• Dollar Reverses as Dark Cloud Hangs Over Data
• Euro Breaks Higher as Inflation Pressures Continue to Rise
• Mergers and Acquisition Activity Fuels Pound Rally

US Dollar
The dollar is down once again but today's move was far more substantial and psychologically significant than the rallies that we have seen all week.  The euro is showing signs of reaching a true bottom against the dollar, as market sentiment, flow and mixed economic data all exert downward pressure on the greenback.  Although consumer prices took the biggest jump in 25 years and retail sales excluding the automobile component also grew at a healthy pace, both pieces of data had dark clouds hanging over them.  First of all inflation soaring by the fastest pace in 25 years should mean a more hawkish Fed, but core price growth continued to remain very subdued which is really what the Fed is looking at.  In addition, higher prices are hardly positive for the US economy or US growth.  Given that the jump in headline prices was primarily a result of higher energy prices and not core prices, it remains doubtful whether its overall implication is really positive for the US economy and the US dollar.  With retail sales, the surge in receipts was primarily attributed to the rise in gasoline prices, although higher sales of items such as furniture were also seen.   Yet to top off the catalyst for dollar bearishness was the two reports that came later in the morning.  Industrial production registered the biggest decline in 23 years while confidence took its third consecutive slide to the lowest level in 13 years.  Therefore taking everything into consideration, the news was far more bearish for the dollar today than the market may have anticipated. 

Euro
The euro has finally managed to breakout of its depressive mode to register an impressive day of gains.  A good deal of information came out of individual EU members today, dominated by inflation figures.  Spain and Italy both released September CPI numbers. Spain reported annual inflation at its 2 year high of 3.7%, 3.8% EU harmonized.  Spain is more susceptible to inflation than many other EU countries and is already seeing second round effects of higher prices with wages rising 3.4% in the second quarter.  Italy posted 2%, 2.2% EU harmonized. These countries, as well as the rest of the EU, are experiencing high inflation due to high-energy prices finally being passed on to the consumer in other sectors.  As more and more of these high and growing inflation figures are released, speculation of a rate hike at the next meeting of the ECB is heightening.  The ECB has given signals that they are worried about inflation and the secondary effects, which were not wholly apparent.  With Spain experiencing a wage increase, other countries are likely to follow suit, increasing the pressure on the ECB to eventually respond.

British Pound
The British pound rose swiftly against the dollar today following a slew of weaker economic data out of the US.  However, the GBPUSD rally remained limited, as the pair has been quelled by speculators who are concerned about a possible slowdown in the UK economy.  News that Hilton Hotels Corporation of the US is in talks to buy a unit of Britain's Hilton Group PLC for GBP3.6 billion and a US consortium is in talks to buy Britain's Drax Group for GBP2.075 billion supported the pound's rise as traders anticipated increased mergers and acquisitions activity. Bank of England's Tucker, who has long opposed a rate cut, sounded even more hawkish today.  The overall sentiment is that the BoE is that they are satisfied with the current neutral policy and while no rate hike is expected in the near-term, the possibility of a rate cut seems even more remote.  Sterling bulls absorbed this news, also contributing to strength in the GBPUSD.

Japanese Yen
The Japanese Yen has finally gained strength against the dollar as the greenback slides against all of the major currencies. The domestic corporate goods price index (CPGI) for September fell perfectly in line with expectations, rising 1.7% over the year and .2% from last month, making this the nineteenth month that the index has risen.  The large gain is due to rising oil prices increasing costs for companies, but with Japan recovering as it is, businesses should have no problem passing these extra costs on to the consumer.  Both export and import prices grew for the month of September, gaining .6% and 13.5% respectively from last year, driven again by rising oil prices.  Imports are especially affected by oil being that Japan imports most of its fuel consumption.  Final numbers for August industrial production, which were originally released as having grown 1.2% from the previous month, were corrected today to 1.1%. From August 2004, industrial production grew 1.5%.  Despite the small negative correction, growth in all of these figures signals healthy expansion in the Japanese economy as it is successfully pulling out of its fourth recent recession and coming nearer to ending the longstanding deflation in its economy.  Tokyo department store sales, considered a leading indicator of nationwide spending trends, rose .5% in September from the same month last year.  Japan is counting on this continued rise in domestic consumer spending, which accounts for about 55% of the economy, to counter slowing export demand and keep the country on its track of economic expansion. 

Kathy Lien is the Chief Currency Strategist at FXCM.