• Oil vs. Fed: Dollar Tackles One Event Risk at a Time
• German Polls Take a Toll on Euro
• Pound Slides as House Prices Tumble

US Dollar - There were two major themes riding in the markets today - the upcoming Federal Reserve meeting and the brewing storm off the coast of Florida.  For the time being, the developing Hurricane has lost out on the battle of what is more important to dollar traders against the Fed rate decision for the majors excluding the commodity currencies.  Against the Australian, New Zealand and the Canadian dollars, the greenback sold off following a $4 rise in oil prices.  More specifically, USDCAD is trading at new 13-year lows.  Workers who were rebuilding the damage to the rigs in the Gulf are being evacuated along with residents in the Florida Keys as the National Hurricane Center warn that Tropical Storm Rita could strengthen to Hurricane Strength as early as Thursday.  According to CBS Marketwatch, Weather 2000 Inc. predicted that Rita "could impact 4 times as many energy rigs and platforms as Katrina and Ivan combined."  If this proves to be true, we could see oil make new all time highs once again next week. Natural gas prices have already closed at the highest level on record and remember, most Americans heat their homes using natural gas, so if prices do not retrace, we could see a brutal winter in more ways than one.  However, for the time being, the markets is tackling one event risk at a time and with the storm still developing, the more immediate task is to assess the impact of the Fed rate decision.  Fed fund futures are currently pricing in a 94% probability that the Fed will be raising interest rates for the 11th time to 3.75%.  Of the 1,300 people who took the DailyFX interest rate poll, 89% expect interest rates to be increased again this year, which means that even Katrina can't stop the Fed.  Most of the pre-Katrina economic data has been strong and in the words of Dallas Fed President Fisher who is a voting member of the FOMC, they "don't really know" how Katrina might alter the outlook for the US economy.  Greenspan and company will probably remain in wait and see mode until more Katrina inclusive data is released.  The Federal Reserve is worried about inflation about also sensitive to potential impact that Katrina and now Rita may have on the economy.  The statement itself remains the main focus * any signs of a possible pause in November would be dollar bearish while significant downplaying of Katrina's impact could be interpreted as dollar positive.

Euro - The Euro has taken a sharp dive after disappointments at the polls.  Neither Merkel or Schroeder managed to capture a significant lead, with the CDU (Merkel's party) taking 35.2% of the votes while the SPD (Schroeder's party) took in 34.3% of the votes, leaving them both with a near equal amount of seats in Parliament.  Schroeder's popularity managed to rebound strongly over the past week.  The battle continues to heat up as both leaders say they have a mandate to be Chancellor.  Even though elections are still to be held in Dresden in 2 weeks, it should not make a big difference in the balance of the power.  The next step will be for both parties to form a government through different alliances or coalitions.  Once they have done so, their choices would be reviewed by the Parliament who will then elect the next Chancellor.  The parties have 30 days to form their governments, which means that for at least the next few weeks, politics will remain on the headlines in Europe and continue to create uncertainty for the Euro.

British Pound - Showing that house price inflation eased yet again, the Rightmove housing price report reflected valuations declining another 0.4% in the August 7th to September 10th survey period.  However, the number of sales rose sharply in the corresponding period and contributes to the notion that the overall market slowdown may have reached a temporary bottom with current activity considered a byproduct of August's interest rate cuts.  What's interesting is that the most recent Rightmove housing price report is being compared to two subsequent reports released earlier.  Our readers will remember that according to building society Nationwide, annual house prices also showed house price inflation at the lowest rate in a decade, at 2.3% in August.  Comparatively, however, British mortgage lender Halifax reported prices that rose 1.6%, the fastest pace in almost a year.  As a result, although taking into consideration that all three reports are based on comparative evidence, industry experts are now leaning towards a rebalance of the sector, albeit temporarily.  Additionally notable has been the volume seen in the past month.  Known for its relatively light volume, similar to the December month, the slight pickup in August has confirmed previous notions that consumers were awaiting lower interest rates in order to take part in any real estate transactions.  Ultimately, this may constitute potential upside considerations for the sector as we approach yearend and may, in fact, lend to up ticks in lackluster consumer spending figures.

Japanese Yen - With benchmark markets closed and economic releases nonexistent on the day, traders kept the underlying spot currency in a tight range, approximately 50 pips, in both the overnight and U.S. trading sessions.  With activity thin in observance of "Respect for the Aged Day", traders will be looking ahead, rather, to tomorrow's convenience store sales data.  Declining 4.7% in the previous period, sales are expected to have dropped once again in light of last week's better than expected consumer confidence figures and rising wage growth.  However, still weighing on the minds of consumers is the idea of further increases in energy costs and current tax legislation.  Tying this into today's holiday theme, recent government legislation, in order to provide for an aging population, may in fact be the undoing of a potential turnaround in consumer activity.  According to recent revisions, policy makers have actually axed the nationwide tax rebate, which ultimately places a hefty financial burden on the individual.  Even more taxing has been the increase in pension contributions as well as a subsequent decrease in distributions allowed.  Ultimately, crimping disposal income circulation in the economy, policy makers may want to change their providence for the "aged" if future generations are to be taken care of as well.

Kathy Lien is the Chief Currency Strategist at FXCM.