• Dollar Bulls Eye Housing Market
• Euro Weakens on Disappointing Industrial Production
• Pound Slides as Blair Gives Up EU Rebates

US Dollar
With no major economic releases on the calendar today, the dollar recuperated a part of its losses during the Asian session and then spent most of the US trading session range bound. Analysts around Wall Street have been releasing their 2006 forecasts this week.  We have done the same today and there is one resonating theme that we have seen in most reports which is that for once, analysts and economists are collectively agreeing that some sort of slowdown in the housing market should come next year. The NAHB housing market index was the only release on the calendar and the disappointment from the release was hardly surprising since the housing market has already shown signs of slowing.  Falling to a 32 month low of 57 in December, evidence that the Fed's interest rate hikes are slowing the economy is becoming increasingly apparent.  A slowdown in the housing market has broad ramifications for the economy as a whole.  Not only could it directly impact consumer spending, but it can also have residual effects on the construction sector and demand for building materials.  In addition, a large number of jobs tied to the housing market have been created over the past few years.  According to Calculated Risk, since 2002, the number of real estate agents increased by more than 50 percent.  Should the housing market turn, the labor market could also suffer as a result.  Thankfully, most analysts do not expect a full fledged collapse, but instead just a mere setback.  Yet the risks loom large as refinancing also resulted in a surge in adjustable rate mortgages which are scheduled to begin to reset to market interest rates.  The housing market is probably the single biggest sector to watch to gauge the health of the US economy in 2006. 

Euro
The Euro ended the US session virtually unchanged against the dollar.  Politics reigned King in 2005 with the breakdown of the EU Constitution, German elections and the riots in France.  Today in Italy, central bank governor Fazio announced his resignation which puts an end to the banking scandal that has further damaged the credibility of the country's leaders.  Director General Vincenzo Desario has temporarily assumed his post until a more suitable replacement can be found. General elections in Italy are scheduled for 2006 and the hope is there can be a clear majority, which would pave the way for reforms.  For the year ahead, the market hopes that more stability along with a tighter monetary stance could help to bolster gains in the EURUSD.  Data released from the region this morning was mixed.  Eurozone industrial production and France's current account both came out worse than expected while German producer prices took a smaller dive.  In contrast to recent reports, Germany was not the laggard this time around with production much stronger over the previous month.  Instead, the -0.8 percent contraction in activity was primarily the fault of France, Italy and Spain. 

British Pound
The British pound sold off against the dollar today as the UK gave up a part of its EU rebates and Bank of England Chief Economist Bean sounded another dovish note for a fragile market that is waiting impatiently for the BoE to signal whether another bout of tightening may be seen early next year.  Bean who traditionally leans more towards the dovish camp said he was relieved that inflation has slowed down recently.  If you recall, consumer prices came in softer than expected in the month of November.  He added that the central bank will not be sitting on their hands till spring and instead will be watching the trend of economic data very closely.  Meanwhile, the UK has conceded to giving up GBP 7.1 billion of its EU rebate in an attempt to push through 2007-2013 EU budget.  For the economy, this concession will put a big strain on the Treasury's budget * which brings the struggle between Blair and Brown back in focus.  Although this may appear to be a diplomatic success for Blair, it is a serious predicament for Brown since the rebate will probably be phased out on his watch. 

Japanese Yen
The dollar rallied 0.4 percent against the Japanese yen, which is rather small compared to the currency pair's 4 percent slide over the course of three days.  Overnight, the Japanese government affirmed the BoJ's forecast for rebounding growth and rising inflation.  They still believe that the economy is recovering at a "moderate pace" and that according to their favored inflation indicator, the GDP deflator, which is also the one that they are trying to get the BoJ to switch to, prices are expected to increase by 0.1 percent next year.  However, this seems to be where the agreement ends.  Once again, the government and the Bank of Japan are exchanging mixed words.  BoJ Governor Fukui has toned down his language modestly by saying that there is no difference between the government's  and central bank's view on the economy.  Economic Minister Yosono on the other hand continued to stress the government's lack of desire to see any changes to the country's current monetary policy.

Kathy Lien is the Chief Currency Strategist at FXCM.