Lower exchange rates helped Japan record yet another better than expected Current Account surplus, but the positive economic news did little to spur yen buying as the single currency once again traded above the 121.00 level in Asia before settling back during the start of the European session. The Japanese Current account surplus expanded to 1673.6 Billion yen - better that the 1436.3 Billion yen projected - as the decline in currency helped the country's export sector while stabilization in oil prices muted most of the import gains. Japanese Consumer confidence also improved. Jumping to 48.2 versus 47.9 the month prior. However, most market participants remained cautious ahead of tomorrow's expected 25bp rate hike by the Fed. The yen has been mercilessly hammered  by carry trade flows and if tomorrow's rare hike goes into effect. the interest rate differential between the two currencies would expand to 425 basis points.

The euro on the other hand suffered none of the carry trade angst, as the unit was lifted by heavy buying out of London and reached a high of 1.1894 in early European trade before retreating slightly. Rumors of Asian Bank buying circulated in the markets and such action would make sense given the EUR/USD remains near its yearly lows,  providing a relative bargain entry for longer term oriented central banks looking to diversify their reserves.  The EU currency also hasn't  suffered as much as the yen from interest rate differentials because of the market perception that ECB may be assuming a more hawkish posture as we move into 2006. Today, ECB's Liikanen stated that risk to price stability increased globally confirming market's suspicions that ECB may institute a tighter monetary policy in the near future thus mitigating some of the Fed's actions.

Boris Schlossberg is a Senior Currency Strategist at FXCM.