• Dollar Recovers as It Reaches Exhaustion
• UK Inflation Reaches Yearly Low
• No Changes Yet on Currency Regime from Chinese President Hu

US Dollar
The US dollar regained strength today not because of good economic data, but because of exhaustion.  The dollar has weakened significantly over the past week for many of reasons.  However now that all of the important pieces of data are behind us and no US economic releases are scheduled for tomorrow, dollar bears took the opportunity to take profits ahead of the G7 weekend.  Both the leading indicators and Philly Fed reports released today were weaker than expected.  In fact leading indicators fell for the second month in a row in March and even though the performance of the manufacturing sector improved, it was not enough to change the market's perception that the Federal Reserve is near the end of their tightening cycle.  Bernanke was scheduled to speak today but he refrained from making any mention of the economy or monetary policy, which suggests that he is trying his best not to fall into the same trap as Greenspan did, which is to cause unwarranted volatility in the markets by making any surprise comments.  This may be a good tactic since the market was already caught off guard by the difference in tone between the FOMC statement and the minutes from the same meeting.  Oil and gold prices are both lower today as they also retraced from their own extremely exhausted moves. This pushed the commodity currencies lower and in fact, the day's biggest movers were AUD/USD and NZD/USD, which sold off 1.2 percent and 1.4 percent respectively.  However the most important thing to remember is that themes have not changed.  The Fed is still less aggressive than the market had initially thought and the pressures pushing commodity prices higher namely, inflation fears, Iran and Chinese demand are still here to stay.

Euro
After three straight days of strength that led to 250 pips of gains, the Euro finally let dollar bulls take the lead for once.  Inflation figures were solid with a 0.6 percent rise in consumer prices in the month of March.  The annualized pace of CPI growth slowed slightly from 2.3 percent to 2.2 percent.  However this still remains far above the central bank's 2 percent target which means that it gives them no reason to veer away from their hawkish stance on interest rates.  Italian numbers were mixed with consumer confidence dipping from 109.1 to 106.1, but orders rose a strong 4.3 percent in the month of February.  Sales increased more than expected by 1.9 percent.  So far, recent data still supports another rate hike in June, but it is important to keep in mind that the central is very sensitive to the value of the Euro.  If we continue to fluctuate between the 1.2150-1.2375 range for the next 2 months, then we are on course for a June rate hike.  On the other hand if the Euro breaks above 1.25 and brings the new trading range up to 1.24-1.26, then a June rate hike, though still very likely, may come attached with much more toned down comments from the European Central Bank.   

British Pound
Unlike yesterday, the British pound weakened against both the Euro and the US dollar.  Despite high energy prices, inflation growth in the UK was extremely subdued.  Consumer prices rose 0.2 percent in the month of March, which compares to the market's forecast for 0.4 percent growth.  This brought the annualized pace of CPI growth down to 1.8 percent from 2.0 percent.  Core CPI growth also slowed from a year over year rate of 1.4 percent to 1.3 percent.  The bottom-line is that inflation in the UK fell to the lowest level in 12 months and the annualized inflation rate is now below the Bank of England's 2 percent target.  With yesterday's MPC minutes showing that some members of the policy making committee are concerned with the downside risks to the economy, the latest inflation numbers has raised the speculation that the central bank may be lowering interest rates in the third or fourth quarter of this year.  Although this is still only a small possibility given the stabilization of the housing market, pound traders now have a good reason to be bearish the currency, which once again highlights the divergence in Euro vs. Pound sentiment.  Mortgage lending figures for the month of March was the highest since July of last year, which confirms the improving health of housing market. 

Japanese Yen
Today, the Japanese Yen has rallied against all of the major currencies except for the US dollar.  It is important to mention that over the past week, the Yen's performance against the dollar has been very different from its performance against any of the other currency pairs.  This confirms that it is the dollar's influence that is driving the price action of USD/JPY and not the market's fundamental perception on how the Japanese economy is performing.  The rally in the yen today has been linked to the surprisingly large trade surplus in the month of March. Originally expected to drop quite a bit, the surplus actually increased thanks to strong exports and weaker imports.  Other developments were not as positive for the yen with BoJ Deputy Governor Muto reiterating that the central will probably keep rates near zero for some time until economic conditions improved further.  He also noted the recent volatility in long term rates.  Meanwhile little came out of the Chinese President's visit with the US President today.  Hu reaffirmed that the country will "continue to advance the reform of the renminbi exchange rate," but did not elaborate on how soon they would do so and through which methods, indicating that they are standing firm on their current policy.

Kathy Lien is the Chief Currency Strategist at FXCM.