• Dollar Collapses; Trade Deficit Hits Record High
• Pound Rally Limited Following Weaker Data
• Dollar Yen Erases Past 26 Days of Hard Earned Gains

US Dollar
After Tuesday's tight trading range, the US dollar resumed its tumble against the majors.  The sell-off began when traders in the Asian session joined the markets to pound the dollar lower as they reflected on the Fed's latest changes to their monetary policy statement.  The increasing possibility that the end is near for rate hikes has some traders looking for an exit, especially as everyone begins to shift into holiday mode.  Bearish sentiment was validated when the US trade balance hit a new record high in the month of October.  Initially expected to narrow from -$66.0B to -$62.9B, the deficit jumped to -$68.9B as imports surged another 2.7 percent, highlighting the voracious appetite of the US consumer.  With the strength of the dollar, purchases of foreign made electronics, clothes and cars continued to increase.  Analysts were hoping that the 11 percent slide in oil prices would reduce import receipts, but the rise in the US' demand for oil offset the price decrease.  US oil imports increased from 278.5 million barrels to 304.5 million barrels, while the price of oil fell from $57.32 in September to $56.29 in October.  Tomorrow's TIC data and CPI reports could easily be the straws that break the camel's back.  After September's impressive $101.9 billion inflow of capital, we are sure that the same strength will be difficult to replicate.  Right now, the market's consensus forecast for the Treasury's International Capital flow report for the month of October is $75.0 billion.  If the number comes in below $65 billion, which would be less the same month's trade deficit (a very rough match of assets to liabilities), it may be the last reason that dollar bears need to rally the pair above 1.2100.  Inflation around the world is beginning to soften, so if CPI falls more than expected, it would only further validate that the Fed can longer continue to hike rates aggressively. 

Euro
The Euro leaped higher today against the dollar, breaking above the 1.2000 level to a high of 1.2062 before retracing to settle around the figure by the end of the US trading session.  Inflation numbers released this morning were mixed with German inflation falling by 0.5 percent and Italian consumer prices rising by 0.1 percent.  If you recall, French inflation figures release yesterday were also softer than expected.  Sentiment in France is on the rise according to the Bank of France's Sentiment index, which increased from 102 to 106 in November thanks to increasing production.  As we have previously mentioned, the business sector as well as business confidence have been rebounding thanks to the weakness in the Euro.  However, consumer confidence and spending on the other hand have been lagging.  French non-farm payrolls is the only major piece of Eurozone data due for release, which means that for the most part, like today, the Euro will barely react off of those pieces of data and instead sit steady until the barrage of important US data is released between 8:30am and noon EST.

British Pound
Unlike the Euro, the British pound's gains today were far less impressive as dollar bearishness was offset by weaker economic data.  The ILO unemployment rate ticked higher from 4.7 percent to 4.9 percent as the number of people claiming benefits increased a more than expected 10.5k, while average hourly earnings took a bigger dive of 3.6 percent from 4.1 percent.  Recent inflation data has shown little evidence of pass through.  Meanwhile leading indicators fell for the first time in 4 months by 0.3 percent.  Growing evidence of a slowdown in the UK economy will put more pressure on the Bank of England to lower interest rates again.  Although they have already said no to the last possible cut in 2005, another bout of easing in the first quarter is not outside the realm of possibility.  However, the true story will be told by tomorrow's retail sales report, the last piece of potentially market moving UK data due out this week.  Sales are expected to rise, but judging from the recent trend of data, the risk is certainly to the downside. 

Japanese Yen
The Japanese Yen dominated market activity today as it rose 2.2 percent against the dollar, causing USDJPY to fall by over 300 pips and in essence, erasing the past 26 days of hard earned gains.  Over this past year, USDJPY benefited the most from the US' growing interest rate; therefore by the same token, it was set to be hurt the most when the US signaled that the end of its rate hike campaign may be near.  Japanese speculators who love the Yen crosses pushed their currency higher as they begin to liquidate their carry trades.  Meanwhile, the market completely brushed off the usually important quarterly Tankan report.  According to the Tankan, business confidence was slightly below forecast, with the index increasing to only +21 from +19, two points below the markets prediction.  Even though the figure came in below expectations, the absolute number still reflected a solid expansion and those businesses remain optimistic. The only difference is that they are cautiously optimistic at this point.

Kathy Lien is the Chief Currency Strategist at FXCM.