The yen gained more than 100 points on the dollar in Asia trading on Wednesday, as a dovish FOMC statement triggered carry trade liquidation sales from spec and real money accounts alike. On Tuesday in New York, the Federal Reserve Bank of New York  raised rates to 4.25% as expected,  but in the accompanying statement, US monetary officials noted that further tightening is "likely to be needed" but is not assured leaving open the possibility that Fed may pause after one last rate hike in January. With currency markets having priced in  4.5% US short term interest rates,  many participants  chose to lock in profits on their long USD/JPY positions which have proven to be extremely lucrative in the past three months.

Yen bulls were also aided by a strong readings from the quarterly Tankan business confidence survey which reached its highest value in 12 months hitting 21 versus 19 the quarter prior. Although most analysts expected an even higher rise to 23, the data confirmed the fact that Japanese industry  is expanding at a steady pace providing the economic underpinning to allow the Bank of Japan to move away from its ultra accommodative Zero Interest Rate Policy sometime next year.   

The euro, too rose on broad dollar weakness, breaking the important 1.2000 barrier.  Yesterday's Fed communiqué appears to have shifted market psychology and if today's US Trade Balance data along with tomorrow's TICS data both come in below expectations they may provide the impetus for a much steeper sell-off in the dollar as the market refocuses on the nagging US balance sheet problems and away from the favorable US interest rate spreads.

Interest rate concerns may once again become the story in the UK, where tonight's unemployment data  turned ugly with rolls increasing to 10.5K from 8K projected while the unemployment rate rose to within a touch of 5.0%. As we noted earlier this week if UK economy begins to exhibit more and more signs of a slowdown, the Bank of England will not be able to maintain a stiff upper lip much longer and  UK rates will have to decline pulling cable down along with them.

Boris Schlossberg is a Senior Currency Strategist at FXCM.