busy with German unemployment, manufacturing and service sector PMI due for release. Meanwhile Switzerland will also be reporting PMI numbers and consumer prices.

British Pound Fails to Hold On to Its Gains
Volatility continued to plague the British pound as a sharp intraday reversal took the short term outlook for the pound from positive to negative. Having lost 700 points in a little over a week, the rebound in the British pound that began on December 26 looked like a real turn. A close above Friday’s high was needed to confirm that, and up until the US market open the outlook for the pound was promising. However, a sharp sell-off began at 10am ET and within the next 4 hours, the British pound fell over 250 pips against the US dollar. The only explanation floating in the markets is liquidation out of carry trades. 2008 is expected to be a tough year for the British pound from both a technical and fundamental perspective. Weakness in the housing and financial market could lead to more layoffs. Read our 2008 technical and fundamental outlook for more on why we believe that the British pound will be headed for further losses in the coming year. Later this week we are expecting manufacturing, construction and service sector ISM reports.

Factors Driving Canadian, Australian and New Zealand Dollars Lower Today
The Canadian, Australian and New Zealand dollars are weaker across the board today for many reasons including a mild sell-off in commodity prices, broad US dollar strength and liquidation out of carry trades. Australian private sector credit was stronger than expected which has also helped since it indicates that borrowing has increased and spending will probably follow suit as well. Despite a recent interest rate hike from the RBA that took borrowing costs to an 11-year high, it has not stopped businesses such as miners from continuing to do all that it takes to meet the resource demand from countries like China. Australian manufacturing PMI is the only piece of data due for release over the next 24 hours. After that, there is no data from these three countries until Friday.

January Effect in USD/JPY
Carry trade liquidation has caused major losses in all of the Japanese yen crosses. There is no data expected from Japan this week, which means that the moves are largely driven by the losses in the Dow. Hopefully losses will not continue in the New Year because if the correlation between equities and carry trades hold, the January calendar effect in stocks could help to trigger a turn in the yen crosses. Stocks tend to rise in the month of January because mutual funds, hedge funds and investors in general tend to initiate new positions in the stock market after having closed them for tax or window dressing purposes in December. We see a similar effect in USD/JPY. Our January Seasonality Study indicates that USD/JPY has strengthened during the month of January in 8 out of the last 11 years.

Kathy Lien is the Chief Currency Strategist at FXCM.