US Dollar
The US Dollar was under the gun today as economic data was less bullish than expected and news from China surprised markets.  Higher in the morning against most of the majors, the dollar retraced in the afternoon following a previous release of the US trade balance for the month of September.  Falling back from the record $69.9 billion made in the previous month, the shortfall narrowed to $64.3 billion according to the Commerce Department.  Lower energy prices helped the figure along, shrinking the gap the most in almost two years.  However, the gap with China stayed well supported, widening to another record of $23 billion as exports from the US dipped by $4.6 billion.  The shortfall with the Asian nation left some bearish undertones lingering over the greenback as consumer confidence fell back from 15-month highs later in the morning.  However, giving the hardest blow to the US dollar on the day was piercing news on the potential for Chinese reserve diversification.  In line with previous central bank releases, including the likes of Russian and South Korean counters, the Peopleâ�,��"�s Bank of China made suggestions eluding to the potential for reserve diversification out of US dollars.  Already reaching $1 trillion, Chinese reserves are overweight in dollars with US based assets accounting for almost a whopping 72 percent.  The suggestion should not come as a surprise as the market had always retained the idea in the backdrop.  However, what is seemingly forcing the early introduction of such a plan seems to be the outcome of the midterm election.  With the Democratic Party now controlling both sectors of Congress, protectionist measures may be forth coming, along with the usual global jawboning.  In order to pre-empt such scenarios, Chinese officials are electing to quicken the process of further revaluation while reminding the US how much weight the Asian nation holds in the global arena.  Either way, the news will likely continue to weigh on the US dollar in coming days as sentiment grows of a weaker dollar, one that may be dropped by more than just China in the near term.

Euro and Swiss Franc
Overall regional data for the Euro zone was absent on the day with most of the component economies reporting some sort of figure for the month.  However, boosting the underlying currency, other than possible reserve diversification from China, was more hawkish rhetoric by a European Central Bank council member.  Reiterating the sentiment that has persisted over the past couple of months, council member Lorenzo Bini Smaghi stated that monetary policy in the 12 nation euro economy still remained â�,��"too accommodatingâ�,�.  The words alone sparked further speculation of higher interest rates, as it continues the string of commentary that has been recently released by Smaghi and fellow central bankers.  As a result, increasing focus will likely be placed on next weekâ�,��"�s consumer price index for the region.  Expected to stay buoyed, estimates are for an incremental pull back to 1.6 percent, dampening the potential rate hikes.  Subsequently, the Swiss franc advanced to the highest level in almost six weeks as central banker Philipp Hildebrand stated policy maker intent on raising interest rates once again.  Recognizing the importance of inflation, Hildebrand noted that although inflationary pressures may not warrant rate increases at the current moment, central bankers will be attuned to any higher advances in the money supply measure.  Money supply figures are usually referenced inflation as increases in the supply of money foster higher inflationary pressures.

British Pound
Surprise, surprise, the Bank of England raised interest rates 25 basis points to lead the benchmark interest rate higher to 5 percent.  Already priced into the market, the decision was a nonstarter and didnâ�,��"�t even prop up an underlying currency which has appreciated to the highest mark in 16 months.  Instead, the news sparked a mild sell off as the pound sterling dropped the most in six weeks, falling against the euro  but staying relatively supported against the dollar.  On the final decision, speculators made the release a reason to pare back long positions after policy makers noted that although prices and inflation are likely to increase in the near term, they will inevitably â�,��"fall back as energy and import price inflation abate.â�,� Speaking loud and clear to the market, players are now seeing only one more rate hike in the poundâ�,��"�s future, likely coming in the first quarter of 2007.  After that, central bankers are likely to stay put, waiting to see the effects of the rate hikes disseminate into the economy.  Subsequently, adding some lighter sides to the dayâ�,��"�s decline, the HBOS Plc housing report showed further signs of life in the housing sector.  Housing prices increased for a fourth month, advancing by another 1.7 percent in the month.  On an annualized comparison, housing prices are now 8.6 percent higher, supportive of healthy consumer spending.

Japanese Yen
Relatively stable in New York, the Japanese yen had little reason to advance on the day, despite the Chinese announcement.  In the overnight, machine tool orders rose at a 6.8 percent clip, supportive of a solid exporting market.  In addition, further jawboning was issued by the Bank of Japan Governor, Toshihiko Fukui.  Adding to comments earlier in the month and prior, Fukui expressed his desire for gradual increases in interest rates sooner rather than later on, implying potential for a rate increase before the yearend.  Although bullish for the underlying currency, the statements may come too little too late to lift the major as another rate hike is likely priced into the market already.  This leaves very little for the yen to appreciate on and counters what some central bankers have deemed worrisome, a depreciated currency.  A lower valued currency tends to increase import costs, however, keeps Japanese goods competitive globally.  If the yen is set to appreciate in the near future, bulls may have to look deep and wide for any indication economically that the worldâ�,��"�s second largest economy is not lagging behind its competitors.  The sentiment will likely depend on the upcoming gross domestic product report and a whole slew of economic data that is set for release next week.

Commodity Currencies (CAD, AUD, NZD)
Employment data was plentiful on the session for both the New Zealand and Australian economies.  However, both reports were also negative, giving respective currencies some bearish fallout in the North American session.  New Zealand employment contracted for the third quarter, falling by 0.4 percent against expectations of a 0.2 percent increase.  This purported a higher unemployment rate as the overall benchmark worsened from the 3.6 percent in the third quarter to 3.8 percent.  Australian markets didnâ�,��"�t fare any better as the overall employment for the month actually fell by 32K against expectations of a 7.5K gain.  Although the unemployment rate remained stable, the report lends a bearish notion to the commodity currency and its counter as it is suggestive of a slowdown in both countries.  Separately, Canadaâ�,��"�s dollar was little changed following a surplus that narrowed to C$4 billion against expectations of C$4.2 billion.  Although still loonie positive, the news remains bearish as it continues to support a â�,��"slowdownâ�,� notion in the worldâ�,��"�s ninth largest economy.

Kathy Lien is the Chief Currency Strategist at FXCM.