• Dollar Rallies on Thin Trading
• Euro Weakens Following Disappointing Data
• Pound Sell-off Contained Thanks to Stronger Housing Report

US Dollar
There has been a rather impressive rally in the dollar today against all of the majors.  A plethora of rationales have spurted up with none being any more convincing than the next.  Some of the reasons that we have been hearing include yield spreads being positive in favor of the dollar, the stock market rallying, early holiday position squaring and the transit strike in NY taking away some of the market's resistance.  The most logical reason for the move was best said by Jamie Coleman of IFR, who indicated that "year end illiquidity combine with staff-shortages in New York today make for untypical dealing conditions." If that is case, then it may seem that US traders have far less conviction in their own currency than their European and Asian counterparts.  As expected, the market completely shrugged off the weaker PPI report.  Producer prices fell 0.7 percent in the month of November with core prices up only 0.1 percent.  Both gasoline and car prices went down 10.7 percent and 0.8 percent respectively.  After the big drop in consumer prices reported last week, the market had already discounted falling headline inflation and the possibility of a contraction in PPI.   Meanwhile, housing starts rose by the most in seven months.  This certainly undermines our warning of a housing market downturn, but then again, just because builders continue to break ground on new homes, doesn't mean consumers are buying them.  New home sales are expected later this week.  After hitting a high in October, home sales are expected to have retraced last month.  Tomorrow, we are expecting the final release of Q3 GDP and personal consumption.  Neither of which is expected to be market moving since they are suppose to only confirm previous figures, but if the transit strike continues, the illiquidity in the markets could certainly deliver another bout of volatility.

Euro
The Euro took an nosedive today falling 1.3 percent against the dollar.  The slide began in the European trading session, right after the release of the weaker Eurozone Trade Balance and industrial orders reports.   The trade surplus has actually evaporated and the balance itself is now at zero for the month of October.  The combination of weaker Euro prices and lower oil prices should help to tip the balance back into a surplus in November.  Meanwhile, industrial production fell for a second consecutive month by 1.1 percent after a 3.6 percent dip the previous month.  The market had actually hoped that orders would rebound after the sharp fall in September.  Sales also took another 0.6 percent nosedive after falling 5.3 percent in September.  The latest numbers indicate that despite recent evidence of a mild recovery in Italy, the recovery is weak at best.  Tomorrow's reports will be a bit more telling of how well the region is performing since we are expecting French consumer spending and Italian consumer confidence.

British Pound
Like the Euro, the British Pound also sold off against the dollar today but unlike the Euro, the sell-off was far less intense thanks to some encouraging data.  The latest BBA mortgage lending report for the month of November showed that mortgage lending increased by the largest amount since July 2004, which is encouraging for the housing market.  The GBP 5.1 billion increase follows an already buoyant GBP 4.3 billion rise in October and suggests that the housing market may be stabilizing.  Meanwhile M4 money supply increased by a more than expected 1.1 percent last month, with an annualized pace of growth of 12.1 percent, the fastest in 15 years.  Taken in conjunction, both of these more encouraging reports should have stifled any optimism for another rate cut in the near future.  The only dark cloud was the public sector net borrowing report which increased by a more than expected 9.3 billion.  The fiscal difficulties that the government is facing are worsening especially following the UK's recent concession to give up some of its rebates.  Soon to be Blair's successor, Gordon Brown has already warned about the health of country's public finances.  With no immediate risk of downgrade, the fiscal health of the UK seems far less concerning to traders, especially since they already have the experience and track record of shrugging off the significance of the US' growing twin deficits.

Japanese Yen
The dollar strengthened across the board against the majors and the Japanese Yen was not spared.  However, against the Euro, the Yen took back yesterday's losses as the Japanese government announced its first budget cut in three years.  Tighter fiscal policy comes at a time when the market also expects some tighter monetary policy in the months to come.  Whether or not the central bank and the government can come to terms and deliver the tightening still remains to be seen, but the fiscal tightening does suggest that even if the government verbally opposes tightening of the economy, they themselves have also reduced some of the extra stimulus that is supporting the current recovery.  Meanwhile China announced today that their economy is actually 17 percent larger than previously reported which makes them the world's sixth largest economy and pushes Italy to seventh place.

Kathy Lien is the Chief Currency Strategist at FXCM.