It didn't take long for the FX market to unwind the dollar long profits from yesterday's FOMC rate hike as new concerns about the potentially lethal impact of Hurricane Rita quickly squashed any dollar bullish sentiment. The EUR/USD rose more than 100 points off its lows trading at 1.2220 in early morning European session.  With Rita headed for the Texas coast and possibly the refining facilities around Houston, the energy markets have once again reacted violently to the news. "You got a right cross with Katrina and now a left hook with Rita," said Agbeli Ameko, a partner with First Enercast Financial Inc., a Denver-based energy forecasting firm. "That's worse than getting hit twice in the same spot."

The euro was also buoyed tonight by much better than expected French consumer spending which rose 1.9% vs. 0.3% projected  on a month over month basis. As the second largest economy in EU, any marked increase in French consumption would have a strong benefit for the union as a whole. Meanwhile Gerhard Schroeder announced that he would not further contest for Chancellorship of Germany if Mrs. Merkel did the same, opening the possibility that a new leader could emerge from among the powerful conservative state premiers with strong pro market sentiments.  

The political jockeying notwithstanding, the FX markets is once again preoccupied with the weather in the Gulf Coast rather than the more typical economic and geo-political concerns.  If Rita, which has already reached Category 3 strength and is expected to become Category 4 hurricane, does slam into Houston, it may well tip the US economy into a recession. Coming as it does on the heels of the most inopportune Fed rate hike in the wake of plummeting consumer confidence numbers, the dollar bulls can only hope that Rita does not become an economic storm as well as a meteorological one. 

Boris Schlossberg is a Senior Currency Strategist at FXCM.