• Dollar Calm After Better Than Expected Chicago PMI
• Bleak UK Confidence Puts Spending Growth In Peril
• Yen Sees Little Action Despite PMI's Rise To Two-Year High

US Dollar
The dollar managed to hold onto its gains from yesterday afternoon's brief rally following this morning's mixed bag of data. Weekly jobless claims data showed that both initial and continuing claims both rose to higher-than-expected figures of 322K and 2,715K, respectively. Meanwhile, the Conference Board's Help Wanted Index report gave further evidence that the US labor market was softening. Although job ads in newspapers increased slightly, online job ads were down over 9% in November. Following yesterday's news of a recent drop in mortgage applications, this morning's existing home sales report from the National Association of Realtors corroborated the sustained slowdown in the housing market with a drop in the annual sales rate to an eight-month low of 6.97 million units. The last piece of news for the morning, which was also the only bit of good news, was the better-than-expected figure in the Chicago Business Barometer for December. Economists had expected the index to drop to 60.0, but it remained largely unchanged at 61.5, down from 61.7. The report showed that after last month's drop in new order growth, backlogs were pared down drastically to keep production growth fairly stable while employment even ticked ahead slightly. In addition, December's rebound in new orders should keep factories chugging along in January.  Despite this solid news from Midwest manufacturers, the yield curve was still pushed to an inverted state today following this morning's Treasury auction of 2-year notes. With growth in labor and housing subsiding, bond yields are expressing the market's expectation of Fed rate hikes to stop shortly after Greenspan leaves office in January. As several other central banks continue to raise rates, US interest rate differentials will shrink, causing the dollar to possibly lose its strength as worrisome topics such as the current account deficit resurface. As we've spoken about several times before, historic data shows a pattern of the greenback weakening sharply against the euro during the last few months of the year. Given the ominous situation that's currently shaping up, it seems as though we may experience a delayed dollar depreciation coming in the first half of 2006.

Euro
The euro moved marginally lower against most of the majors today as the region's M3 money supply growth for November came in below estimates of 8.1% at 7.6% year-on-year.  This is still far above the ECB's stated inflationary threshold of 4.5%. With M3 growth being one of the ECB's two pillars of interest rate strategy, the other being economic and financial developments, this latest figure seems to still support upcoming rate hikes. However, bear in mind that there is good reason to believe that this pillar may be largely ignored by the ECB. The Fed recently renounced the use of this indicator as its importance has been “diminishing greatly”. In addition, past data shows that annual Eurozone M3 growth has been above 4.5% since June 2001, indicating that this part of the bank's analysis should have suggested rate hikes. Meanwhile, interest rates have actually been cut several times since then from 4.50% to 2.00% before the rate hike which took place just this month. Evidently, the bank has been placing greater emphasis on the second pillar of their policy-making strategy and the key to the next rate hike will actually lie in data representative of economic growth such as the upcoming manufacturing PMI survey results. 

British Pound  
This morning's news of the lowest UK consumer confidence in two and a half years elicited barely a flinch from the pound as the currency even managed to end the day higher against most of the majors, including the dollar. The index, published for the European Commission by market research group GfK, fell from -8 to -9 while economists had expected it to rise to -6. The results did not reveal an improvement in any of the surveyed areas while particular weakness was found in consumers' outlook of the climate for major purchases. With the unemployment rate up to 4.9%, nearly a two-year high, and housing price declines creating the perception of lower wealth, it seems that the recent recovery in consumer spending may not last. Retail sales data had taken a turn for the better in several of the latest reports, but much of the progress may be attributed to the deep discounts being offered by businesses after sales have been anemic for so long. Today's news certainly signals that the economy may be veering deeper into the trough of the business cycle rather than making a sustainable recovery.

Japanese Yen
Light trading left the yen fixated in a 32-pip range against the dollar since before yesterday's close of the New York trading session. Even news of the Nomura/JMMA Japanese manufacturing PMI reaching a two-year high failed to move the pair. The index was boosted by a strong upturn in export orders while output and domestic orders both remained strong. Being a leading indicator for overall economic growth, this increase bodes well for the country's fourth and first quarter GDP numbers. On the other hand, it seems that inflation is still being held down as the survey's index of output prices stayed below the expansionary threshold for the second month in a row. Competitive pressures and building warehouse inventories are preventing companies from passing higher costs onto consumers, which will only further delay the country's foray back into a state of positive consumer price inflation.

Kathy Lien is the Chief Currency Strategist at FXCM.