• Lack of Data Keeps Dollar Weakness Limited
• Euro Weakens on Softer Economic Data
• Yen Soars on Speculation that BoJ Could Drop ZIRP

US Dollar
Today has been a rather quiet day in the market, which gave some of the major currencies a chance to recover against the US dollar.  The recovery in the Euro was rather shallow while the Japanese Yen was able to rack up some nice gains.  The Canadian dollar however continued to lose strength, as it slid against the greenback for the fifth consecutive day.  Despite the cooler weather here in the Northeast and still existing geopolitical tensions with Iran, oil prices are softer, trading back below the $65 a barrel mark.  Losses in the dollar however remain rather limited as the market continues to maintain a bullish bias.  Like today, there is nothing of consequence in tomorrow's US economic calendar that could shift the market's direction.  In fact, with the market so focused on the possibility of 5.00 percent rates, it seems that even a strong trade balance number due out on Friday could not stifle the resolve of dollar bulls.  Yet as we watch the dollar rally, we wonder how much longer it can last.  It is irrefutable that the Federal Reserve will stop raising interest rates sometime this year and at that time, dollar bulls could run out of arguments to back their rally.   We will probably have to look ahead to next week's testimony to Congress by the new Federal Reserve Chairman Ben Bernanke (on February 15) for clearer direction.  This will be one of the first times that we will get chance to hear about where the new Fed Chairman stands on monetary policy.  If you recall, it wasn't too long ago that he said that there will no major changes in policy.  Yet popularly known as an inflation dove, Bernanke could very well move closer to a neutral policy faster than we would think, but until February 15, this is nothing more than a guessing game.  The risks that the US economy faces still exist, but there are many who also believe that growth could pick up over the next few months. 

Euro
The rally in the Euro today was so shallow that you could basically call the day's move unchanged.  Weaker economic data continues to pour in from the Eurozone.  German industrial production fell 0.5 percent in the month of December compared to the market's forecast for a 0.7 percent rise.  This brought the annualized pace of growth down from 5.0 percent to 3.5 percent.  This follows the weaker factory orders, retail PMI, unemployment and consumer spending data that we have received over the past two weeks.  On top of that the preliminary inflation numbers received for the month of January were also softer than expected.  This certainly spells bad news for Eurozone growth, but should be unsurprising to our readers as we have warned that the Euro's rally from 1.1650 in November to 1.2330 in January would be disastrous for growth.  Now that we are back at 1.1970, some of the stimulus that evaporated when the Euro rallied is returning to the market and as such if we remain at current levels, the February data could be more positive.  Perhaps this is what Trichet was alluding to when he reaffirmed the central bank's hawkish bias last week.  Meanwhile helping the Franc was news that the Swiss unemployment rate dropped from 3.7 percent to 3.6 percent last month.  We also want to point out an incredibly interesting comment made in today's Sovereign Society Offshore A-letter.  They cited a Wall Street Journal article released yesterday that talked about how the pressure on Switzerland to relax some of their bank secrecy laws has drained "billions from Switzerland" to the benefit of Asian countries like Singapore.    According to the report, the little nation has "beefed up account secrecy protections, has changed trust laws and has begun allowing foreigners who meet minimum wealth requirements to purchase land and become residents."  Top that off with English as one of the primary languages spoken in Singapore and you have another reason why money is pouring into the Asian region. 

British Pound
Unlike the Euro, the British Pound was unable to rebound against the US dollar and instead, it lost strength for the third consecutive day.  The pound suffered greatly after news that the BRC retail sales index hit a 11 year low.  This suggests that we will not be seeing any significant pick up in consumer spending.  Going into Thursday's monetary policy meeting, the market is still looking for another member to join Steve Nickell in voting in favor of lowering interest rates once again.  However, we will not know the details of the vote until a few weeks later.  In the meantime, the British pound's performance highlights how interest rate expectations can play a major role in currency fluctuations.  Previously, when we saw dovish comments from the ECB and more neutral comments from the BoE, the Euro underperformed the British pound.  Over the past week, the more hawkish comments from the ECB and various newspaper articles hinting to the possibility that the BoE could still lower interest rates has helped the Euro regain its dominance over the pound. 

Japanese Yen
The big mover of the day was by far the Japanese Yen.  The Yen soared across the board against all of the major currencies thanks to an advisory newsletter article suggesting that the Bank of Japan could end its zero interest rate policy relatively soon.  This number one fixation of the market continues to jostle the Japanese Yen.  Given the debate between the Bank of Japan and the Japanese government, it seems too abrupt to rally the Yen simply on comments from an advisory newsletter (albeit a rather respected newsletter) even though the government's stance is clear.  Many analysts on the street are now aiming for a change in interest rates at the April 28 meeting.  At best, we will probably see a shift in the votes with more members of the BoJ voting in favor of changing the current account balance at this week's meeting.

Kathy Lien is the Chief Currency Strategist at FXCM.