Both the euro and the yen treaded water at the start of weekly trading although economic data from both regions was a little better than expected. In Japan, Capital Spending increased 10.6% far exceeding the 6.0% expected gain, but the yen continued to set multi-year lows against the dollar and in fact set an all time low against the euro trading at 141.98 just 2 points away from the 142 figure. As we noted in our weekly piece, quoting General Glut's eco blog, "The chief problem for the yen is that the flattening of the US yield curve has made it uneconomical for Japanese investors to hedge their ongoing purchases of US Treasuries, but a falling yen encourages overseas investors to hedge their purchases of Japanese equities * negating the value of these latter flows in currency terms." Thus the yen continues to suffer from portfolio flows and its path was not made any easier by news this week-end from the G-7 meeting that Japanese officials were unconcerned about the weakening unit. Apparently the macro bet being made in Tokyo is that the country can withstand higher oil costs which are denominated in dollars in return for generating ever greater Trade Surpluses. Presently the Japanese are running a record $80 Billion trade surplus of goods with the United States, a fact that has been of tremendous economic help to the export driven nation. Still, eventually push has to come to shove and USD/JPY will need to correct if even for a few hundred points as dealers have had to become progressively longer into this relentless rally. The most likely event to spur some profit taking may be another yuan revaluation by Chinese. In the meantime yen bulls continue to suffer massive losses.

The euro on the other hand appears to have stabilized even after the strong US NFP data which has the currency market contemplating 5% fed funds rate by springtime. With market players now accustomed to nothing but good news from the US economy, the greenback will need constantly better results to generate further gains. On the surface the dollar bulls argument couldn't be more clear: US economy is operating on all engines, Fed is going to 5% money and the greenback will continue to rise as higher yields attract more portfolio flows. Looking underneath the hood however, there may be some cause for concern and most of it centers around housing. Irrespective of latest data, the housing market appears to be slowing. Existing Home Sales dropped from 7200K expected to 7090K and although much ballyhoo was made over the fact the New Home Sales jumped 13% from 1200K to 1424, as Barry Ritholtz properly pointed out the margin of error in the data sample was larger (17%) than the actual increase making the whole report highly suspect. Perhaps most trenchant dollar bear argument was made by a reader of Jack Crooks Black Swan newsletter who noted: "If I am correct, the average Joe is going to get so beaten up this winter by enormous heating bills, higher minimum credit card payments, and, in some cases, higher adjusted mortgage payments. Even Merrill Lynch sees it: They estimated that the first two of the three I listed might add as much as $700 to the monthly budget. Nobody earning $53K per year can absorb $700 per month without suffering a dire personal recession. Multiply that times 100 million households and you've got a mess. My prediction: Spring seasonal housing market opens and the buyers are no shows. Game over."  The currency market may be thinking the same thing.

Boris Schlossberg is a Senior Currency Strategist at FXCM.