• Dollar Rebounds as Bush Appoints Bernanke as New Fed Chairman
• Inflation Data Confirms Growing Price Pressures in Europe
• Both Japan and China Want More Yuan Revaluation

US Dollar
The big news today was the much awaited appointment of the next Fed Chairman.  President Bush announced today that Ben Bernanke will be replacing Greenspan next year as the Chairman of the Federal Reserve.  Any hopes of Greenspan extending his term and staying on longer than expected is now out of question.  Ben Bernanke was probably the safest pick for Chairman given his experience within the Federal Reserve working with Greenspan along with his academic expertise and the fact that he does hold some credibility within the international markets.  Any other pick could have caused quite a bit of uncertainty in the markets since no one would know how the prospective Chairman would stand on policies, but with Bernanke, his speeches are essentially the second most analyzed by Fed watchers after Greenspan. His most well-known stances include an unwavering devotion to inflation-targeting, which Greenspan opposes.  He is also known as “printing-press” Ben, a title that he has been criticized for, because it means that he has explicitly promised to print money as a manner of increasing liquidity to generate inflation, if necessary.  Bernanke has been credited with shaping the policy debate on deflation and helping to spur the decision of lowering interest rates to 45 year lows of 1%.  Other work Bernanke has done indicates his advocacy of combining even more indicators into the models used to determine monetary policy in order to achieve more effective economic stabilization. He has studied this possibility over the years and penned papers describing possible implementation methods. Having Bernanke as Fed Chairman would mean that we would probably be moving to an inflation targeting policy similar to the ones followed by the European Central Bank and the Bank of England.  He  may also want to prove early on that he is a staunch inflation fighter which could mean more rate hikes to come. This would be more restrictive and less flexible than the current policy, but having Bernanke as Chairman could also bring about greater disclosure to the public and hopefully the credibility to the Fed.  See the special report on our homepage for more details on Bernanke's appointment.

Euro
Although range trading continues to be the predominant theme in the currency markets these days, there sure has been quite a bit of intraday volatility.  After Friday's reversal, the Euro has managed to gain strength against the dollar but then reversed it once again.  The first string of inflation data out of Germany confirmed the European Central Bank's fears that inflation may be stronger than expected.  Prices in both German state Hesse and Bavaria ticked higher as higher home energy prices offset lower gasoline prices.  We expect this to be the case globally and with the weather already turning cooler in the US and Europe, heating bills may hit the consumer's bottomline sooner than expected.  ECB President Trichet took this opportunity to reiterate that inflation risks have increased but the central bank's policy remains unchanged.  It is clear that the ECB has an on hold policy at the moment but their bias is clearly to the upside.  In terms of other data, the Eurozone reported a wider than expected current account deficit in the month of August.  More importantly though the region saw a EUR31.8 billion net outflow of direct and portfolio investment, six times more than the previous month.  This is particularly concerning, especially given the strong portfolio inflows (as reported by the TIC data) into the US during the same month.  It is now becoming increasingly clear that the shift in portfolio flows (possibly related to the Homeland Investment Act) could be playing a big role in the dollar strength that we have been seeing over the past few months. 

British Pound
Like in the Euro, the British pound initially gained quite a bit of strength against the dollar, only to give back most of its gains throughout the US trading session.  The economic calendar out of the UK was rather light today.  The only piece of notable data was the Hometrack house price survey which reported to have fallen to the lowest level in 2 years.  Hometrack economist Wrigglesworth said that inventory was increasing and that further declines in prices would be inevitable over the next few months. This should be supportive of a more accommodative monetary policy, but with oil prices continuing to rise, the BoE finds themselves facing the same problems as their international counterparts.  The UK is generally a mild net oil exporter, but they have recently found themselves importing oil.  Interconnector, the owner of reversible gas pipelines between Belgium and England announced today that they would have to start importing gas to account for falling supply ahead of the winter season when energy usage tends to hit its peak.     

Japanese Yen
Talk of Chinese revaluation is the focus of Japanese Yen traders once again.  Japan's vice finance minister Watanabe warned today that China's “trial period” for absorbing its FX reforms is over and that they need to continue with revaluation to make sure their currency reflects market forces more.  In response, Chinese central bank adviser Yu reiterated China's belief that more flexibility does need to occur in their currency and that the renminbi is indeed undervalued and would need to strengthen gradually.  It seems that the 2 countries are on the same page in terms of where the Yuan needs to be headed, but it comes as no surprise that Japan wishes for China to move at a speedier pace than they have been doing over the past few months.  China on the other hand sticks to their stance of moving only when they want to and when they are politically motivated to do so and not just to bow to international pressure. 

Kathy Lien is the Chief Currency Strategist at FXCM.