Dollar Doesnâ�,��"�t Dive
Letâ�,��"�s see. What if you were told at the start of last week that both ISMs (Manufacturing and Non) and the NFPs would all fail to meet expectations. In fact, all three would print materially lower that forecast. Would you expect for the dollar to only lose 20bp for the whole week? Most probably not. The data suggested that the dollar weakness should have been more pronounced and the fact that it was not was the most interesting aspect of trading in the currency market last week. Whatâ�,��"�s keeping the bid in the greenback? Inflationary expectations. This Fridayâ�,��"�s NFPâ�,��"�s, which at 121K, came in much weaker than the pre-release anticipation of 200K did not diminish the possibility of yet another 25bp hike from the Fed in August. Why? Because average hourly earnings jumped from 0.1% to 0.5% suggesting that upward pressure on wages will keep the Fed hawkish despite lackluster employment numbers. Indeed, the night prior to the release the Fedâ�,��"�s Vice Chairman Donald Kohn argued that officials were aware of the risks of over tightening policy but were even more aware of the dangers of the letting inflation get out of control, essentially telegraphing to the market that when it comes to inflation the Fed will err on the side of caution and will continue to hike.

Next week theUS economic calendar is quite limited with only the Trade Balance, Retail Sales and U of M Confidence survey on the schedule. The Trade Balance numbers present a very interesting study of event risk as the number could be extremely bearish if the recent spike in oil pushes the overall deficit towards the $70 Billion mark or relatively benign if US exports, fueled by the lower dollar offset the effects of importing so much crude. Retail Sales will be the other key data point for traders. If they print as expected rising 0.5% the Fed will have more leeway in tightening monetary policy further, having peace of mind that the US consumer remains strong.

How Tough is Trichet?
Jean-Paul Trichet talked tough at the ECB press conference, using the phrase â�,��"extreme vigilanceâ�,� when referring to monetary policy but in the end his rhetoric amounted to nothing more than words as the European Central Bank chose to leave rates unchanged. Mr. Trichet did state that the ECBâ�,��"�s August 3rd meeting, which was originally scheduled to be a phone conference, will now take place in person, indicating that the Central Bank will hike rates by another 25bp to 3.00% at that time. The key question for euro bulls however is whether the ECB will hike yet another 25bp at the August 28th meeting.  As weâ�,��"�ve stated before we doubt the Central Bank will be quite so vigilant given the fragile nature of consumer spending in the Euro-zone as evidenced by poor Retail Sales and Retail PMI numbers this week. Indeed Mr. Trichet himself quashed any speculation about the 50bp hike by stating that the bank makes no ex-ante decisions. It appears that the ECB simply decided to move up the timing of the rate hike to August 3rd rather than August 28th and for now the interest rate differential between the euro and the dollar should remain the same limiting any upside action for the euro.

Next week the EZ calendar is should demonstrate continued strength in the Manufacturing sector with French Industrial and Manufacturing activity expected to rebound from the month prior. The other release worthy of note will be the EZ GDP numbers expected to rise by 0.6% from the 0.3% in Q1. Should the GDP data report materially better, market sentiment could become decidedly euro bullish as currency traders may feel that the ECB will have no choice but to raise another 25bp at the August 28th meeting.

Tankan Helps the Yen
The event that set the tone for yen trading last week happened early Sunday night New York time before most traders even had chance to consult their screens. The release of the quarterly Tankan report  which printed at 20 versus 19 expected removed all doubt that ZIRP would be lifted. The only question was whether the change in monetary policy was to be announced  in July at this weekâ�,��"�s BOJ meeting or delayed until August.  As a result the yen was the best performing major against the dollar rising 46 basis points for the week.  Ideally the BOJ should lift ZIRP at this Thursdayâ�,��"�s meeting, especially if the inflation gauges from the domestic CGPI data show yet another month of increases. However, the latest issue to preoccupy the policy makers is the impact of North Korean missile launch on the Japanese  economy. As we wrote on Friday, â�,��"If the North Korean missile launches should postpone the move by another month it will serve as yet another negative for the yen in a world where the other G-3 members are relentlessly raising rates.â�,�

In addition to the inflation data yen traders will be watching the Eco Watcherâ�,��"�s survey to confirm that the Japanese consumer sentiment continues to be strong. The report is expected to remain above the 50 boom bust level albeit off the highs of the year. However, the key event on the Japanese economic calendar will undoubtedly be the BOJ Monetary Policy meeting. Should the Central Bank choose to assert its independence and raise rates despite the lingering implications of the Fukui scandal and the threat of additional North Korean launches, the yen is likely to strengthen as the market will finally begin to understand that the salad days of the carry trade are finally over.

Pound Mixed as Usual
Nothing new under the sun was the essential message for the UK currency markets as the BOE kept rates unchanged for the seventh consecutive month while Manufacturing Production beat expectations but was offset by the miss in Industrial Production. The pound continues to mark time, trading primarily off dollar news with the weak NFP number, fueling yet another short covering rally to the 1.8500 level. The unitâ�,��"�s sole source of strength is the continued M&A activity in UK capital markets, but that sort of dynamic does not lend itself to long term appreciation. Indeed, Cable continued to lose ground on the crosses as the euro reached a high of 6960 on divergent interest rate expectations.

Next week promises to be much of the same with most economic data expected to show only mild improvement from the month prior. One possible expectation could come at the start of the week when PPI data is released. If PPI input costs continue to rise, pressure may build on the BOE to reconsider its neutral stance. However, with the BOE standing still while the rest of the majors central banks are aggressively hiking the pound continues to be the weakest of the pack.

Swiss Fundamentals Are Gold
Where the Euro-Zone goes, so does Switzerland - at least in terms of manufacturing growth.   The first of two release scheduled to print last week, the SVME measure of factory activity bulked up to a 64.0 read, besting last monthâ�,��"�s figure and matching the marketâ�,��"�s consensus.  The market moving affect that this indicator was capable of was definitely tempered this month however since an atmosphere of optimism was already surrounding it given the related figures in neighboring European nations.  Euro-zone manufacturing growth at a six-year high and German business confidence at a 15-year record pace was already expected to spill over to Switzerland.

The other scheduled fundamental statement out of the diminutive nation, the unemployment rate for June, put another positive spin on the Swiss unit.  Continuing its steady pace of contractions, the jobless rate adjusted for seasonal swings dipped to 3.3%.  This three year low proves to be both a cause and catalyst for economic growth.  Firms have been forced to boost their ranks as demand from countries like Germany and China, the latter of which is expecting 10% GDP growth, has brought many to face capacity restraints.  On the other side of the equation, the boost in employment is expected to stabilize domestic demand which could take over for exports should the breaks be thrown on global demand.  Officials have already made known their high hopes for burgeoning domestic spending.  The SNB predicts growth in 2006 will top 2.5%, while the government has cast an official 2.7% forecast.

Looking to the week ahead, there is little on the Swissieâ�,��"�s plate except for the Producer and Import Price Index indicator, whose potential release ranges from the 14th to the 20th.  Despite this lack of data flow, the franc will continue to offer the currency market the hedge for what ails most fears.  Dollar sentiment remains on the fritz and the market is looking for any indication that the Fed will stop in August.  Also geopolitical tensions like that in Iran and North Korea arenâ�,��"�t likely to go away anytime soon.  With that in mind traders are likely to find some piece of mind by placing their money in francs and gold.

Boris Schlossberg is a Senior Currency Strategist at FXCM.