• Dollar Rally Continues as Fed Official Remains Vigilant
• Market Shrugs off ECB Rate Hike Rumors
• Pound Slides as BoE Votes 8-1 to Leave Rates Unchanged

US Dollar
In another day of thin trading and Day 2 of the New York City Transit Strike, the dollar continued its impressive rally against the majors.  The story remains very much the same * perhaps this may be reflective of the pre holiday relief rally, which is certainly something we are seeing in the stock market today.  This may be particularly true since GDP for the third quarter was revised down from 4.3 percent to 4.1 percent.  The price index and Core PCE were both revised higher, which confirms the inflationary pressures we saw throughout the quarter.  However despite the downward revision, the pace of growth remains solid, which validates the market's rather indifference towards the weaker report.  For the most part, growth and other economic data still support at least one more rate hike early next year.  The one in March remains far more uncertain, especially since it will be the first one that the rookie Fed Chairman Bernanke oversees.  Fed President Lacker who is also a voting member of the FOMC was still solidly hawkish despite the modest shift in tone in the December statement.  He said that the Fed needs to continue to "respond vigorously" to inflation expectations.  He also believes that it is too early to say that the Fed has successfully tackled inflation. Meanwhile, we've got two more days of trading until the holiday week begins.  If the transit strike in NY continues, we expect more thin trading conditions.  Eurozone inflation reports and US durable goods orders could be of mild interest, but as we have seen throughout this week, fundamentals have been an unreliable indicator for price action in the dollar. 

Euro
The Euro sold off for the third consecutive day against the dollar despite stronger French consumer spending numbers.  In the month of November, spending accelerated by 1.1 percent compared to the market's forecast for 0.5 percent growth.  Spending for the month of October was also revised higher from negative 0.6 percent to negative 0.1 percent.  The market also shrugged off rumors of more rate hikes by the European Central Bank.  According to a report released by Reuters citing unnamed sources, the ECB could deliver another rate hike in March and September of next year.  We remain skeptical of such specific dates, especially since no one knows exactly how the global economy will be doing six months from now.  However, if growth does remain stable as the ECB expects, then two or three more rate hikes would be far from surprising.  In fact, in our 2006 forecasts, we predicted that Eurozone interest rates could hit 3-3.25 percent by year end.  Meanwhile we caught an interesting report by our friend Rhonda Staskow at IFRMarkets.  She said that according to the IMF data released today, central banks are indeed shifting their reserves to Euros, albeit quietly.  "The data shows that global forex reserves in 1999 were comprised of 54.7% in USD and 13.8% in the EUR. 2.2% were allocated in sterling with 4.9% in the JPY. In Q3 2005, 44.3% of reserves were in the USD and 16.2% in the EUR with 2.37% in Sterling and 2.4% in JPY." The biggest shifts were in the holdings of India, China and Russia.  We remind our readers that reserve diversification is similar to the current account deficit in that the issue is sure to resurface in the future and our neglect of it will ultimately catch up to us.

British Pound
A more dovish bias at the Bank of England has pressured the British pound for yet another day.  According to the minutes from the latest Monetary Policy meeting, the members of the committee voted 8 to 1 to keep interest rates unchanged at 4.50 percent.  Stephen Nickell was the one dissenting member who called for a quarter point rate cut.  The market did not take this news well since it was expecting a unanimous vote.  Although one member hardly puts us at risk for another rate cut anytime soon, recently dovish comments from Chief Economist Bean and skepticism by Barker could indeed set the stage for a second quarter dose of easing.  However, as the BoE has repeatedly warned, any rate reductions would be made based upon the trend of economic data and so far, data has been very mixed.  The CBI Distributive Realized Sales Balance jumped from -35 to 0, which is the strongest reading since February.  Although the index has been very volatile, pound bulls are sure to have found it comforting. 

Japanese Yen
The Japanese Yen ended the day unchanged against the dollar, but higher against most of the other majors thanks to mildly hawkish minutes from the October 31 and November 17-18 monetary policy meetings.  According to the minutes, two members of the committee, Mizuno and Fukuma voted both times against leaving the current account target balance unchanged.  Instead, they both separately voted in favor of cutting the current account target and even though their two votes had little sway in overall policy, it shows the gradual shift in bias by the members of the central bank. Ultimately, the BoJ will be rooting for an end to their zero interest rate policy next year.  However it remains to be seen whether the government will agree.

Kathy Lien is the Chief Currency Strategist at FXCM.