• Inflationary Concerns Spark Dollar Strength
• Weak Retail Sales Add To Pound Woes
• Japanese Consumers To The Rescue

US Dollar
Certainly a busy day for the greenback as a mixed basket of data was released to the glee of dollar bulls.  First and foremost, expansion continued according to the Empire manufacturing report for the month of September.  Expected to print a reading of 15, the report was released higher at a figure of 17.  Suggestive of expansion, the figure was still below the previous 23 reading in the prior month.  Subsequently, core consumer prices were released in line with expectations, higher by 2.1 percent on an annualized comparison.  Indicative of inflationary pressures, although still relatively weak against benchmark targets, the figure added to the continued manufacturing activity seen in the Empire survey, leading traders in expecting a 25 basis point hike at next week's meeting.  However, there does remain some questionability to the strength of U.S. manufacturing as the later released Philadelphia survey showed a plummeting figure of 2.2 according to the Federal Reserve.  This is especially alarming as the recent release showed a reading of 17.5.  Nonetheless, dollar favoritism did remain dominant as the drop was seen mainly attributed to thin demand and higher costs resultant of Hurricane Katrina devastation.  Additionally, details of both the Federal Reserve's regional survey cited overall rising prices, adding to the day's consumer prices report.

Euro
With no economic data for the day, political concerns continued to weigh heavily on the underlying spot market as we approach the weekend election.  Falling to a two-week low, further selling pressure pushed the domestic currency lower as opinion polls are increasingly offering the notion that opposition leader Angela Merkel will ultimately be forced into a coalition with incumbent Chancellor Gerhard Schroeder when all things are said and done.  If such a coalition was to occur, current optimism looks to be hampered as anticipated financial reforms may not be as forthcoming.  One such platform would involve a promise to cut welfare spending while loosening the stringent labor laws in Europe's largest economy.  Particularly of interest would be Merkel's proposal in suspending legal protection against unfair dismissals from smaller domestic companies.  As a result, steady conditions look to remain until a direction can be established politically.  Separately, the market will be looking ahead to tomorrow's consumer price index.  Even with currently high energy and oil prices, consumer prices remain tamed and far below the central bank's benchmark target.  As a result, with output still overall weak, central bankers are afforded plenty of room in keeping the short term rate at the current 2 percent.  However, any indication otherwise would definitely spark expectations of the possibility.

British Pound
Disappointing economic news led to a full onslaught by pound bears as speculation grew that the Bank of England may indeed have to consider further interest rate cuts in the near future.  Stagnating in the month of August, U.K. retail sales remained unchanged after dropping a revised 0.6 percent in the month of July, suggesting the economy is struggling to expand.  As a result, investors abroad see the only remedy to the situation as being a subsequent cut in interest rates as consumer spending continues to be hampered by record oil prices, plateauing housing valuations, and increasing jobless claims.  However, at least for now, the notion may remain an afterthought as the central bankers remain vigilant to the increasing pressures of inflation.  Consumer prices have risen 2.3 percent on an annualized basis, an eight-year high, above the Bank of England's benchmark target of 2 percent.  Now the question exists to how long policy officials can focus on the inflationary concern while disregarding fundamental consumption, as it constitutes approximately two thirds of economic output.  Interest rate traders seem to be siding with the notion that officials will be taking their time.  Paring back expectations, the December interest rate future is boasting an implied rate of 4.49 percent, indicating no expectations going into yearend.

Japanese Yen
A silver lining for the world's second largest economy today as consumer confidence actually climbed for the second month in August.  Bolstered by increases in wages and job prospects, individuals are becoming increasingly flexible with their wallets and as a result look to once again underpin economic growth in Japan.  Our readers will remember that it is consumer spending that ultimately attributed to the economy pulling out of the recessionary conditions at the tail end of 2004.  Coupled with the recent win by the incumbent Prime Minister, current upbeat sentiment may actually translate into tangible figures to the upside and offer concrete evidence of consumption.  However, yen players may still have to consider the ramifications of current tax legislation and their negative effects on disposable income.  Nonetheless, global counterparts remain confident in a complete turnaround as the Nikkei 225 once again looks to test the 13,000 psychological level.  With that said, all that is needed now seems to be a complete exit of deflationary conditions in the country.  This has become an increasing consideration as the final key factor to potential rate increases, the first such notion since deflation seven years ago.  With whispers of new carry trade potential versus other majors, in particular the U.S. dollar, further pressure will be placed on the currency until formidable signs of growth can be mustered.