• The Market Sets Up For a Dollar Positive Week
• German Political Stalemate Comes to An End
• Growing Carry Interest in USD/JPY Boosts Demand for the Pair

US Dollar
The dollar is firmer today against the four major currencies - Euro, Swiss Franc, Japanese Yen, and British Pound.  With no US economic data on the calendar and US bond markets along with Canadian and Japanese markets closed for holidays, the move today was primarily linked to a delayed reaction to Friday's surprisingly tame non-farm payrolls report.  As we speculated in our Non-Farm payrolls preview, given that the market was so long dollars, the greenback's reaction to a negative report was expected to be far stronger than a possible reaction to a positive report.  Yet the weakness of the dollar's rally following not only a far less pessimistic September number, but also a strong upward revision to the July and August figures was even more surprising.  Stripping out the job losses related to the strike at Boeing, which are expected to be added back onto October payrolls, the labor market data indicates that the impact of Katrina has been limited.  This paves the way for a Fed rate hike in not only November but also December.  Therefore today's follow through reaction in the dollar seems to be the more logical move.  The commodity currencies however are proving to be far more resilient.  Both the Australian and New Zealand dollars are stronger against the greenback as the price of gold hovers near its 18-year highs.  The decoupling of the dollar / gold inverse relationship has exacerbated over the past few months as inflation, currency, geopolitical and simply environmental risks rise.  Gold, which is the only pure form of monetary value is proving to be the vehicle of choice for global investors at a time of heightened uncertainty.  The US calendar is fairly light until Thursday.  Tomorrow we have the FOMC minutes from the meeting held on September 20th, but there should be little surprises in the report since it is clear that the Federal Reserve is hawkish and view inflation risks as their top priority at this point.  There is almost no likelihood that the minutes will shift the market's expectations for no pauses in the Fed's tightening cycle this year.

Euro
Early gains on the back of a resolution to the German political stalemate have been completely erased as US traders bid up the dollar.  The biggest story in Europe today was the announcement that Schroeder will be stepping down, as Chancellor and Merkel will be taking on his post to become the first female to run the country.  She will also be heading up the "grand coalition," which is a collaboration that the country has not seen since 1969.  Merkel however will not be officially taking on the role until mid-November, as the two parties still need to sit down and hash out an agreement on policies.  The market is still quite divided on whether the coalition government will make it harder or easier for reforms to be pushed through.  We believe that this should be a positive for the German government and economy going forward because independently neither party seems to have what it takes to pull Germany out of its current slump.  Perhaps more great minds working together with vastly different point of views can help come up with some actionable reforms that may actually work this time around. 

British Pound
The rally in the dollar has been much more extensive against the pound than the other major currencies.   As a currency that has been laden with speculators, moves in the GBP/USD tend to be wider and more volatile than some of the other pairs as of late.  Mixed economic data out of the UK continues to make the Bank of England's job all the more difficult.  Core and output producer prices were on the rise once again in September, validating the central bank's fears of rising inflationary pressures.  In contrast, home price growth is continuing to slow.  According to the Office of the Deputy Prime Minister, house price growth slowed from 4.0% to 2.8% in August, which is below the market's 3.4% forecast.  However, the ODPM report tends to be delayed, which means that the market will need to wait for the Rightmove survey next week for further confirmation.  The BoE's next step remains key.  If the central bank finds a need to cut rates again, there could be a deeper slide in the pound, but if inflation pressures prevent them from doing so, any losses should remain limited. 

Japanese Yen
Japanese markets were closed for holiday today, but broad dollar strength kept the currency active.  Running off of Friday's strength following a surprisingly slim Nonfarm payroll report, the market continued to bid the dollar against the yen to take advantage of the widening interest rate gap.  Japanese monetary officials have had little to consider over the past few weeks to suggest that a change in the countries' ultra-loose lending rate is in the works for tomorrow and Wednesday's meeting.  On other hand, rate hikes in the U.S. are likely to continue through the year - perhaps tightening the overnight lending rate to 4.25% - furthering the pair's title as carry trade of the year.  In other news, Japanese markets will be keeping their eye on Treasury Sec. Snow and Fed Chairman Greenspan, who will head over to China to convince the rapidly expanding nation to speed up their currency reform.  While the 2 officials are looking to solve their own countries' trade balance woes, any positive comments or promises from the usually tight-lipped Chinese would prove a strong market mover for the Yen.

Kathy Lien is the Chief Currency Strategist at FXCM.