• Dollar Traders Continue to Debate the Outcome of September Fed Rate Decision
• Bank of England Keeps Interest Rates Unchanged
• Yen Slides Despite Optimistic Comments from BoJ

US Dollar
The dollar is firmer once again as the Katrina induced jitteriness in the markets continues to subside.  Yesterday afternoon we posed the question of whether the Fed could deliver a mid-cycle pause.  This morning, there was an article in the Wall Street Journal that examined the very same topic.  There seems to be a lot of dissent within the Fed itself as some Fed officials believe that it would appear "unseemly" to raise rates so soon after a national tragedy while others believe that it would be a "mistake for the Fed to subordinate its goals of low inflation and maximum growth to political considerations."  They also fear that "pausing for noneconomic reasons could actually undermine confidence by suggesting that the Fed is more worried about the economy than it actually is."  Bottom-line, it appears that the smooth sailing to 4% rates is behind us and for now, there is a lot of uncertainty surrounding the September meeting and accompanying statement.  According to the people who responded to a poll posted on the bottom of DailyFX.com, 40% of the 330 respondents expect rates to be increased to 4.00% by year end while another 30% expect only one more rate hike to 3.75%.  Jobless claims fell 1k, but the improvement was largely ignored since most of Katrina victims have yet to get a chance last week to file for benefits.  Consumer credit also fell far short of expectations, rising only $4.4 billion compared to the market's forecast for an $11.2 billion increase.   Since the decline came primarily from less credit card debt, consumers are either cutting back purchases or using lower interest rate debt such as home equity loans to pay off higher interest rate debt. 

Euro
Hawkish comments from the ECB failed to lift the Euro today.  The central bank's monthly bulletin highlighted the need for continued vigilance, a word used frequently by ECB President Trichet when dealing with inflationary pressures. At the moment however, they do not see any significant buildup in inflationary pressures that needs immediate attention.  They are paying particular attention to the rise in oil prices for any signs of second round inflation pressures.  The central bank also believes that the rise in energy prices will have a negative impact on growth.  ECB member Weber took the bulletin one step further and said that the negative impact of higher oil prices on demand cannot be offset by monetary policy.  He adds that if the business cycle changes and growth picks up, then policy would no longer be "appropriate."  The clear hawkish bias of the central bank confirms that if there ever were a move on rates, it would certainly be to the upside. 

British Pound
As expected, the Bank of England voted to keep interest rates steady at 4.50 percent after cutting them 25 basis points last month, for the first time in two years.  Although widely anticipated, the decision may be indicative of a shift in monetary policy as officials are now holding steadfast to their hawkish ideology and passing on previous concerns of slumping consumer demand.  For Europe's second largest economy, consumption has remained sluggish, declining in the previous month by 0.3 percent and ultimately leaving the annual comparison at a mere 1.8 percent rise.  Instead, Governor King and his fellow central bankers have taken in to consideration two main factors in keeping rates constant, lending to speculation that rates will be moving higher in the near term rather than lower.  First and foremost, benchmark inflation targets have been breached.  Since the last meeting, inflation in the United Kingdom has reached an eight-year high of 2.3 percent, effectively bypassing the previous 2 percent target. A product of increases in crude oil and energy prices, economists continue to further their estimates on the growing strength of price increases ahead of yearend.  This has prompted Governor King to argue that lowering the rate would effectively send consumer prices higher in the face of rising energy costs. Secondly, concerns over a further decline in the housing market have abated.  According to yesterday's measure released by the HBOS Plc, housing valuations picked up in the month.  Although the report was contrary to an earlier print by Nationwide, the fact that the two are at ends suggests that the housing market has stabilized at the moment from their previous declines, creating upside potential.  Ultimately, this poses an interesting scenario for the economy in the next couple of months, especially if output and consumer demand continue to be as weak.

Japanese Yen
Further bearish undertones were felt in the Japanese yen today as the lack of any real positive releases spurred the underlying currency lower.  Core machinery orders fell less than expected, but the 4.3% drop still took a bite out of June's impressive rise.  Traders are mostly focused on this Sunday's elections. The Eco Watchers Survey was basically unchanged, as yen traders centered their attention on the Bank of Japan monetary policy report.  Expected to hold rates steady, policy officials reiterated the soundness of the world's second largest economy with expectations remaining high that consumer demand will pick up and further underpin growth prospects.  These are fairly bullish comments in the face of rising oil prices.  Perhaps this is mostly related to the fact that policy maker themselves remain undecided as to the definitive effects of the recent pickup in the price of crude oil, citing that the economy as a whole has held up against such shocks. BOJ Governor Toshihiko Fukui additionally assured that the bank would continue to monitor the adverse effects of rising prices on the domestic economy as well as its global partners.  Subsequently, the bank left reserve targets unchanged as well as keeping its monthly purchases of government fixed income at $11 billion.

Kathy Lien is the Chief Currency Strategist at FXCM.