Will the Dollar’s Strength Continue?
The US dollar has rallied significantly against the Japanese Yen and the Euro as risk appetite returns to the market. Since the beginning of the week, the Dow Jones Industrial Average has increased 600 points, leading many market participants to believe that a break above 13,000 is very possible. US earnings have been mixed, but stock market traders are simply happy that at least some companies are beating expectations. There have been no big misses like the one reported by General Electric at the end of last week and instead there have been nice upside surprises from companies like Google. This has been the primary reason why the dollar is higher and could be the reason why the dollar continues to rise in the coming week. The US economic calendar is relatively sparse with only housing and durable goods numbers due for release. Mortgage applications have rebounded and this suggests that sales of existing or new homes could have actually increased during the month of March. Given the lack of any major economic data to threaten the latest rebound in the US dollar, the rally could continue. However, we still believe that the medium term trend for the US dollar is down. With rice prices hitting $1000 a ton for the first time ever and oil prices breaking $117 a barrel, the pocketbooks of consumers are getting pinched by the day. It certainly doesn’t help that this is coming at a time when job security is a premium. Layoffs continue to build. This morning, Citigroup announced 9000 job cuts while earlier this week Merrill Lynch announced 4000 layoffs, matching the slashes at AT&T. This does not include potential layoffs by JPMorgan - Bear Stearns and Delta - Northwest. The US labor market is still in trouble and in a few weeks, this will come back to the haunt the US economy.

Euro: Is the Rally Over?
One of the biggest questions in the currency market right now is whether or not the rally in the Euro is over. Despite selling off for the second day in a row, the EUR/USD has recovered nearly half of its losses. Economic data has been holding up well in the face of growing inflationary pressures. Producer prices in Germany grew 0.7 percent last month, which was the fastest pace of growth in 15 months. This has raised red flags throughout the ranks of the European Central Bank. Weber, Liikanen and Hurley all warned about how important it is to anchor inflationary expectations. In the week ahead, Eurozone data will shed more light on the health of the region’s economy. Are the individual countries within the Eurozone continuing to weather the storm? Service and manufacturing sector PMI reports are due for release along with the German IFO report. Analyst sentiment as reflected by the ZEW survey tumbled and it will be interesting to see if business sentiment will follow suit. Meanwhile Switzerland will be reporting producer prices and the trade balance. Price growth is expected to grow at a steady pace but the trade surplus should narrow.

British Pound: Will the Bank of England Save the Day?
Over the past 3 trading days, the British pound has rallied over 300 pips on the hope that the Bank of England will come and save the day. The central bank is expected to officially announce a plan that would allow them to take over mortgages from lenders to increase liquidity. In return they hope that these mortgage lenders will be more willing to extend new loans to potential homeowners. This is the only reason why the British pound is higher because the UK economy faces the same risks as the US. Job losses are continuing to build and many of the layoffs in the financial sector are expected to happen in London. The housing market is also in trouble. According to the UK Times, Morgan Stanley predicts that one in ten homeowners will face negative equity. As house prices continue to fall, the amount of money that homeowners owe on their mortgages could be more than their home is worth. Looking ahead, it will be a very busy week for the British pound with the minutes from the latest monetary policy meeting due for release along with retail sales and GDP. As house prices fall and the labor market deteriorates, consumer spending could suffer.

Commodity Currencies Face 2 Rate Decisions
The commodity currencies have been mixed today with the Australian dollar slipping on the back of softer gold prices and the Canadian dollar rising on stronger oil prices. The fact that gold is falling tells us that risk appetite is improving because gold is often times seen as a safe haven during times of a recession. The move in the comm.dollars conflicted with economic data because Australian import prices increased more than expected while Canadian leading indicators and wholesale sales both deteriorated. In the week ahead, the Bank of Canada and the Reserve Bank of New Zealand will be conducting monetary policy meetings. The BoC is expected to cut interest rates by 50bp while the RBNZ is expected to leave them unchanged. Aside from the rate decisions, Canada will also be releasing their retail sales report while Australia will be reporting producer price growth.

Stock Market Rally Drives Yen Crosses Higher
All of the Japanese Yen crosses rallied on the back of the 200 point rise in US stocks. Risk appetite continues to be the dominant driver of the Yen crosses and will continue to be in the coming week. Bank of Japan Governor Shirakawa said today that he believes growth will regain momentum after a temporarily slowdown. The price action in the Yen indicates that the market does not believe him. Japanese consumer prices are due for release next week and given the recent strength of the Yen, CPI growth is expected to slow.

Kathy Lien is the Chief Currency Strategist at FXCM.