US Dollar
With a heavy economic calendar today, we had said the country that doled out the biggest disappointments would be the dayââ,¬â"¢s biggest loser.  Even though the outlook portion of the German ZEW survey hit a 13 year low and GDP fell short of expectations, headline US producer prices matched the biggest monthly drop on record while core prices fell by the largest amount in 13 years.  Retail sales also disappointed significantly with major revisions made to the September data.  The double dose of negative readings in the US raises the question of whether the US Federal Reserve is being overly aggressive with monetary policy by keeping interest rates at a 5 year high for too long.  Federal Reserve Presidents remain persistently hawkish by warning about the upside inflation risks despite the sharp drop in producer prices. This trend suggests that we could see a more hawkish tone in tomorrowââ,¬â"¢s FOMC minutes. However the more aggressive they are in the face of weaker economic data, the greater the possibility of a Fed induced recession. The housing market is already seeing major signs of weakness and it is also affecting other housing related sectors.  In todayââ,¬â"¢s retail sales report, furniture sales fell for 2 months in a row along with building materials.  Today's data indicates that the US consumer is buckling which could push the Fed over the cliff especially with exceptionally weak inflation numbers. If they are forced to cut interest rates to stimulate the economy later on, it would not be a one off reduction but instead will be the beginning of a brand new easing cycle.  For the time being, traders could be holding off major dollar short positions until Thursday, when we see the release of consumer prices, which tends to be the more important inflation indicator.  If there is also a sharp slide in CPI, then we have major problems as the market will completely discount the validity of any further hawkish comments by the Federal Reserve. 

Euro and Swiss Franc
Even though weak US data has pushed the Euro higher, a quick look at the charts will reveal that the currency has actually had a very tough time rallying.  For the past 3 trading days, the EUR/USD reversed most if not all of its earlier gains.  It seems that someone has a vested interest in making sure that the Euroââ,¬â"¢s rally does not become overextended and we would not be surprised if it involved European governments.  As an export dependent region, a strong Euro is damaging to the economy, especially if the ECB plans on raising interest rates again in December.  Both serve to tighten the already fragile economy, which saw a drop in third quarter GDP from 0.7 to 0.6 percent.  The Economic Sentiment component of the German ZEW survey also dropped from -24.5 to -28.5, a 13 year low.  Even though analysts were more optimistic about current conditions, the prospect of another rate hike and a VAT tax increase next year has the group siding with slower rather than stronger growth.  The real catalyst however for the intraday reversal in the EUR/USD were comments from French Prime Minister Villepin who called for collaboration on dealing with the Euroââ,¬â"¢s strength as it poses a risk for all export dependent industries.  Although the market reacted on these comments, we doubt that it really has that much punch since the ECB are the ones that control monetary policy and Garganas was on the wires again this morning, stressing the central bankââ,¬â"¢s need to exercise strong vigilance.  Individual European governments always kick and scream when the Euro is strong, but only comments by ECB President Trichet actually manages to cause a major reversal in the EUR/USD. 

British Pound
Unlike its peers, broad dollar weakness was not enough to drive the British pound higher.  With the much awaited November inflation report due out tomorrow, the market is questioning whether the Bank of England will actually retain its earlier hawkishness.  Softer consumer price figures today followed weak producer numbers yesterday.  CPI rose by a modest 0.2 percent in the month of October, keeping the annualized pace of growth unchanged at 2.4 percent while core prices also stayed steady at 1.4 percent.  The market was originally pricing in another quarter point rate hike by the first quarter of 2007 and todayââ,¬â"¢s price action reflects a shift away from that expectation.  We do want to point out that even though CPI and PPI came out weaker, the retail price index which is an older measure of the most basic retail goods increased to the highest level since June 1998.  This suggests that inflationary pressures in other parts of the economy may still be prevalent and if so, would validate the BoEââ,¬â"¢s most recent rate hike.

Japanese Yen
The Japanese Yen is stronger across the board today thanks to solid GDP numbers.  Growth accelerated by 0.5 percent in the third quarter, bringing the annualized pace up to 2.0 percent.  This is the seventh straight month of higher quarterly GDP growth, which suggests that if things continue this way, we could see an interest rate hike by the Bank of Japan early next year.  The current weakness of the Japanese Yen only provides an additional stimulus to the economy and we expect incoming economic data to reflect that.  The Bank of Japan begins their monetary policy meeting tonight.  No rate changes are expected and Fukui should be reiterating his recently hawkish stance.  In the meantime, short yen carry trades continue to face major risks. 

Commodity Currencies (CAD, AUD, NZD)
The Australian and New Zealand dollars are stronger against the greenback thanks to solid economic data.  New Zealand reported very strong retail sales.  Originally expected to drop by 0.1 percent, sales increased by 1.2 percent in the month of September.  On a quarterly basis, retail sales also rose by a stronger than expected 1.0 percent.  The data suggests that the economy is not doing as poorly as people may think and consumers are continuing to spend despite the damaging impact of the strong kiwi on the export sector.  In Australia, even though the NAB business confidence index remained unchanged, business conditions accelerated and the wholesale / retail sector reported strong gains.  There was nothing out of Canada today although manufacturing orders and shipment data are due for release tomorrow.  The drop in energy prices and the strong Canadian dollar should have hurt orders which may explain why the Canadian dollar is softer today. 

Kathy Lien is the Chief Currency Strategist at FXCM.