• Explosive US Numbers Send Dollar Soaring
• British Pound Plunges as BoE Cuts Inflation Forecasts
• End to ZIRP in Japan Still Up in the Air

US Dollar
It has been quite a day for the dollar today as it soared against the majors.  The strength of the day's numbers gave dollar bulls the conviction to push forward.  The massive amount of money flowing into the US and growing consumer prices alleviated two major fears that traders have at the moment.  The record Treasury International Capital flow report of foreign purchases pushed the issue of a growing trade deficit further into the closet of worries as we see more than sufficient demand for dollar denominated assets flood into the country.  With $101.9 billion of net foreign purchases reported in September, inflows hit a record high.  So even though we have two records set in September, it was a net positive for the dollar.  Rising interest rates and the economy's resilience after Katrina helped to boost investor confidence at a critical time and the results are in * it will be difficult to undermine the significance of this flow, especially since central banks were on a buying spree once again, with both Japan and China snapping up more dollars.  The biggest demand was for US corporate stocks and bonds. In terms of inflation, weaker core prices reported yesterday did not filter into weaker consumer prices.  October headline and core consumer prices both rose 0.2 percent.  The rise comes even in the face of falling gasoline and energy prices.  The longer inflationary pressures remain prevalent, the stronger the need for more rate hikes.  Yet not all news was good news today.  Mortgage applications fell 0.6 percent over the past week, but more surprisingly, the NAHB housing index plunged from 68 to 60 in November.  This is a clear consequence of higher rates.  Rising mortgage costs is causing the sentiment of builders in the housing market to turn sour.  Meanwhile volatility will probably not settle until Friday.  Tomorrow, we are still expecting industrial production and the Philly Fed survey. 

Euro
Weakness continues in the Euro as the market speculates about the possibility of a December rate hike by the ECB.  According to various press reports, it seems that even the European Central Bank may not know their next step.  There appears to be a lot of dissent within the monetary policy committee and in our opinion, a December rate hike is not likely.  The Euro still remains under significant pressure primarily from broad dollar strength.  The sprinkling of data today did little to shift sentiment. Consumer prices for the month of October accelerated modestly, which validates the ECB's concern.  French non-farm payrolls rose less than expected but wages jumped by 1 percent.  Over the next few days, there is little standing in the way of the dollar so it will really be a battle of whether bulls will finally capitulate and let the Euro slide down to 1.15 or fight to the bitter end, making range trading the predominant theme. 

British Pound
The British pound was the biggest market mover today, falling 1.1 percent or 232 pips against the dollar, which is the lowest level that we have seen in over 2 years.  The numbers just seem to be getting worse across the pond with the number of claimants rising to 12.1k from an upwardly revised 10.7k.  The growth of average earnings including bonuses slowed to 4.1 percent from 4.2 percent.  Basically what we are seeing is more people out of work while wage growth overall is slowing.  The Bank of England's Quarterly Inflation report was the real killer though.  The central bank cut both its growth and inflation forecasts, with inflation predicted to slip below their 2 percent target in the middle of next year.  This keeps alive the possibility of another interest rate cut by the BoE.  Fears that the growing interest rate gap would be coming from two directions has put extensive pressure on the pound and unless data begins to turn up, we expect this to remain the case.  Tomorrow's retail sales report is another important release to see if we reach even further lows in the GBPUSD.  

Japanese Yen
The Japanese yen broke another two year high today before giving back some of its gains.  Like the UK, the future of interest rates is also dictating the movements in USDJPY.  Although the Bank of Japan has repeatedly prepped the markets on the possibility of tighter monetary policy and higher rates in the foreseeable future, Prime Minister Koizumi, who rarely makes comments on monetary policy said that he believed it was "too early" to end the Bank of Japan's quantitative easing policy.  This political pressure will certainly be another cause for consideration that the central bank has to deal with.  As the USDJPY continues to grind higher, the possibility of a government intervention remains unchanged.  A stronger yen poses a big risk to the country's export dependent economy, but a weaker yen is stimulative and actually may even boost domestic demand by keeping spending at home.   According to a newspaper poll, a survey of Japanese analysts report that a turn amongst that crowd is not expected until the central bank actually ends their quantitative easing policy.  In our opinion, waiting for the Japanese to make a move is like waiting at the line in the Department of Motor Vehicles * long and frustrating.  Instead, the end of the Fed's tightening cycle could have the same effect on USDJPY and could possibly come earlier. 

Kathy Lien is the Chief Currency Strategist at FXCM.