“We have the best result in more than four years,” noted Gernot Nerb, chief economist of IFO economic institute after the survey results surprised the market by printing better than expected 96.0 vs. 94.6. But Mr. Nerb also stated that the outcome of German elections weighed heavy on business confidence and “If one took only the expectation of the companies that handed in the information late (after the election results) the increase in the index would be smaller.”

Mr. Schroeder and Mrs. Merkel will convene coalition talks this Wednesday, but with neither party willing to give up claim to Chancellorship, the negotiations are expected to be slow and uneventful.  The best news for the euro is coming from the economic rather than the political arena as the lower euro stimulates more orders from the export based Euro-zone. 

However, the hawkish tone from Fed officials continues to underpin the dollar. Last night Kansas Fed's Hoenig reaffirmed Fed policy bias towards controlling inflation rather than focusing on growth. Such attitude is likely to favor a restrictive US monetary policy, which has been the primary reason for the rising dollar.  Yesterday, the pundits made much of reported remarks by Alan Greenspan to French Finance Minister Thierry Breton that “US has lost control of the budget process” Indeed some analysts believe that Mr. Greenspan may be trying to overcompensate with monetary policy to avoid the dangers caused by profligate fiscal spending.  How long Mr. Greenspan can maintain the balance remains to be seen, especially if consumer spending, which represents more than 70% of US GDP, comes to a screeching halt ahead of the critical Christmas shopping season.

Boris Schlossberg is a Senior Currency Strategist at FXCM.