Dollar Dumped
On Friday we wrote, â�,��"Incredibly wild night of action in FX markets as both euro and pound verticalized in thin holiday trade to take out multiple option barriers and triggered a torrent of stops. Once the EUR/USD crossed the psychologically important 1.3000 level it invited massive inflows of speculative capital as momentum players, option sellers and wrong footed dollar bulls all scrambled for euros sending the pair higher by 70 points in a matter of seconds.â�,��"

Of course holiday thin trading wasnâ�,��"�t the only reason for the collapse. As we noted last week, â�,��"the fundamental bias remains to the dollars downside.â�,� That bias includes the unrelenting fact of US housing slowdown which is impacting sentiment and spending throughout theUS economy. The key trigger for dollarâ�,��"�s woes was Tuesday downgrade of US economic forecast by the White House.  That news suddenly made clear that the Fed may be facing the prospect of having to lower rates by the first half 2007 and dashed the dollar bulls â�,��"goldilocksâ�,� scenario.

Continuation or a bit of a retrace next week? Data will tell and given the dour projections for US economic releases including further contractions in Housing and Durable Goods dollar longs may have little help from the calendar. Most critical of all will be the ISM manufacturing survey. With the index hovering near the 50 boom/bust mark a fall through that level will set off yet another round of hand wringing, as talk will turn to the possibility of a US recession. However, should the data surprise to the upside, the dollar could mount a very strong comeback as dealers will try to buy back all the euro shorts they printed this week to the momentum players.

IFO Boosts the Euro
The story this week was clearly the demise of the dollar, but the euro helped its own cause quite well after the IFO survey surprised to the upside printing at 106.8 versus 105.2. As we stated last week,â�,� The market expects no change which should a be positive for the euro  as the index remains near decade long highs.â�,� And indeed it was as European businessmen, apparently unconcerned about the unitâ�,��"�s recent strength, expressed continued optimism about future growth prospects.

However,  with EUR/USD now above the 1.3000 level it will become progressively more difficult for EZ exporters to sustain their growth which has been the underlying foundation for the regionâ�,��"�s economic recovery. Already producers worries were evident in Fridayâ�,��"�s French production outlook which slipped to 14 from 17 expected. Unless EZ consumers increase their spending - and up to now they have shown very little inclination to do so, even with the motivation of higher VAT taxes next year -  EZ growth could slow markedly into Q1 of 2007 putting a halt to any further rate hikes from ECB.

Next week the concerns about the strength of the consumer will once again come front and center as German Retail Sales report their results. The market anticipates a sharp improvement of 1.5% from last months dreadful â�,�“1.7% decline. If however, we see yet another lackluster print, the fundamental case for further euro gains will become considerably less persuasive.

Yen â�,�“ Collapse of the Carry
Much like the US, Japan was on holiday last week and the calendar reflected the slowdown in activity. Despite that fact the unit managed to gain 168 basis points on the greenback, carry trade speculators began to liquidate their positions. Much like in the euro ,the downward revisions of US economic performance in 2007 by the White House started the ball rolling. As we wrote on Wednesday, â�,��"Yen was the biggest beneficiary of this news, as the unit ignored its own lackluster data gaining 70 points from yesterdayâ�,��"�s New York close. With US growth anticipated to slow the interest rate differential between the two currencies may now contract, prompting many traders to bail out of their carry trade positions ahead of the Thanksgiving holiday in both countries.â�,�   The exodus continued on Friday, albeit centered on the USD/JPY. Against the euro and the pound, the yen did not make nearly as much progress with both currencies remaining near yearly highs on the EUR/JPY and GBP/JPY crosses.

Next week the Japanese calendar will highlight retail trade, employment numbers, and overall household spending, with none of the data expected to be particularly yen supportive. Additionally, Governor Fukui remarks may weigh in on trade. In listening to the latest rhetoric from the Japanese monetary officials, we get the distinct impression that they would like to tighten rates sooner rather than later, but are constrained by the fear of triggering yet another contraction in Japanese economy. Despite the inaction on the part of the BoJ, the yen could continue its rally if US data shows further deterioration.

Pound Marches On
Cable followed in euroâ�,��"�s footsteps, as the massive anti-dollar rally propelled the unit above the 1.9300 figure taking out all of the option barriers in the process. As we noted Friday, â�,��"Having now reached these august levels the question facing the market is - whatâ�,��"�s next? Although, much like a snowball rolling down a mountain, these momentum rallies can take a life of their own , we suspect that after some sober post holiday analysis the markets may conclude that this move is a bit overdone.â�,� While the data at front of the week was pound positive,  Fridayâ�,��"�s UK GDP printed slightly weaker at 2.7% versus 2.8% expected. More troubling for pound bulls was the sharp slowdown in private consumption which rose only 0.4% versus 0.6% expected. Given the fact that BoEâ�,��"�s recent rate hike decision was made with a surprisingly dovish 7-2 vote, further rate increases from UK central bank may not be forthcoming.

Next week should shed more light on the state of UK economic health with GFK consumer confidence survey, PMI manufacturing and CBI Distributive trades all on tap. If the data  suggests a slowdown, the pound rally may hit resistance, but for now momentum rules the day.

Carry Crackup Rockets Swissie
Swissie was the biggest beneficiary of last weekâ�,��"�s dollar liquidation, as the currency skyrocketed 2.9% higher with the help of an unwinding of carry trades along with stellar economic data. First, the trade surplus was slightly wider than expected at 1.58 billion francs, though the balance is lower than last monthâ�,��"�s downwardly revised figure of 1.76 billion francs. Exports picked up 3.1% from September, while imports accelerated more quickly at a rate of 3.6%, indicating that consumer spending remains robust. However, adjusted real retail sales ran counter to the trade report when the figure grew slower than estimated at 2.3%. Nevertheless, with the employment level jumping an annualized 1.3%, a solid labor market should continue to help underpin economic growth in Switzerland.

While the greenback is likely to retrace some of its losses over the course of the next week, Swissie could hold its own should the most important economic gauge for Switzerland , the KOF leading indicator, remain solid for the month. Additionally, an expected slowing of CPI and GDP could inject some pessimism into the Swiss franc, but the SNBâ�,��"�s resolve to hike rates in December and beyond will likely keep USD/CHF from rebounding significantly.

Tax Cut Prospects Prop Loonie
While Loonie did appreciate nearly 1% over the course of last week, a tepid retail sector capped the currencyâ�,��"�s gains. However, the announcement of potential tax cuts of C$22 billion by Finance Minister Flaherty in the Fall Economic and Fiscal Update helped underpin Canadian dollar strength. Additionally, the Update focused on government debt reduction with the goal of an elimination of net debt by 2021, which serves as a net positive for the Loonie. On the economic front, low energy prices and weak auto sales dragged both wholesale and retail sales down, indicating a broad slowdown in consumer spending during the third quarter. Traders will be looking towards the results of the holiday shopping season to give fourth quarter retail sales a boost. Meanwhile, the Bank of Canadaâ�,��"�s measure of inflation edged higher in October with the help of rising housing costs, bringing the annual rate further above the 2% target to 2.3%. With price pressures alive and well in Canada , the BOC will likely be forced to keep rates on hold well into 2007.

Data in the week going forward should help maintain a neutral bias for the BOC, as the release of third quarter GDP is expected to accelerate to 2.3% on the back of business investment. However, a significant downturn in personal consumption could limit growth prospects for Canada amidst already lagging export demand from the US . Nevertheless, with oil prices gaining towards $60/bbl, Loonie longs could continue to flock to the market.

Aussie Rallies on Gold Prices
While the Aussie pushed higher against the greenback towards the end of last week with the help of surging gold prices. However, the currencyâ�,��"�s strength didnâ�,��"�t extend to the AUD/JPY cross, which dropped to one week lows on the unwinding of carry trades. Nevertheless, the picture remains blurry for the Australia n economy and currency, as the Australian Bureau of Statistics said that a drought is impacting GDP, and mentioned that a special note on its impact will be included when it releases third quarter growth. The comment signals that economic expansion could prove to be disappointing. The Westpac leading index bode a bit better for growth, as the figure rose 0.4%. Meanwhile, M&A news helped underpin the Aussie, with Qantas Airways saying it had been approached with a bid by Macquarie Bank and Texas Pacific Group.

In the week going forward, Aussie traders will be focused on a speech by the RBAâ�,��"�s Richards, who will cover the measurement of underlying inflation. Additionally, markets will be looking towards the trade deficit, which could expand even further and indicate that the languished export sector may continue to hinder economic growth. Barring a further up tick in commodities prices, Aussie bears may decide now is the time to enter the markets with a surge of AUD/USD shorts.

Kiwi Gains Despite Record Deficit
In spite of a dismal trade report, Kiwi gained last week with the help of the market wide anti-dollar stance and a surge in commodity prices. Similar to the Aussie, the New Zealand dollarâ�,��"�s strength was contained to the NZD/USD pair as the currency dropped against the yen to one week lows on the unwinding of carry trades. The trade balance jumped to the second largest monthly deficit on record of NZ$1.167 billion, as import growth of 15.8% year over year has started to trend significantly higher than that of exports at 10.5%. The data indicates a resilience in domestic demand, which has substantially hurt improvement in the deficit and will likely keep the Reserve Bank of New Zealand vigilant on inflation pressures. Meanwhile, credit card spending slowed slightly to 8.9% as record high interest rates keep borrowing costs lofty.

Economic data in the week going forward will be light in New Zealand , leaving ample opportunity for the greenback to recoup some of its losses against the Kiwi. Tepid business confidence should continue to point to the negative impact of interest rates on firms, while money supply data is like to signal that price pressures continue to build.

Boris Schlossberg is a Senior Currency Strategist at FXCM.