• Dollar Breaks Records Along With US Trade Deficit
• ECB Confuses Market With Contradictory Statements On Rate Outlook
• Yen Looks Ahead To Tomorrow's GDP Release

US Dollar
The dollar moved markets today as U.S. data affected the majors across the board. After strengthening over the past few weeks, the dollar fleetingly looked like it may have met its match this morning, posting a record trade deficit along with higher than expected initial jobless claims. September's trade balance was released at a record $66.1 billion, almost $5 billion more than expected. However, the market quickly brushed off the staggering figure as traders began to realize that the number was heavily affected by the aftermath of Hurricane Katrina. Imports, namely petroleum, surged in price and volume as production in the Gulf Coast was temporarily suspended during the month and energy prices soared to record levels. Comparatively, exports during September dropped by the most in four years. However, as foreign economies begin to improve and a trade agreement with China finally takes place, trade should regain strength in the coming months. Traders additionally restocked dollar positions as the University of Michigan released a far better than expected consumer confidence reading that rose from the previous 13-year low, the most soothing factor for dollar woes this morning. Coming in 5.5 points higher than last month at a reading of 79.9 for November, retailers are predicting strong holiday sales as consumers overcome oil shocks and hurricanes. Finally boosting greenback demand later on in the afternoon, the monthly budget statement for October narrowed, posting more than $10 billion less than September, almost $3 billion less than expected.

Euro
The euro looked to be gaining some strength during the Asian session, reaching its high for the day against the dollar of 1.1797 with the announcement of the US trade deficit. But the currency continued its fall shortly after reaching a two-year low against the dollar based on high US confidence data and a smaller than expected US budget deficit triggered a technical sell off. A large bulk of today's European data came out of France, its third largest economy. Industrial and manufacturing production rose for the second month, contrary to expectations, by 0.2 and 0.8 percent, respectively, possibly signaling strengthening growth. French consumer price inflation was lower than expected with October's year-on-year changes of 1.8 percent, or 2 percent on an EU harmonized basis, as oil prices failed to seep into other sectors of the economy. French GDP rose more than expected as well, by 0.7 percent in the third quarter, the most in over a year, versus 0.1 percent in the second quarter. These numbers indicating a pick-up in economic health and a fall in inflation stirred a bit of confusion, but the real conundrum of the day came about an hour later. The European Central Bank released its November monthly report detailing that policy makers were concentrating more on headline inflation which is being pushed up by volatile energy prices instead of relatively tame core inflation numbers. This is completely contradictory to statements made by ECB President Trichet yesterday about high oil prices failing to have second-round effects. His statements caused traders to speculate that the bank would not raise rates until at earliest February. However reports today, noting that headline inflation stands at 2.5 percent, well above the target rate, indicate a move could be expected much sooner. Despite the positive data and the now hopeful prospects for a rate hike to help out the currency, the conflicts held back any potential gains for the euro, leaving it to the whims of the ever-strengthening dollar.

British Pound
The pound continued its overall gain on the dollar today although it took traders for a bit of a ride along the way. The morning began with the currency strengthening in anticipation of the Bank of England rate announcement. The MPC, as expected, kept the rate at 4.5 percent and did not release a statement with the announcement. The currency reacted little after the announcement although the debate still rages on. Some feel that the MPC may follow up with another rate drop early next year to boost the still faltering economy. Manufacturing and spending numbers have continued to come in weak, signaling that the August cut may not have helped enough. As prospects look dim coming into the vital holiday shopping season, the economy could suffer even further if consumer spending and confidence do not pick up considerably. There are also those that believe the worst is over and inflation issues will come to the forefront in the coming meetings as businesses may need to start deflecting higher costs sustained from the shock in oil prices to consumers. For now, however, both factions do agree that the bank will stay at the current rate until at least early 2006. Though little reaction to this UK news was seen, the pound took part action in US data action throughout the day while closing the day little changed from yesterday's New York close.

Japanese Yen
The yen continued on yesterday's loss trend against the dollar today. The currency traded steadily through the Asian session before poking its head out to capitalize on a record US trade deficit announcement, reaching an intra-day high of ¥117.37. The glory was extremely short-lived, however, with USDJPY peaking only 2 and a half hours later at ¥118.19 and stayed at around that level for the rest of the day. Although the dollar led the action in the pair today, Japan is set to release a plethora of data tomorrow including GDP, price indexes and industrial production data, which may help the Bank of Japan better gauge when they can safely abandon their loose monetary policy. Today, machine orders were shown to have dropped 10 percent in September, a fall 4 percent greater than expected, after jumping last month. The heavy fall is probably due to a comparison to the extremely high numbers from last month. There was still a decent year-over-year rise of 4.8 percent causing the market to mostly ignore this data, looking to the US and tomorrow's releases for movement.

Kathy Lien is the Chief Currency Strategist at FXCM.