• Syria's Switch to Euros Does Little to Stifle Resolve of Dollar Bulls
• Ben Holds the Key to Dollar Near Term Fate
• British Pound Weakens as Fall in House Prices Offset Rise in PPI

US Dollar
It almost feels like a holiday today with the US dollar fluctuating within a tight 45 pip trading range against the Euro over the past 24 hours.  The dollar's range against the Japanese Yen and British pound was slightly larger, but even so, most of the action was over before the London close.  With no US economic data scheduled for release today, dollar bulls found a bit of comfort in the hawkish words from Fed President Pianalto.  Repeating last week's comments, she was relatively positive on the economic outlook and suggested that the weak fourth quarter GDP figures on 1/27/06 will most likely be revised higher.  Speeches from the Federal Reserve are the market's major focus this week and in particular, Federal Reserve Chairman Ben Bernanke's semi-annual testimony before Congress on Wednesday and Thursday.  Although Bernanke has pledged "continuity with the policies and policy strategies on the Greenspan Fed," there could be many new changes under his regime.  As a clear speaking book smart former Princeton Economics Professor, Bernanke has been known to be a straight shooter.  It will be interesting to see how Bernanke balances the outlook of the economy with market expectations.  It is no secret that Printing Press Ben is known far more as an inflation dove and in an environment where traders are bumping up their expectations to 5 percent rates, the market has set the bar high.  Therefore what will be most important is Bernanke's view on the risks to the housing market.  With energy prices sliding, the risks that it poses to economic growth are also waning.  If Bernanke sees greater upside risks for both growth and inflation, then dollar bulls have their green light for 5 percent rates.  Alternatively, if his dovish nature gets the best of him, Bernanke could be a bit more conservative, talk about how the outlook is uncertain and risks still exist, which could cause dollar bulls to leave the market dejected.  If so, then we could have a bottom established in the EUR/USD.

Euro
There were two major developments for the Euro today and the currency barely budged, ending the trading session virtually unchanged.  Amidst growing political conflict with the US, Syria has announced that they were switching all of their reserves to Euros from dollars.  Syria has said that they have "billions of dollars."  According to the CIA Factbook, Syria's reserves of foreign exchange and gold as of 2004 are approximately $5 billion.  Compare that to Japan's reserves of $610 billion in the same period and we easily realize why the market shrugged off Syria's announcement.  There have also been rumors today that Iran could switch to Euro reserves as well to protect their foreign assets.  In 2004, Iran had approximately $30 billion foreign reserves, which is considerably more than Syria but far less than Japan and China to be consequential.  What the market should be keeping an eye on instead is Iran's plan to open a new International Oil Bourse which would trade oil in Petroeuros instead of Petrodollars.  As the world's third largest holder of oil reserves, Iran's move could pave the way for other countries to offer oil denominated in Euro's in order to compete with Iran.  Looking ahead, there are a lot of reasons why countries within the Eurozone and Russia would prefer to trade oil in Euros over dollars.  The volatility in the US dollar and the cost of converting currencies could  make Petroeuros particularly attractive.  Of course there are many political barriers that need to be overcome, but oil priced in both dollars and euros appears likely over time.  Although this news should have been positive for the Euro, it was offset by a more pressing concern that the Bird Flu has hit the shores of the European Union.  Italy, France, Greece and Bulgaria have all reported outbreaks in swans or other birds.  For countries that already have huge budget issues, Bird Flu not only means damage to the poultry industry, but also higher costs needed to combat and isolate the outbreak. 

British Pound
After one day of respite, the British pound lost ground against the dollar once again.  Although inflation data was slightly positive with producer input prices rising 1.8 percent (market expected 1.2 percent) and output prices rising 0.4 percent (market expected 0.2 percent), the disappointing house price survey and flat leading indicators report with a downward revision for the prior month stripped the pound of any possible gains.  Data from the UK continues to be mixed, but the market is also treading carefully ahead of the Bank of England's Quarterly Inflation report due on Wednesday. 

Japanese Yen
The dollar is slightly weaker against the Japanese Yen thanks to a larger than expected current account surplus and solid industrial production figures.  Strong investment income helped to boost the current account balance but on the flip side, the trade balance increased less than expected.  The market continues to focus on speculation about when the Bank of Japan will lift its quantitative easing policy.  BoJ Governor Fukui was on the wires again talking about the country's "abnormal" monetary policy framework.  However, governmental pressure continues to keep the central bank's hands tied and in our opinion, a March and even April rate hike could still be unlikely.

Kathy Lien is the Chief Currency Strategist at FXCM.