US Dollar
A surprisingly strong Empire State manufacturing survey and hawkish FOMC minutes has helped the US dollar climb higher against everything except for the Euro. Although manufacturing conditions in the Empire State are hardly reflective of manufacturing conditions nationwide, the fact that the index rose to 26.7 in November from 22.9 when it was originally predicted to drop is very encouraging.  However traders need to be very cautious of reading too much into the number because the Empire state index has increased for 3 straight months, while the Philly Fed, Chicago PMI and ISM index have not.  The Philadelphia Fed index, which is due for release tomorrow tends to be a much more reliable leading indicator for manufacturing conditions nationwide, so before getting too excited about the recent manufacturing sector weakness reaching a potential bottom, we would also need to see similar strength in the Philly Fed. As for the FOMC minutes, it appears the view that inflation is higher than desired is one that is held by nearly all Fed Presidents.  Although they acknowledge that there are still downside risks to economic activity, they appear to be a bit more comfortable with the growth outlook, especially as the labor market remains tight. Clearly inflation was more important than growth to the Federal Reserve last month, but we think that things will be changing going into the next meeting.  We have already seen weaker consumer spending and signs of softer inflationary pressures.  Consumer prices tomorrow will be deciding factor of whether the EUR/USD will have what takes to make a run for 1.30.  Yesterdayââ,¬â"¢s producer prices suggest that CPI could also have fallen significantly in the month of October.  However, the key number to watch will be core prices because that is the Fedââ,¬â"¢s top concern.  If annualized CPI does not drop from its present rate of 2.9 percent, it will still be holding at 10 year highs, which would give the Fedââ,¬â"¢s inflation concerns validity.

Euro and Swiss Franc
The Euro was the only currency that managed to accelerate against the US dollar today.  Despite weaker industrial production figures, central bank demand continued to keep the currency propped.  The Euro broke down yesterday when the French Prime Minister called for collaboration on dealing with the Euro level.  The German governmentââ,¬â"¢s unwillingness to participate threw cold water on that attempt.  The Eurozoneââ,¬â"¢s largest member believes that the ECBââ,¬â"¢s independence should be respected and they said that they have no problem with the present level of the Euro. Unlike Japan, the ECB has a far greater sway on the markets than the heads of the European governments.  With only a few weeks to go until another interest rate hike, the market is shrugging off any weak Eurozone economic data.  Industrial production in the month of September dropped by a larger than expected 1.0 percent, led by weakness in France.  The Eurozone is also expected to release consumer price data tomorrow.  Even though the ECB is adamant about raising rates, the annualized CPI number is predicted to be lower than their 2.0 percent target.  Meanwhile the Swiss Franc is weaker against the Euro today after SNB President Roth acknowledged the reduced safe haven bonus of the Swiss Franc after the introduction of the Euro.

British Pound
The British pound suffered greatly today against both the US dollar and Euro as the double blow of a more dovish November Inflation report and weaker employment data sent 2007 rate hike expectations down the tube.  After a barrage of weak consumer and producer price data, the Bank of England was forced to downgrade their inflation outlook.  They were more optimistic about growth but that may not be enough to warrant another first quarter interest rate hike.   Traders have been piling into the long GBP trade after the previous batch of stronger economic data and hawkish comments from the BoE.  The market was pricing in a more than 70 percent probability of 5.25 percent rates by February, which would put the UK on par with the US.  The latest data however makes it far more likely that rates will remain on hold through the first quarter of next year.  Tomorrowââ,¬â"¢s retail sales data should help the British pound recover some of its recent losses as the strong housing market helped to keep consumers spending healthy.

Japanese Yen
Disappointing tertiary activity data and a tsunami warning has sent the Japanese Yen lower.  Despite yesterdayââ,¬â"¢s firmer GDP report, there are still many parts of Japanese economy that remain very fragile.   The Bank of Japan is expected to leave interest rates unchanged tonight at 0.25 percent.  No surprises are expected from Fukui who only recently confirmed his hawkish stance.  The BoJ will also be releasing their monthly report.  It will be interesting to see if the central bank has any comments on the Q3 GDP release. For the time being, short yen carry trades are still working, but policymakers are increasingly concerned.  The Japanese government is specifically afraid that a massive carry trade unwind would send the yen skyrocketing, which in turn would cause a big blow to their export sector.

Commodity Currencies (CAD, AUD, NZD)
The Commodity Currencies were all down for the day on the back of weaker economic data.  Australian wages rose by a less than expected 0.8 percent in the third quarter while house price growth slowed from 3.5 percent to 2.2 percent.  These two pieces of data suggests softer inflationary pressures which come in slight contrast to the Reserve bankââ,¬â"¢s recent statement on monetary policy.  Canada also disappointed with larger than expected drops in Canadian manufacturing shipments and new motor vehicle sales.  Both sectors have been hit by lower energy prices and a stronger Canadian dollar.  Even though New Zealand reported very strong retail sales the previous day, dovish comments from the RBNZ kept pressure on the kiwi.  RBNZ Governor Bollard warned that any increase in interest rates would cause considerable strain on the household sector which is already saddled with a tremendous amount of mortgage debt.  They are watching the sector closely in fear of a ratings downgrade, which suggests that they may have already one hand on the rate cut button.

Kathy Lien is the Chief Currency Strategist at FXCM.