• Trichet Confirms Speculation of "Augmenting" Rates
• Pound Bears Continue on Quarterly Report Momentum
• Bank of Japan Leaves Rates Accomodative

US Dollar
After reaching highs not seen since 2003 against all other majors this week, the recent dollar rally took a break on Friday. Without any news from the US and fairly mundane economic releases from the rest of the world, the only excitement seen today was a sharp reaction to the hawkish comments made by ECB President Jean-Claude Trichet. Save for that spike, the rest of the day saw very limited movement in all dollar pairs. Though the greenback is slightly off its highs, the overall sentiment in the market is still very dollar positive with the main driver being the differential in short-term yields. Even factoring in a rate hike from the ECB, the continuation of Fed rate hikes will still keep US rates ahead of those garnered by the other major currencies. And at this point, it seems that a continuation of rate hikes is quite likely. Even with the overnight rate at 4 percent, the US economy is still going full steam ahead after producing 3.8 percent growth in the third quarter. Though there was some concern over the effects of the hurricanes, those fears are a thing of the past as the highs in oil dissipated leaving consumers with enough cash in their pockets to keep spending up. Barring any unexpected developments, the path is clear for further rate hikes. Next week, the only economic news pieces coming out of the US are FOMC minutes from the November meeting, University of Michigan's Consumer Confidence and the weekly jobless claims data. On top of that, the markets will be practically deserted after the Thanksgiving holiday.  Given the thin holiday volume, dollar underlying strength may not regain full momentum until the following week.

Euro
The euro started its morning with a slow fall against the dollar, but rose on higher than expected inflationary suggestions in the German producer prices report.  Subsequently, European Central Bank President Trichet essentially announced a rate hike this morning, stating that the bank is ready to raise rates for the first time in 5 years from the six-decade low 2 percent in order to curb inflation.  Stating comments that included the "augmenting" of current interest rates, Trichet added that policy makers would have to "take into account the level of risks to price stability that have been identified."  The bank believes that the hike will not affect growth as drastically as many predict, contrary to experts calling for a stay as higher rates may endanger the current turnaround in the region.  Additionally, policy makers believe the necessity for short term rate hikes will slow to no higher than 3 percent through 2006.  Recently, many members of the ECB have been skeptical about a rate hike despite Trichet's obvious favor toward one; however statements this bold most likely would not have been made without some backing from subsequent proponents. 

British Pound
In early morning trading, the pound lost a good deal of strength to the dollar, continuing its three week losing streak to bottom out at a two year low of $1.7099 as traders continued to speculate that the Bank of England is planning a rate drop to help the faltering economy.  Economic data on the docket included the M4 money supply, which grew by 1.1 percent, 0.4 percent more than expected, in the preliminary figures released for October.  The now places an 11.6 percent annualized increase.  Lending, at 10.0 billion pounds, was less than the previous month but still more than expected as public sector borrowing showed that Britain unexpectedly ran a surplus of 2.18 billion poiunds in October.  Meanwhile, economists were actually predicting a deficit of half that amount, due to a surge in corporate taxes, making it easier for Chancellor Gordon Brown to avoid raising taxes.  This, of course, is good news for businesses and consumers in Great Britain, but additionally for the currency.  If the government can avoid raising taxes, leaving more money in the hands of the public, a rate drop may not seem as impending or necessary.  Notably, however, the U.S. Fed is already creeping up to the British target rate, now only 50 basis points away.  With U.S. policy makers continuing to raise rates, a drop by the Bank of England would kill any interest rate advantage that would possibly keep the pound afloat above its shaky economy.

Japanese Yen
The yen weakened steadily against the dollar in early morning trading, reaching a low of 119.40 as speculation grew that the Federal Reserve would continue raising interest rates at a far faster pace than the Bank of Japan.  The only news out of Japan today was the Bank of Japan's monetary decision.  As expected, policy makers left rates and monetary policy unchanged along with the target range of liquidity.  The difference here is that BOJ central bankers look to have been partly coerced by central government officials, leaving independence at the door step when citing further deflationary pressures as the main culprit in the decision to remain accommodative.  Subsequently following the decision, Governor Fukui stated that "the government and the BOJ may have different areas of policy management, but there is no difference in the basic view."  Fortifying relations with government heads, Fukui's comments along with the recent public spat suggests that even as deflationary pressures subside, rate hikes may not be as forthcoming as a central banker may like.  Now, with a higher power judging the existence of deflation, bears may continue to have a field day with the underlying spot.

Kathy Lien is the Chief Currency Strategist at FXCM.