• Even Strong US Data Fails to Keep Dollar Afloat
• Euro Rallies on Hawkish Comments from ECB
• UK GDP In Line With Expectations

US Dollar
Dollar weakness continues to be the predominant theme in the markets as traders shrug off another batch of stronger US economic data.  In fact, strong would probably be an understatement.  Durable goods orders in the month of March surged 6.1 percent with orders excluding transportation rising 2.8 percent. This was three times more than expected and along with that, the figures for the month of February were also revised higher from 2.6 percent to 3.4 percent.  These figures confirm the strong pickup in GDP growth that the market is expecting for the first quarter.  The current forecasts is for GDP growth to accelerate from 1.7 percent to 4.9 percent.  However, durable goods was not the only piece of good news that was released today.  New home sales also jumped 13.8 percent, printing the biggest increase in 13 years.  This follows yesterdayââ,¬â"¢s sharp rise in existing homes sales and at first glance, the report suggests we are still far from a burst in the housing market bubble.  However, cautiousness is warranted by housing market bulls because much of the increase can be attributed to price cuts by builders.  On average, prices are 7.1 percent lower from February and 3.6 percent lower from a year ago. Meanwhile mortgage rates hit the second highest level since 2002, which prompts us to ask once again, how much longer can this last.  Unlike existing homes where price cuts are more bearable by owners since they are coming off of sharp appreciations in the past, price cuts by builders of new homes are less so.  Nonetheless, the strength of these reports cannot be refuted and the fact that the dollar failed to hang on to even a modest rally indicates how deep dollar bearishness has been embedded in the currency markets.  The Treasuryââ,¬â"¢s Beige book report was basically neutral.  The various districts reported tighter labor markets, improving retail sales, but also slower sales in the real estate sector. They also stressed price pressures and the difficulty firms have in passing costs onto consumers, which means that they have been taking the hit themselves.  Given the muted response from these reports, it is even clear that the tone in the market has been set by the G7 and even though moves are getting somewhat overextended, dollar weakness still remains the predominant theme. 

Euro
Wednesday marks the fourth consecutive day of Euro strength.  It is worth noting that we have not seen a move in the EUR/USD last more than five straight days since November.  The latest bout of Euro strength came from broad dollar bearishness, but also hawkish comments from the European Central Bank.  In particular, Gonzalez-Paromo said that the ECB could increase the pace of its rate hikes while Bini-Smaghi added that if the economic recovery strengthens, then the central bank will adjust rates to avoid inflation.   This has raised the question in some minds that a May rate hike may not be completely off the table.  We remain doubtful however since the ECB is not one to deliver surprises.  Meanwhile economic reports released this morning were mostly positive for the Euro.  Industrial orders jumped 2.7 percent in the month of February, bringing the annualized pace of growth to 13.3 percent.  Industrial production was flat for the same month, but the upward revision to the January figure offset the neutral report.  The annualized pace of growth also increased from 3.0 percent to 3.2 percent.  Finally, German consumer confidence as measured by the GfK report rose to 5.5 for the month of May following an upward revision of the indicator to 5.3 last month.  The improved business confidence seems to be having an impact on the general sentiment of consumers and could also act to offset some of the risks facing the export market at the moment.

British Pound
In contrast to the Euro which held onto its strength for yet another day, the British pound weakened against both the dollar and the Euro today.  UK GDP for the first quarter came in right in line with expectations, rising by 0.6 percent, which brought the annualized pace of growth to 2.2 percent from 1.8 percent in the fourth quarter.  Bank of England member Kate Barker was on the radio today clarifying the difficulty that the central bank is facing at the moment.  Economic data has been very mixed, particularly in the consumer sector, but at the same time, even though they have had a limited impact on wages, the fact that energy prices is continuing to move higher still makes it a concern.  Although this comes in contrast to last weekââ,¬â"¢s reports of strong spending and slower consumer price growth, the fact that she is still mentioning them indicates that the central bank is still worried.  One month is hardly a trend and it is clear that they are watching these two subsets of data closely.  Local elections are also scheduled in the UK next week.  The market will be looking to see how well Prime Minister Blairââ,¬â"¢s party does and whether there will be increased pressure for him to step down.

Japanese Yen
There was mixed performance in the Japanese Yen today with weakness against the commodity currencies and strength against most other currencies.  There was no economic data released overnight, but the G7ââ,¬â"¢s harsh words on China and the ECBââ,¬â"¢s follow-up comments that called for more strength in Asian currencies in general should keep losses in the yen limited.  Japan will be heading into the Golden Week of holidays next week, which means that we could see a bit more hedging by Japanese exporters.  This could keep USD/JPY pressured going for the next few days.

Kathy Lien is the Chief Currency Strategist at FXCM.