• Dollar - September Fed Rate Hike Still in Play as Greenspan Searches for Answers
• Euro Traders Looking Beyond the Good Data
• Bank of England Could Pass on Another Rate Cut This Week

US Dollar
The first thing that traders did after coming back from their summer vacations was to send the dollar higher.  As we said on Friday, the move last week in the EURUSD from 1.2175 to 1.2589 was both sharp and extensive * necessitating a period of consolidation. The heavy driving season is now behind us and we should see two or three months of respite before we hit the winter season, when oil and natural gas usage increases once again.  The refineries in the Gulf State are beginning to recover with three of the twelve refineries that went offline restarting.  Europe and Japan have pledged to send more oil this way.  However, the pace at which the oil can be refined remains limited until we see the other seven refineries reopen.  The price of oil has come off its high for now, helping the dollar recover some of its losses.  In fact, traders breathed such a big sigh of relief that they sent the stock markets soaring, posting the biggest one-day gain in the Dow and the NASDAQ since July. However, whether respite really lasts two or three months remains to be seen. A sharp rise in the service sector ISM survey from 60.5 to 65.0 also injected some optimism into the markets, but it is important to keep in mind that the number was a snapshot of the service sector pre-Hurricane.  The ISM surveys in general usually reflect activity through the third week of the month and in this case,  Hurricane Katrina did not hit until the fourth week of August.  There was also a good deal of chatter about John Berry's article today predicting a rate hike on September 20th.  We too said on Thursday that Greenspan will probably go ahead with a quarter point rate hike later this month.  He will most likely spend the next few weeks gathering information to answer a few key questions * 1) How much have oil prices and Katrina impacted consumer spending? 2) How high will jobless claims rise? 3) Will oil prices continue to remain above $60 a barrel even following the aftermath of Katrina? - The November decision is really where the uncertainty lies now and it remains to be seen whether economic activity will show enough signs of rebounding by that time to warrant another quarter point rate hike to 4.00%.

Euro
Even though the Eurozone released a series of stronger economic data this morning, the optimism in the Eurozone recovery failed to translate into an immediate optimism in the currency.  Retail PMI surveys in Germany, France and Italy all increased in the month of August, while factory orders in Germany shot higher by a whopping 3.7% m/m in July.  The slide in oil prices and the rebound in the dollar is the primary reason why the Euro gave back its gains, but there is the possibility that some more astute traders are already thinking ahead.  If you recall, we have been saying that the Eurozone economy has been improving over the past few months because of the 11% slide in the EUR/USD since the beginning of this year to July.  The sharp decline has even shielded the Eurozone from the rise in oil prices.  Now that the EUR/USD has rebounded 4% in approximately one month, this stimulus could gradually subside and the Eurozone, which still has not found a sustainable way to stimulate growth, could fall in back into its old ways.  If this scenario unfolds, it will not be long before we also hear Europeans gripe about the rise in oil.

British Pound
The market's attention this week is centered upon the Bank of England's rate decision on Thursday.  To the dismay of some traders, recent data fails to make the decision any clearer.  According to the Office of National Statistics, industrial production in the U.K. dipped 0.3 percent, furthering the overall pessimistic sentiment that we have been seeing lately. In contrast, for the fourth straight month, the manufacturing component report ticked higher by 0.1 percent.  As a result, with the increase in manufacturing and rising sentiment, policy officials may pass on another rate cut at this week's meeting.  Although consumer consumption remains sluggish and housing valuations staid, policy officials still remain wary and ever hawkish of previous inflationary concerns as it topped benchmark targets this past year.  Additionally, the fact that the last 25 basis point rate cut was won on a marginal vote of 5-4 even contributes to the likelihood that the central bank will stand pat.  Ultimately, policy officials remain slightly more optimistic on the economy as they wait to gauge the full extent of recent consumer disinterest.  However, this may pose further problems down the line as economic conditions may worsen to such a point leaving monetary policy even more difficult to rely on.  For the time being, the central bank remains in wait and see mode. 

Japanese Yen
According to a Cabinet Office survey released today, consumer optimism in Japan remains steady. The sentiment index for ordinary households in the month of July rose slightly below expectations at a 48.1 reading.  However, the release is still relatively better than the 46.6 print in the previous month, contributing to the notion that consumption is still strong in light of the day's disappointing household spending figures.  According to the report released by the Ministry of Internal Affairs and Communications, Japanese household spending slipped by a surprising 3.7 percent in July against an expected decline of 2.8 percent. Although the data may be perceived as bearish, it may be slightly misleading as most traders will rather refer to the salaried worker's report as being more reflective of the consumption factor.  Subsequently, with consumer confidence on the rise, the disappointing consumption figures may simply be suggestive of a break in spending rather than a complete slowdown in individual interest.  As a result, there is an increasing belief that the economy will once again be propped up by domestic demand strength and further capital expenditure instead of the traditional export market going into yearend.