• U Of M Confidence The Saving Grace For Dollar Bulls
• Euro Disregards Slower French Spending For Late Session Rally
• Surging Machine Tool Orders Bode Well For Japanese Growth

US Dollar
It was a relatively barren day in the way of scheduled economic releases from the US.  However, the consumer confidence indicator, released by the University of Michigan, gave dollar bulls a positive note to end the week on.  The sentiment index, against expectations of a 92.5 read, reported in at 93.4.  This represented the third consecutive increase in confidence following October's 74.2 number, a 13-year low.  With this current number in place, optimism has returned to pre-Katrina levels and reestablished a basis for rate hike speculation.  Furthermore, the U of M figure has taken some of the sting out of the mass of poor prints in housing, inflation and manufacturing indicators released earlier this week.  Looking back over the whole of this week, the market has reacted rather placidly to what are otherwise moving indicators.  Dollar price action over the past week in the four majors has seen continuations on the range-bound trading from the previous week.  Hesitancy in the FX market is partially coming from the resurgence in the price of oil.  Where as indicators this week seemed to have quieted calls for an interest rate hike at the January 31st FOMC meeting, crude oil making a strong march towards the $70 bbl level lays ground for a potential jump in inflation.  Consumers have escaped much of the burden of growing energy prices this winter as temperatures have remained mild.  However, gas prices are on the rise and a cold snap like Russia has had over this past week could quickly spark levels of inflation near those seen in September.  With these factors in mind; comments from Fed officials like San Francisco Fed President Janet Yellen's statement that, "inflation will continue to be well contained" and "we're sure closer to the end of the road" could prove hasty.  One thing is for sure, the market is winding tighter and tighter and the dollar will pick its direction quickly. 

Euro
A rush of bids ended the day for the Euro, despite a report from INSEE that showed French consumer spending dropped in December and a warning issued from Iran that they were pulling all reserves out of European banks.  Spending in Europe's third largest economy fell at the fastest pace in seven months with a 1.0 percent contraction from November.  As sales of manufactured goods account for nearly 15 percent of gross domestic product, this could indicate a slowdown in fourth quarter economic expansion which is slated for release on February 10th.  Another concern for Euro strength came from comments made by Ebrahim Sheibani, Iran's Central Bank governor, that they were pulling the all reserves from European banks in a pre-emptive measure in advance of threatened sanction from Europe and their allies over Iran's nuclear development program.  Iran, the world's fourth largest crude oil exporter, has been in hot water since it ignored calls from U.N. members to halt its development efforts against claims that they are instead enriching uranium in order to produce a nuclear weapon.  While the withdrawal from reserves does not seem to out of their respective currencies, and therefore not necessarily affecting the currencies that it is held in, it could prove disruptive to Iranian investments in Europe.  Going forward, expect Iran to be one of the hot issues in the currency market.

British Pound
The combination of dovish Fed official comments and positive UK data gave the pound a strong push today, with the currency rising over 100 pips. After yesterday's disconcerting economic report from the BCC, today's better than expected retail sales report was just what the pound needed to pull it out of yesterday's rut. Retail sales grew for the fifth month in a row in December by 0.4 percent from November, or 4.0 percent from a year ago. This was one of best holiday shopping seasons in recent years. However, the dismal labor market situation indicates that retailers may not be out of the woods yet because things may well make a turn for the worse again. However, for the time being, this report does lend support to the argument of the Bank of England not cutting rates again in the next few meetings. Also related to this is the recent run-up in energy prices, with oil hitting a high today of $68.80 per barrel, it seems that the threat of inflation is creeping up again, which may prevent the Bank of England from cutting rates any further in the upcoming months.

Japanese Yen
With a few pieces of relatively positive news, the Japanese yen managed a small recovery of this week's losses, hitting 114.95 against the dollar at its strongest before closing at 115.24. The machine tool orders data released overnight showed an annual growth rate of 10.2 percent in December with much of the year's increase being driven by activity in the automobile sector. As a measure of business investment, this number is certainly very encouraging as the country continues on its economic recovery and also gives hope for the fourth quarter GDP figures, to be released on February 16th. The latest Bank of Japan Monetary Policy Committee meeting also concluded today with, again, no change to policy. However, the economic assessment published concurrently in the Bank's View contained some more positive wording than last month's report. The most notable change is the addition of a paragraph describing that the steady rise of both domestic and external demand is causing the Bank to expect growth to deviate to the upside from the outlook published in October. Domestic corporate goods prices are now also expected to move higher than previously forecast while consumer prices will at least be in line with expectations. Even the government, which has quarreled with the central bank in recent months on the direction of monetary policy, has recognized that there are signs of fading deflation. Finance Minister Sadakazu Tanigaki said in a speech today that the government and central bank will "cooperate and strengthen [their] policy efforts to ensure deflation is beaten." Both the yen and the benchmark interest rate certainly stand to benefit from such an alliance.

Kathy Lien is the Chief Currency Strategist at FXCM.