• Lower Oil Supplies Weigh on Dollar
• ECB and BoE Expected to Leave Interest Rates Unchanged
• Records Galore - UK Trade Deficit Disappoints, Chinese Trade Surplus Triples

US Dollar
For once, we are seeing a bit of consensus price action in the dollar.  Picking up from where it left off at the beginning of the year, the dollar has weakened across the board.  The economic calendar is fairly barren today with the release of only weekly data.  Mortgage applications for the week ending January 6th increased a seasonally adjusted 9.9 percent.  This is the first increase in applications that we have seen in five weeks.  The improvement was most likely attributed to the fall in mortgage rates.  The relatively subdued action in the far end of the curve has helped keep the growth in mortgage rates relatively tame.  The 30-year fixed rate mortgage rate decreased from 6.15 percent to 6.08 percent, which is also the lowest rate seen since October.  Although this report, though volatile, should have been mildly dollar positive, the dip in inventories reported by the Energy Department offset any bullish momentum.  Crude prices have ticked higher once again as lower supplies come at a time when there is growing tension in Iran, Venezuela and Russia.  Tomorrow, we will finally receive some meaningful US data.  The trade deficit for the month of November is expected to shrink from $68.9 billion to $65.4 billion thanks to a 10 percent slide in crude prices during the same month.  With triple digit net foreign purchases of US securities in the last 2 months, worry about funding the deficit will be shoved onto the sidelines for the time being.   In all likelihood, the stronger report will be taken quite positively by the market.  The risk for another record high trade deficit seems unlikely in November, but we should not forget that even if the deficit does improve, funding of the deficit is becoming a greater concern with talk of reserve diversification throughout Asia.

Euro
After two days of losses, the EUR/USD has resumed its rally once again as the market waits patiently for tomorrow's ECB rate decision.  Although no changes are expected from the ECB, with the economy showing clear signs of improvements, ECB President Trichet could very well make some new hawkish comments.  However we do want to point out that with the rally exhausting below recent highs, should Trichet fail to deliver hawkish enough comments to satisfy the market, the Euro could take a slide back below 1.2100. The only piece of data released from the Eurozone today was the French trade balance.  The deficit increased from EUR 2.4 billion to EUR 3.1 billion due to a rise in both imports and exports. Despite the rise in the trade balance however, the outlook for growth is not comprised.  Just look across the Atlantic to the US, where the trade deficit has continued to grow and yet, there have been plenty of analysts who expect slower, but still robust growth.  Meanwhile geopolitical risks remains a concern around the world thanks to the latest comments from the President of Iran who said that he is not afraid of the global superpowers or their "noise." 

British Pound
You could never tell that the biggest news today was from the UK by looking at the British pound's unchanged price quote against the dollar.  However the UK trade deficit came in much wider than expected, increasing to a record high from - GBP 5.05 billion to - GBP 5.96 billion.  The market had actually expected the deficit to contract to - GBP 4.9 billion.  Part of the increase has been due to fact that the UK remained a net oil importer for the fifth consecutive month while exports to countries outside of the European Union suffered tremendously.  Although the Bank of England will not view this change positively, it will probably have a limited impact on their decision to keep rates unchanged once again.  Unlike the ECB, the BoE does not issue a statement or make comments on the economy when they make no changes to their monetary policy.  Right now, the UK is yielding 25bp more than the US.  However if the BoE stands pat and the Federal Reserve raises rates at the end of this month, the yield advantage of the pound over the dollar would be zero which means that going forward, the outlook for rates then becomes negative. Hit by a bit of nostalgia - it seemed as if it was only yesterday that the UK was yielding 325bp more than the US (but in reality, that was a year and a half ago). 

Japanese Yen
The dollar has now weakened against the Japanese Yen for the seventh consecutive trading session.  China continues to grab headlines as they posted a new record trade surplus.  In 2005, their trade surplus more than tripled to $102 billion to the envy of other export dependent nations. Despite such rapid growth, there are many who still believe that the trade surplus could grow even more this year.  Therefore even though China has downplayed their recent comments about selling dollars, their growth will make further revaluation an even bigger likelihood.  At this point it is inevitable that we will see another major announcement related to currency flexibility by the Chinese government this year.  The stronger Chinese data has helped to bolster the Japanese Yen, which tends to be seen as the general barometer for Asian strength.

Kathy Lien is the Chief Currency Strategist at FXCM.