• Dollar Not Surprised By Another Rate Hike
• Data Suggests That Eurozone Economy Continues to Improve
• Pound Extends Losses Despite Improving Data

US Dollar
Today was probably the most boring reaction to a Fed rate decision that we have seen in the dollar in months.  Within the first 15 minutes following the release, the dollar sold off 15 pips, but then quickly rallied back to the level that it was trading at prior to the interest rate announcement.  The lack of a significant move was due to the fact that the market knew exactly what the Fed was going to do and the committee stuck to their well known script of continuous rate hikes with more to come.  Interest rates were increased for the 12th consecutive time by a quarter of a point to 4.00 percent, full 300 basis points higher than the 45 year low that we hit in June of 2003.  Aside from adjustments to the Katrina comments, the statement remained pretty much unchanged.  The FOMC left in the words “accommodative” and “measured,” paving the way for more yield, yield, yield.  Although the data released today was very encouraging for the dollar, the greenback sold off mildly against the dollar.  Construction spending hit a record high in the month of September, which certainly provides additional ammo for housing market bulls.  The ISM manufacturing sector index was reported at 59.1, which was higher than the market's forecast but slightly weaker than the previous month.  Improvements were seen in all sectors expect for production and new orders.  Tomorrow should be quiet with nothing significant on the US calendar, leaving the limelight on Thursday and Friday when we get pounded with not only a number of key economic releases, but also Greenspan's testimony before Congress. 

Euro
The Euro strengthened modestly against the dollar today.  Although the market's focus was on the US, the schedule for the Euro-zone was also packed today with PMI manufacturing surveys from Spain, Italy, France, Germany, and the entire Eurozone itself.   All countries showed expansion besides France.  New and export orders in France dropped from September, pulling down the entire survey.  Germany's manufacturing sector showed the most impressive growth, posting a 53.1 in October, up from 51.0 in September.  The Euro-zone as a whole saw the index rise from 51.7 in September to 52.7 in October.  This is the fourth successive jump in expansion and marks the strongest rate of expansion in 13 months.  This improvement is yet another piece of evidence of the gradual recovery that we have been seeing across the Atlantic thanks to low yields, softer oil prices and a weaker Euro.  Broken down, the index rose almost completely across the board with input prices and new orders leading the rise.  Input prices rose for the fourth straight month taking inflation to an 8 month high.  The jump seen in prices put further pressure on the European Central Bank to raise rates in order to curb inflation.    Signs of recovery ease these tensions and the ECB should now be more comfortable switching its focus to inflationary pressures and beginning to close the gap being created between the European borrowing rate and that of the United States.  Economists currently expect a rate raise sometime in the beginning of next year, although it could come as early as December.  Positive data is pushing expectations towards a hike before the end of the year.  

British Pound
Despite a dose of positive data, the British pound took a nosedive today against the dollar. October rose unexpectedly to 51.7, continuing the gradual recovery. The CBI distributive trades survey, which represents the percentages balances of retailers who see higher sales minus those who see lower, came in at a -18 for October, far better than the expected -22.  Meanwhile Nationwide housing prices rose 1.3 percent from September to October, far outpacing expectations of a meager 0.2 percent rise.  This gain more than covered the losses seen in the past two months.  From October 2004, prices gained 3.3 percent, more than double the annualized gain in September but still way below the 15 percent increase seen a year ago.  However, sounding a note of caution, Nationwide warned that although this rise may be viewed as a stabilization of the faltering UK housing market, it is by no means a turning point and accelerating prices are not expected to be seen in the near future.  The market is still at a very sensitive point and can easily be moved by changes in other economic factors, especially consumer confidence and employment data. 

Japanese Yen
The dollar yen pair rose to a two year high of 116.78, thanks to the latest US interest rate decision.  Releases for the yen today were overall rather disappointing.  Housing starts, after rising 7 percent in September saw the first drop in six months, falling 0.2 percent from a year earlier due to a steep decline in starts on owner-occupied homes, the 13th straight monthly decline in this category.  This dropped annualized housing starts from 1.271 million in August to 1.245 million in September.  Economists expected housing starts to actually rise by 1.3 percent.  Meanwhile domestic private orders fell for the first time in three months while orders from overseas rose for the first time in 2 months.  Public sector orders were the biggest contributor to the gain, jumping 22.7 percent.  Domestic vehicle sales in October dropped from a year earlier by 3.4 percent, after dropping 0.1 percent the month before.  The drop was led by Nissan Motor Company and Toyota Motor Company, Japan's two largest automakers, and marks the lowest sales volume for October in 34 years.  With Japan having one of the shortest product cycles of any major car market, producers are forced to continually introduce new models to boost sales; these two companies failed to deliver new choices quickly enough with both carrying their newest models a year or more already.

Kathy Lien is the Chief Currency Strategist at FXCM.