• Rumors and Comments Caused See-Saw Action in Dollar
• Pound Extends Rebound on Improving Data
• Yen Strengthens on Reports of Possible Chinese Revaluation

US Dollar
Non-farm payrolls came in right in line with expectations, but that did not stop the dollar from delivering its usual post payrolls volatility. This time however, the move wasn't induced by post payroll position adjusting alone. The G7 Finance ministers and central bankers meeting beginning today caused rumors and speeches to circulate around the markets.  Even though the dollar gained strength initially after the release, it quickly lost ground against the Euro as the market caught whiff of a possible Chinese revaluation next year.  According to a German newspaper (WirtschaftsWoche), an unnamed Chinese source said that China could revalue the Yuan by 7.5 percent in the New Year.  The possibility of further revaluation caused a sharp slide the dollar as it would mean a smaller need for US Treasuries.  At the same time, Greenspan was making comments on the wires.  Although he refrained from saying anything ground breaking and remained relatively optimistic on the health of the US economy, he continued to caution about the growing deficits.  The second big move came when a newswire ran comments from US Treasury Secretary John Snow as saying that yen weakness would be apart of the G7 discussions.  This caused a sharp slide in USDJPY.  Unfortunately, shortly afterwards, a spokesman for the Treasury confirmed that Snow did not make any of the comments.  So overall, it certainly has been quite an interesting day in the FX markets.  In terms of the payrolls report, 215k jobs were created in the month of November, which was almost exactly at market predictions of 210k.  The October number was revised down nominally to 44k from the originally reported 56k.  The unemployment rate remained unchanged at 5.0 percent.  Most encouraging of all was the rise in manufacturing payrolls and stronger annualized hourly earnings, which was 3.2 percent vs. 2.9 percent the period prior - the second gain in a row.  For the Fed, the number confirms the strength of the economy and validates their still vigilant monetary policy.  Given the slate of positive news this past week, 4.75 percent yield by early next year now appears quite likely.

Euro
Without much significant fundamental data for support, the Euro continued to slide against the dollar.  The only break was a spike of strength shortly after the US non-farm payrolls number.  However the strength was short lived as the market realized the slightly lower than expected number would not stop the Fed from continuing to raise rates.  The only release from the entire Euro-zone was the producer price index for the month of October.  Prices rose by 0.6 percent from September and 4.1 percent from October 2004, slightly more than expected.  This rise was most likely due to oil prices reaching record levels during the month.  The market however continues to be concentrated on dollar strength fueled by the Fed continually tightening their monetary policy.  With the Euro having one of the lowest interest rates among the major currencies, the Fed's policy is making the Euro less and less attractive.  This is especially true after the ECB recognized yesterday that the Euro-zone economy could not withstand a policy such as the Fed's and that the 25 basis point hike would probably be a solo move, stifling speculation that the target rate could be higher in the near future.

British Pound
The British pound tacked on its third consecutive day of strength, the longest in over a month.  This morning the UK released house price and construction PMI data for the month of November.  Halifax Plc announced that housing prices rose by 1.2 percent in November and 4.5 percent in the three months leading to November, the fifth rise in six months.  This suggests that the housing market may be sustaining a small recovery.  Economists predict that, after looking to post the slowest growth since 1992 this year, a recovering housing market may help to push consumer spending, allowing for a recovery of economic growth in the UK next year.  Higher wages and a high level of employment are fueling the economy's rebound.  Also released this morning was the CIPS construction PMI that increased to 54.2 during November. The report indicated that construction activity, new orders and the quantity of purchases are all increasing more quickly but future business activity, although still increasing, is slowing.  An overall positive report in the construction sector, probably benefiting from the recovering housing market, is another sign of a possible recovery in the economy.  With the pound continuing to gain against the dollar today, the currency posted its first week of gains in five as the UK is finally seeing some relief after struggling for months to come out of a recession.  As the economy improves, speculation of a rate drop by the Bank of England is continually dampened, attracting investors back into the pound.

Japanese Yen
There was quite a bit of volatility in USDJPY today as rumors and speeches hit the market. The rally this morning was partially attributed to comments by the Japanese Finance Minister Sadakazu Tanigaki, who indicated that the currency is moving mostly in line with fundamentals, hinting that officials favor a weaker currency. The Deputy Governor of the Bank of Japan also stated that the bank would maintain a zero interest target rate even after they begin to tighten monetary policy, a move that will further discouraging foreign investors from buying Japanese assets or the yen.  Later in the afternoon, the yen's sudden strength came from a report by a German publication that China would revalue its currency early next year. Its following sell-off was from a newswire misquoting John Snow.  Aside from that, the pair did not react much to the solitary yen release early this morning.  Japan announced its November monetary base numbers as having climbed 1.5 percent, almost half the expected amount, after growing the most since June in October.

Kathy Lien is the Chief Currency Strategist at FXCM.