• Greenback Interest Remains Strong Overall Despite Bank Holiday
• Lower Inflation And Higher German Taxes Weight On Single Currency
• Yen Rising Out Of The Recessionary Ashes

US Dollar
After dominating the market yesterday with its releases, the greenback took a rest on Veteran's Day allowing the market to recover from the whirlwind gains from the past week.  Pushed to the back of traders' minds, further effects of yesterday's record trade deficit figure look to be rather muted until we see the net foreign securities balance next week.  Here, the market will be scrutinizing whether or not foreign interest in dollar denominations will be sufficient enough to cover the ballooning total.  Nevertheless, interest rates continue to be the overwhelming focus of the market, allowing the greenback to reach a two year high against the euro, a three month high against the pound, and a 18 month high against the swissie. Notably, this recent price activity shows a change in trading themes from recent years as deficits have recently lost their scare value with interest rate differentials stealing the spotlight.  Heavy trade and budget deficits caused the three year sell-off to 2004, but as was seen in recent days, the market has brushed off the staggering figures within minutes and keeping dollar strength without any new fundamental support.  With the Fed expected to continue raising rates above the current 4 percent, the dollar is looking more and more attractive to outside investors, especially when compared to the low interest bearing euro and yen.

Euro
The euro, breaking through the significant 1.1700 figure in early morning trading, licked its wounds and steadily rose back above in light of downwardly revised German consumer price index figures.  The final numbers indicated no rise from September to October, and a 2.3 percent rise, versus the original 2.4 percent release.  Within in the central bank's inflationary target range, low inflationary figures in the Euro zone's largest economy may indicate a decline in otherwise rampant inflation suggested by policy makers earlier in the month and the notion that high energy costs have not had second round effects.  Additionally, turmoil in the German government over the lack of a majority in the September 18th elections may be calming as well.  Today, the two sides sealed an agreement forming a coalition, with Angela Merkel becoming the first female chancellor of Germany.  One of the main parts of the policy comes with the agreement to tackle Germany's budget deficit by raising taxes and lowering public spending.  Despite the pact, it is still to be seen how much of each parties original campaign promises have been factored into policy, although it is apparent that Merkel's plans for sweeping economic reforms will not see the light of day.  Regardless of the final outcome, the end of political fighting and the establishment of a leader after 3 months of quarrelling will calm consumer and business jitters, injecting at least some certainty back to the country and the consumer.

British Pound
Devoid of any releases for support, the pound fluctuated heavily today as traders await further clues on the motivation of yesterday's rate stay by the Bank of England.  As the debate continues in the United Kingdom, investors and policy makers alike are looking forward to Monday and Tuesday's releases of producer, consumer, and retail price indexes for October.  The inflationary figures, which are expected to remain the same, or slightly tamer than September's, will indicate whether high energy prices have begun to seep into other sectors after sustained highs.  If this is the case, the Bank of England will not be able to appease supporters of another rate cut to bolster the economy.  However, according to expectations, this does not seem to be a strong worry as a move will be dependant more on the performance of the economy. Next week also holds unemployment and wage data - another signal for the Bank of England.  Predictions hold that there was not much change in the month.  To those cheering for a rate decrease, low figures could support the opinion that the economy is still at a low point.  Either way, the Bank of England is not expected to move at least until early next year

Japanese Yen
Giving the yen its early morning jolt, preliminary GDP growth for the third quarter was released 0.6 percent higher than expected, expanding 1.7 percent from third quarter 2004.  Although this is a drop from the 3.3 percent annual growth seen in the second quarter, the increase is still substantial and leads to forecasts of follow through growth in the fourth quarter based on companies indicating that they plan to invest more on machinery.  Additionally, consumers have regained their confidence as lower energy prices have lessened the pressure individual budgets.  If it holds, this will be the longest period of expansion in the Japanese economy in 8 years with domestic demand, fueled by higher wages, the clear driving force.  The report also detailed that consumer spending and investments made positive contributions while exports actually made a negative contribution to growth, suggesting that the Japanese economy may finally be pulling away from its dependence on foreign consumption.  Released simultaneously, the CPGI for October, showed a greater than expected rise of 1.9 percent from the same month last year and of 0.2 percent from September.  Exports and import prices also rose by a good deal more in October than in the previous period.  With export prices only rising 2.4 percent from a year before, import prices rose 18.3 percent due to the surge in oil, gas, coal and chemical prices.  All combined, continued GDP growth, less dependence on exports, rising prices, and higher consumer confidence are giving strong signals to the Bank of Japan that the economy has finally pulled away from the series of recessions it has seen over the past two years and that it may be time to consider tightening monetary policy.

Kathy Lien is the Chief Currency Strategist at FXCM.