• Euro Gives Back Losses on Dollar Profit Taking Ahead of Trade Balance
• French Riots Begin to Ease, Bolstering Euro
• Yen Traders Watching for More Chinese Revaluation

US Dollar
For the fifth consecutive day, the dollar is stronger against the Euro. However, unlike the previous trading sessions, the turnaround that we saw on an intraday basis may be signaling that we are nearing a possible short term bottom in the Euro.  The only piece of economic data released this morning was wholesale sales and wholesale inventories.  Sales surged 2.4 percent while inventories were up 0.6 percent in the month of September, both of which were stronger than the market's expectations.  Tomorrow we are expecting the trade balance report for the month of September which is probably why we saw a great deal of profit taking today.  The trade deficit for September is expected to widen to a record high of $61.5 billion from $59.0 billion.  Petroleum prices were up 7.3 percent during the month while aircraft export orders suffered due to Boeing strike.  Furthermore West Coast port data has been indicating that imports from Asia continue to grow at a healthy pace.  Therefore even though the trade balance report has fallen in significance over the past few months because of the ample foreign investment flows to plug the deficit, if the number does come out particularly bad, this could give dollar bulls an even better reason to step onto the sidelines for a while.  On the other hand, if the trade balance fails to deliver any surprises, expect market activity on Friday to be even more boring than the quiet grind lower that we have seen all week.  Any rallies in the EUR/USD will face fierce resistance at the 1.1900 level, which was the former head and shoulders neckline.  The drive lower in the Euro was primarily due to rising US interest rates.  The outlook for rates has not changed and the trade balance will not have much of an impact on expectations for rate hikes.  Therefore until we get some more concerted data next week, in particular, the heavy duty dose due on Tuesday, the current themes in the dollar should remain intact.  Sneak Peak: Next week, we are expecting a lot of key economic data beginning with Tuesday Nov 15, when we are expecting PPI, retail sales and the Empire State Manufacturing Survey. 

Euro
The Euro is weaker against the dollar once again, but appears to be on the road to recovery.  The violence and riots in France are showing signs of calming.  Since Tuesday night, there have been reports that the number of cars being burned dropped by 40 percent while the number of calls to firefighters in general fell by 30 percent. As the situation continues to stabilize, we may see more relief rallies in the Euro. The German trade surplus increased from 11.6B to 15.0B, due to a sharp rise in exports and surprising fall in imports. This is clear evidence that even though domestic spending is weak, the lower Euro is helping exports. The ECB continues to throw out hawkish comments, but by the same token, the market continues to take it with a grain of salt.  Trichet noted yesterday, ""We need to solidly anchor inflationary expectations. Each central bank has to see what the appropriate policy to anchor inflationary expectations is. We have to remain credible." However, only when the ECB follows through on their statements will the Euro be able to rally based upon improving Eurozone fundamentals.  With the interest rate differential going only one way (in the dollar's favor), there isn't much left to support the single currency.  However, on the bright side, the longer the Euro remains at such levels, the longer the Eurozone can benefit from the triple stimulus of falling oil prices, low interest rates and a weaker currency. 

British Pound
The British pound is lower against the dollar once again.  Although the trade deficit in the month of September narrowed to *GBP 5.5 billion, the deficit for the month of August was revised higher to *GBP 5.9 billion from *GBP 5.6 billion. Weak demand for foreign products has kept a lid on any potential improvements in the trade balance.  Tomorrow's Bank of England rate decision is the market's main focus.  The central bank is expected to leave interest rates unchanged at 4.50 percent once again as a slowing economy offsets rising inflation.  The five members that voted to lower the lending rate in August decided to focus on a slowing economy rather than the inflation when deciding on their policy stance.  Since then, significant economic expansion has not materialized, but the cheaper lending rates have sparked inflation.  Price growth among consumer goods rose to 2.5 percent in September, the fastest pace in over eight years, as the burden at the pump saddled another layer on retailers' attempts to pass on rising costs. Growth looks to continue its softening trend into the final quarter as consumer confidence remains on the rocks.  Consumer spending accounts for nearly two-thirds of the economy and recent indicators hint that there is unlikely to be any support from citizens for the final months of the year. Considering these issues, policy makers will likely pass on the opportunity to change the benchmark rate.

Japanese Yen
After two days of losses, the dollar has captured the lead against the Japanese Yen once again.  Over the past two days, there has been a lot of speculation about whether China would make another move ahead of President Bush's visit on November 19th.  Treasury Secretary John Snow has previously said that he would like to see more flexibility in their currency regime before the President's visit.  With the visit right on the corner, we have yet to see any additional action on behalf of the Chinese.  However, if you recall each move in the country's currency policy has been particularly well timed politically.  This time around, the pressure is on once again as the US-China Economic and Security Review Commission advised Congress to urge the Bush Administration to impose a tariff on all Chinese imports.  President Bush is scheduled to meet with President Hu on November 20th.  If China were to make a politically well timed move much like the one that they did right before the last G7 meeting, a day or two before President Bush's visit would be an opportune time. 

Kathy Lien is the Chief Currency Strategist at FXCM.