US Dollar
This morning, President Bush announced that Hank Paulson, the Chairman and CEO of Goldman Sachs, will become the new Treasury Secretary.  Last week, the market was chattering rampantly about the possibility of Snow stepping down but the Bush Administration downplayed the speculation.  Today, the market has been proven right and judging from the price action, traders perceive the new Treasury Secretary to be a dollar negative.  However, of all of the names that circulated around the markets, Paulson was the best pick of the bunch. With low approval ratings, the President really needed a heavy weight to inject some optimism back into the market.  As a well respected Wall Street leader, the hope is that Paulson will not be just the figurehead that Snow was, with limited decision making powers in the government.  The real test will be whether Paulson can push through any meaningful changes in policy.  We are sure that he comes with the intention of bringing changes to the table, but according to an interview with a German paper last year, his focus may be on boosting exports rather than pressuring China to be more competitive. Paulsonââ,¬â"¢s deep ties with China could lead to a more amicable relationship.  The CEO prides himself of having visited China over 70 times in the last 16 years and his company was very much involved in the Bank of China IPO earlier this month. Paulson has a great track record of doubling his staff at Goldman Sachs, boosting profits last year by 24 percent, broadening into China and shifting the companyââ,¬â"¢s main focus from underwriting to trading.  The question will be whether the new Treasury Secretary finds himself bumping heads often with the President or if he can actually becomes a reliable adviser and decision maker.  In terms of policy, although we do not expect Paulson to admit that Administration is really following a weak dollar policy, he may stop paying as much lip service to the nonexistent strong dollar policy.  Paulsonââ,¬â"¢s pro-business, Rubin style pedigree should give the markets much comfort over the longer term, even if on a shorter term basis, he needs a weaker dollar to make the US economy and eventually the US dollar stronger.  His nomination also reduces the likelihood that China will be branded a currency manipulator in the Treasuryââ,¬â"¢s next report. Meanwhile US consumer confidence fell less than expected today from 109.8 in April to 103.2 in May.  More signs of slower economic growth are emerging, pushing the probability of a June rate hike down to 50 percent.  This makes tomorrowââ,¬â"¢s minutes from the May 10 FOMC meeting even more important.  If a good number of the Fed districts report weakening conditions, especially in the labor market, the dollar could come under pressure once again. 

Euro
Today the Euro recuperated nearly all of last weekââ,¬â"¢s losses thanks to broad dollar weakness and stronger Eurozone economic data. Signs of inflation are continuing to emerge, fueling more hawkish sentiment in the European Central Bank.  M3 money supply grew by 8.8 percent last month, compared to a downwardly 8.5 percent the previous month.  The market was forecasting for M3 growth to slow from 8.6 percent to 8.5 percent.  French unemployment figures also came in better, with the number of unemployed people dropping by 39k, bringing the unemployment rate down from 9.5 percent to 9.3 percent.  This follows yesterdayââ,¬â"¢s stronger Italian confidence figures and better Eurozone current account deficit numbers.  Therefore it was not surprising that we heard hawkish comments from ECB Council member Liebscher who reiterated the central bankââ,¬â"¢s general view of strong vigilance towards price pressures.  Compared to the US where disappointing economic data is becoming a new trend, over in the Eurozone, stronger data has become the norm for the time being.  Although we continue to remain cautious as the Euro rallies, it is undeniable that we are on path for an interest rate hike next week. 

British Pound
Although there was no economic data released out of the UK today, the British pound still managed to be the dayââ,¬â"¢s best performing currency pair, rising 1.3 percent against the US dollar.  The only news from the country was comments from the Chief Economist of the Bank of England who warned that higher oil prices and competition from China is squeezing the margins of UK manufacturers.  However he also added that domestic manufacturing is improving as exports rebound.  In the meantime, the market is looking ahead to tomorrowââ,¬â"¢s housing, confidence and CBI distributive trades reports.  With the housing market stabilizing and the economy rebounding in general, all three pieces of economic data are predicted to be positive for the British pound. 

Japanese Yen
Divergent price action in the Japanese Yen is a behavior that we have recently become all too familiar with.  The Yen sold off against every major currency today except for the US dollar, telling us that the dollar component is the primary driver of USD/JPY weakness today while Yen traders in general are mildly disappointed by last nightââ,¬â"¢s economic reports.  Household spending fell more than expected in the month of April while industrial production was  weaker than expected.  Despite a small uptick in the job-to-applicant ratio, the jobless rate remained unchanged at 4.1 percent.  The Japanese Economics Minister attempted to talk up the yen by saying that sharp moves are undesirable, but with USD/JPY back at 112 and EUR/JPY at 144, we are still not in intervention territory.  As for interest rates, a rate hike is also a ways off as the government probably has no interest in fueling even further demand for the Yen at the moment. 

Kathy Lien is the Chief Currency Strategist at FXCM.