• Dollar Sells off as Oil Prices Rebound and Greenspan Warns About Housing Market 
• Euro Rallies German Inflation Highest in 4 Years
• Pound Rebounds from Seven Week Low

US Dollar
With only existing home sales on the US economic calendar today, traders turned their focus to Fed speeches.  There are four Federal Reserve officials scheduled to speak today, not counting a speech by Treasury Secretary John Snow and one by President Bush.   As we expected, Fed Presidents Bies and Moskow both downplayed the impact of the recent Hurricanes and talked up the resilience of the US economy to the recent "temporary" setbacks.  The market was looking for hints on what the Fed may do in November and Moskow, who is a voting member of the FOMC provided as straight of a response as we could hope.  He said that the economic fundamentals in the US are "still strong" and that "there's still excess capacity in the US economy."  In the world of the Fed, excess capacity is synonomous with having additional room to cut rates.  The dollar held onto its gains for most of the morning, but once oil prices began rebounding right before lunch time, the dollar began to lose ground against the Euro.  Oil prices first began rallying when President Bush said he that he wasn't sure how much damage was done to the refineries in Rita's path, but the rise accelerated after the release of reports that the refineries in both Texas and Louisiana may remain closed for a longer period of time due to some extensive electrical damage from Hurricane Rita.  Close to a third of US refining capacity has been affected by the Hurricanes along with two key ports in Houston and Lousiana.  To cap off the announcements, in his speech Greenspan focused his comments on the housing and mortgage market.  He painted a gloomy picture by warning that households with exotic loans such as interest only loans could face significant losses.  As he had noted before, he believes that the rise in home prices has been driven purely by speculation.  Real estate broker Corcoran just released their 2005 mid-year report and although on an average basis, condo prices are up 26%, 1 bedroom condos in midtown east are up a whopping 50% from last year.  When you have the prices of homes increasing that much in an environment where the population has not changed significantly, coming to the conclusion that speculators have been spurring the price increase is hardly surprising.  Yet despite the persistent warnings by everyone including Fed officials and bank analysts, the housing market continues to move forward.  Today, we saw existing home sales increase 2% in the month of August.  Tomorrow's consumer confidence report should not be as lucky as today's existing home sales.  We doubt that confidence managed to escape the impact of the Hurricanes.

Euro
Growing inflation pressures in Europe has the ECB once again caught in difficult position.  German consumer prices grew by 0.4% in the month of September as a result of higher oil prices and a tobacco tax hike.  The annualized CPI growth jumped from 1.9% in August to 2.5% in September, which is the highest in 4 years and far above the central bank's 2% target.  ECB Weber warned that the central bank needs to remain vigiliant.  However, highlighting the difficult situation that they are currently facing, he added that on the economic side, they still need to take action if necessary.  Oil prices are having a very significant impact on both growth and inflation, so this leaves the Fed at the same place they have been over the past 2 years, which is in wait and see mode.  In terms of politics, things seem to be improving in Germany, but worsening in Italy.  Merkel and Schroeder are moving closer to a "grand coalition," which may finally bring an end to their political stalemate.  In Italy, Prime Minister Berlusconi's approval ratings have collapsed to the lowest levels since 2001 which may make it difficult to push forward reforms. Adding salt to the wound was a warning by rating agency Fitch that Italy may face a ratings downgrade if fiscal stability is not restored.  Even though Italy the was worst performing major economy within the Eurozone this year, the former finance minister Siniscalo's determination to tackle Italy's economic problems provided a glimmer of hope. 

British Pound
The British pound fell to a seven week low on the session before rebounding with no economic data to justify the dip.  However, what has become apparent is the concern of many traders that interest rate differentials between the United States and the British economy are likely to narrow by yearend.  With a bottom finally forming in the housing market and rising consumer interest potential, considerations of further interest rate cuts may be contemplated in order to get that final push over the recessionary hump.  However, still remaining to be seen are inflationary pressures.  Known for years to be notorious hawks, Governor Mervyn King and his fellow policy makers have already stated that the current state of inflationary affairs remains temporary as the economy can weather such shocks.  But what if the already high pressures remain intact?  Mostly attributed to higher energy costs, inflationary pressures may remain in the economy as we approach the winter season.  Known for its spikes in energy prices, the winter snap may prove to be the undoing.  In this case further hikes or "no-action" verdicts would be most applicable, with the latter being most probable.  Ultimately, little dovish consideration looks to beset the board as we enter the fall season.

Japanese Yen
Surprise, surprise, more conflicting data in the world's second largest economy.  Although today's BSI report states a pick up in large manufacturers' confidence for the three months up to September, there remains continued confirmation of a consumer slowdown.  According to today's report, stronger export and domestic demand assisted in pushing the release higher to a 6.4 figure compared with a previous minus 2.4 print.  However, once again, sales figures ended up on the downside as has been for the past couple of releases.  Compared against a 1.1 percent rise in the month of July, department store sales dipped 0.7 percent in the month of August, according to Japan Department Stores Association.  Considered to be underpinning the economic recovery, consumption still remains weak with no significant increases in any of the consumer sales reports.  Until that day, questions still remain over the viability of the its current run, in light of a soaring equity benchmark.

Kathy Lien is the Chief Currency Strategist at FXCM.