• Asian Central Bank Buying, Stronger Trade Data Fuels Dollar's Rise
• Euro Slides on Trichet's Choice of “Pragmatic” over Vigilant
• BoE and ECB Both Leave Interest Rates Unchanged

US Dollar
Dollar bulls are cheering as the greenback strengthened against all of the major currency pairs today.  At first glance it seems that the dollar has rallied because of stronger US economic data and a less hawkish ECB President, however, these are not the only reasons.  Interestingly enough, many interbank traders are reporting that the central banks of South Korea, Malaysia, Taiwan and Singapore have all bought US dollars today.  Although none of these central banks confirm intervention, after Thailand's intervention last week, it is not surprising that other Asian central banks have also become concerned about their currency's recent appreciation against the dollar.  This goes to show the difficult decision that Asian central banks are facing.  First off, they need to gradually diversify out of dollars to properly manage their increasing trade with other countries while at the same time, they need to make sure that their currency does not appreciate too much against the dollar that they risk hurting their export sector.  Although we cannot gauge how much intervention was made, we do know that these banks tend to have deep pockets.  Of course, today's economic data certainly played a role in boosting the dollar. Jobless claims increased from 292k to 309k, which is 6k less than the market's forecast. Despite the smaller non-farm payrolls reported last week, the labor market seems to be off to a good start in 2006.  The trade deficit for the month of November narrowed from -$68.1 billion to -$64.2 billion.  This was a nicer rebound than the market was initially anticipating, thanks to a record level of exports and a fall in imports.  Many analysts however are attributing the improvement to the lower value of oil prices which is a factor that could reverse itself in the following months as oil prices move back above $60 a barrel.  Import prices also fell 0.2 percent in the month of December, which takes away some of the market's immediate inflation pressures.  Meanwhile the monthly Federal budget surplus also jumped higher from negative $2.9 billion to positive $11.0 billion, helping to allusive some of the market's twin deficit concerns.  Should tomorrow's retail sales and producer price figures also come in positive, riding off the coattails of today's momentum, we could see the EUR/USD back below 1.20. 

Euro
Part of the reason why the dollar rallied so much today was because of US data, but the reason why the Euro was the biggest percentage loser against the dollar today had to do with the European Central Bank President's less than hawkish comments.  Although the market had not expected the ECB to raise interest rates, the recent trend of stronger economic data did compel most traders to expect hawkish comments from the ECB.  However once they realized that he left out the word “vigilant” from his comments, they sent the EUR/USD on a nosedive.  As we have mentioned in many prior instances, this is an expectations market and today, the market had “expected” Trichet to at bare minimum, match the comments he made following the December monetary policy meeting.  Instead to the market's dismay, he said that the ECB will remain pragmatic.  According to Webster dictionary, to be pragmatic means to be “practical” and to be vigilant means to be “alertly watchful.”  Therefore, it seems that the hawkish central banker has become a bit less hawkish.  The timing is quite surprising since as recently as January 9th, Trichet was quoted saying that central banks need to be “vigilant” with inflation and in late December he said that when dealing with inflation, “prevention is better than a cure.”  His shift in stance probably has to do with his outlook for growth risks and concern about the rise in the Euro.

British Pound
Like the Euro, the British pound also lost ground against the dollar.  Unlike the Euro however, the move was far smaller.  As expected, the Bank of England left interest rates unchanged at 4.50 percent.  Perhaps to the benefit of sterling bulls, the BoE does not make any comments when they leave monetary policy unchanged.  Data was also positive for the pound.  Industrial production increased 0.6 percent during the month of November while manufacturing production increased 0.4 percent.  Both were in line with expectations and suggest that the manufacturing sector may be showing gradual signs of recovery.  However, before getting too excited, the sector still requires further observation since November's rise only covered half of the previous month's decline.  Meanwhile, the Financial Times has a great article on UK productivity that is worth reading.  Their conclusion is that productivity has been overlooked and could very well be one of the factors contributing to Britain's current economic weakness. 

Japanese Yen
After seven consecutive trading session of losses, the dollar has finally managed to rally, albeit modestly against the Japanese Yen.  Comments continue to come from various members of the Japanese government.  Ministry of Finance members Hosokawa and Abe both expressed concern about the fluctuations in the Yen and that they are watching the currency's moves closely.  The possibility of Asian central bank buying has helped to spur gains, but otherwise trading in USD/JPY remains very quiet.  The recent strength in the Japanese Yen reduces the likelihood that the Bank of Japan will be able to tighten monetary policy anytime soon.  Yen strength hurts the export sector, which filters into overall economic growth.  Therefore, for the time being, the Yen still remains one of the market's preferred funding currencies for carry trades.  If this is really the case, then USD/IJPY could very well find support near current levels.