• Euro Slides on Fears that French Riots are Spreading
• Profit Taking Hits Dollar
• Weak Retails Sales Data Plagues Pound

US Dollar
If you thought yesterday was quiet, today you could hear a pin drop.  For the second day in a row, we had no significant US data on the calendar that could have shifted market sentiment.  The dollar rallied strongly in the late Asian session, hitting a high against the Euro of 1.1710.  Once US traders joined the market however, we saw a great deal of profit taking as the dollar gave back most of its gains.  The majority of the big banks are saying that the latest move can be attributed to position squaring and this makes perfect sense since dollar bulls have raked in 6.6 percent or over 800 pips over the past 2 months.  Tomorrow should be much of the same with only wholesale inventories wholesale sales on the US calendar.  From the looks of it though, the dollar rally against the Euro appears to be losing steam and with no major catalyst until Thursday, there could be little to push the Euro to even further lows.  Oil prices are worth watching though since every Wednesday we get supply data.  Traders have been closely eyeing the recent move in crude prices below $60. Prices have rebounded today, but tomorrow will be much more telling.  Any meaningful up ticks in crude prices will have the press raising warning flags about how high oil prices will hurt the US consumer in the winter season.  In the meantime though, its still all about yield.

Euro
The Euro hit a two year low against the dollar before licking its wounds.  The riots in France are continuing to get out of hand as the French government invoked a 50 year law that allows for curfews where needed.  Reports of arson in Berlin and Brussels are also spurring worries that unrest seen in the French riots may have spread to minority communities elsewhere in Europe.  This is weighing heavily on the Euro at the moment and should continue to until we see some calming in the situation.  Investors also worry that spreading political unrest will make it even more difficult for the European Central Bank to raise rates anytime soon * one more reason to dump the currency.  Adding to the turmoil, the ECB is under pressure to forgo a rate hike at its next meeting.  After ECB President Jean-Claude Trichet announced that the bank was ready to raise rates "at any time" to keep inflation in check, government officials and industry representatives from across the Euro-zone began to argue against the decision.  These groups point out that core inflation is completely under control and that the huge jump in oil prices was the force behind the rise in the overall price indexes.  Finance ministers and businesses alike feel that the ECB should not abandon its six-decade low borrowing rate yet as it will hurt already very shaky economic growth.  Trichet would not comment after his meeting with business and labor leaders and government officials in Brussels today however a member of the ECB governing council Yves Mersch hinted that a rate hike was still a possibility, allowing the Euro to recover a bit of strength.  We however continue to believe that any rate increases will not happen until the first quarter of next year at the earliest.

British Pound
The British pound reached a 3 month low against the dollar as the combination of weak growth and disappointing retail data hit the pair. Traders are already looking forward to Thursday's rate decision, where they expected another stay in rates.  However, soft data released today is leading to further speculation that the first rate cut did not do enough to jump-start the economy and another cut may come in the first quarter of 2006.  The NIESR announced its estimate for GDP growth in the three months to October as only 0.4 percent, matching its estimate for the prior three month period and in line with the estimate of a mere 1.7 percent growth for 2005.  Despite this low growth which could put pressure on the MPC to attempt to lend a hand to the economy with a rate cut, the NIESR stated with its release that a rate cut would be inappropriate at this time and over the medium term, they actually see rate hikes as more likely than cuts, in line with the policies of other major central banks.  Also, the British Retail consortium reported a drop of 0.2 percent in like-for-like sales in October from the year prior as long-lasting warm weather cuts into fall clothing sales.  This is the seventh consecutive fall in annual retail sales however it is the least severe drop seen since March of this year, hopefully indicating that the worst is finally over for the faltering retail sector.  Consumers continue to be cautious though, opting for smaller ticket items and essentials over expensive electronics.  The decline in the housing market is also hurting furniture sales.  The suffering felt by retailers for months is now being passed on to wholesalers and are having a broader effect on the economy as a whole.  Retailers are hoping for a pick up in sales before the critical holiday shopping season however they are worried they may need to begin holiday sales early in order to spark demand. 

Japanese Yen
The Japanese yen has continued to recover steadily from its recent lows against the dollar with the USD/JPY pair sliding for the second consecutive day.  Japan only gave one release today, which was the official reserve assts for October. This is the eighth fall in 11onths as reserves were at $841.8 billion in October down from $843.6 billion in September.  Foreign currency reserves in the country reached an all time high in August and, despite the 2 consecutive falls, the country still holds the largest reserves in the world.  Officials detailed that the largest contributor to the fall was the rise in yields of US treasuries which caused a drop in prices.  The reserve is watched very closely due to its size, as an intervention in the policy could move the FX markets dramatically.  Monetary authorities usually only intervene in the case of a currency appreciation that threatens to hurt Japanese exports.  They have not done so since March of last year. 

Kathy Lien is the Chief Currency Strategist at FXCM.