• Dollar Sells Off as Traders Fear Weak Data Means More to Come
• Good Data Bolsters Euro Ahead of ECB Meeting
• Yen Extends Gains as Carry Trades Unwind

US Dollar
Broad dollar weakness was the overwhelming theme in the markets today as traders continue to come to the realization that the Federal Reserve is nearing the end of its tightening cycle.  GDP was revised higher to 1.6 percent for the fourth quarter, which was right in line with expectations. Personal consumption growth was slightly weaker, but that was offset by higher inflation as suggested by the 3.3 percent rise in the GDP price deflator. The market barely budged on the higher number, since deep down, they were expecting a much more explosive upward revision.  What traders did not expect however, were the dismal reports that followed at 10am EST.  The Chicago purchasing managers index slipped down to 54.9 from 58.5, consumer confidence fell from 106.8 to 101.7 while existing home sales slowed from 6.75 million to 6.56 million.  With such strong jobless claims figures over the past few weeks, the market was really positioned for good data this week.  Now the fear is that the poor Chicago PMI number may be foreshadowing an equally dismal ISM number due for release tomorrow.  Also, with confidence falling hard this month, it remains questionable as to whether tomorrow's personal spending release can actually show improvements.  Having started a busy week on a weaker footing, the market has been caught by surprise causing much of last week's dollar bullishness to be erased.  If the anti-dollar rally manages to continue for one more day, we could have the makings of a reversal in the EUR/USD and GBP/USD.  

Euro
The Euro staged a strong rally today thanks to the combination of better than expected European economic data and worse than expected US data.  Over in the Eurozone, German unemployment fell by 5,000, which marked the tenth decline in eleven months.  The ILO unemployment rate also fell from 9.0 percent to 8.8 percent.  By now, it should be no surprise that the German economy is gradually improving with France not trailing all that far behind.  The country's consumer confidence indicator improved from -27 to -24. Producer prices increased more than expected last month which also leads well into the continued inflation concerns going into Thursday central bank meeting.  Even though consumer price inflation fell 0.4 percent last month, the annualized rate of growth increased from 2.2 percent to 2.4 percent, which is solidly above the central bank's 2 percent pain threshold for inflation.  Both consumer and industrial confidence improved this month, which should overall be quite encouraging for Trichet's staff.  There are even some optimists who expect the ECB to raise their inflation forecast for 2007 if things continued to improve.  Given the length of time that the Euro has spent below 1.20, we could see a more hawkish stance by the ECB, which would really be the wild card on Thursday. 

British Pound
Although economic data was somewhat negative for the British pound today, the currency pair managed to be the biggest mover of the day, rallying close to 200 pips against the US dollar.  Strong month end demand and portfolio rebalancing has apparently helped to lead the pound higher as it extends the momentum from the major merger and acquisition announcement made yesterday by Japan's Nippon Sheet Glass for Britian's Pilkington.  The purchase is worth USD$3 billion and marks the glass' industry's biggest deal ever.  Meanwhile offsetting some of the optimism that may have come from yesterday's Hometrack house price report, building society Nationwide reported a 0.2 percent drop in house prices this month, which was far short of the market's 0.4 percent forecast.  However, taking both of the reports into consideration, the argument for stabilization in the UK housing market still holds.  Consumer confidence also ticked lower along with the CBI distributive trades report confirming the market's belief that the Bank of England will still has to lower rates again some time this year, even if they are not in a rush to do so at the moment.  The move in the British pound has been impressive with prices breaking above some key resistance levels.  Therefore we would not be surprised to see an extension move over the next few days. 

Japanese Yen
With the Japanese government giving their blessing to the Bank of Japan to do as they please, the Japanese Yen has rallied for the fifth consecutive day.  Economic data is also supportive of the move with retail sales rising 3.1 percent in January and the manufacturing sector PMI index holding near record highs.  Industrial production fell short of expectations, but still increased 0.3 percent last month.  The market is touting the end of the USD/JPY carry trade story which may be the correct belief in the short term as some speculators unwind their short Yen trades ahead of a possible shift in policy at the Bank of Japan's meeting next week.  However, even if the BoJ did remove quantitative easing, at best, they would only deliver a quarter point rate hike, which still leaves Japan with the lowest interest rate in the world.  According to a Reuters report, Bank of Japan officials have already said that the central bank would keep short term rates low even after scrapping the policy.

Kathy Lien is the Chief Currency Strategist at FXCM.