US Dollar
Yesterdayââ,¬â"¢s recovery in the US dollar did not last long as the greenback came under another day of severe selling pressure.  Having already started the US session on a softer footing, the Chicago PMI report tipped the currency over the edge.  For the first time since April 2003, Chicago PMI dipped into contractionary territory and in doing so, rang the recessionary bells along with it.  Large drops were seen in nearly every component of the report including employment, production, prices paid and new orders.  This means that manufacturing conditions in the Chicago region is slowing and suggests that we could see a sharp slide in the regional ISM survey tomorrow as well.  The market is not taking this well because we have finally seen a solid reason that supports the meltdown in the dollar.  The June Fed fund futures contracts are pricing in a 100 percent probability of a 25 basis point cut to 5.00 percent by the summer while the odds for further cuts after that have also jumped.  ISM is really the key tomorrow.  The trend in the market is very strong.  If ISM prints weak like the Chicago PMI report, we could possibly see 1.34 in the EUR/USD and 1.9750 in the GBP/USD.  There are also a number of Fed officials speaking tomorrow including Bernanke.  Given that many of them have already spoken earlier in the week, we do not expect anything new from them.  Aside from Chicago PMI, there were other pieces of US data that were released today, most of which were dollar bearish as well.  Personal income growth slowed while personal spending saw a sharp revision to the September data that essentially offset the mild upside surprise that was reported in October.  Initial jobless claims jumped significantly last week to the highest level since October 2005, which suggests that non-farm payrolls could come out weaker next week as well.  There was some good news though, the core PCE and PCE deflator both came out stronger, reflecting inflationary pressures while the help index held steady at 30 in the month of October and the house price index increased by a slightly more than expected 0.9 percent in the third quarter.

Euro and Swiss Franc
The Eurozone reported mostly disappointing economic data this morning even though the market has chosen to ignore it.  Germany, who has long had a problem with domestic spending, reported a 0.2 percent drop in retail sales in the month of October, after having already reported a 2.9 percent drop the prior month.  Labor market data was stronger, with 86k people dropping off of the unemployment list, lowering the ILO unemployment rate to 7.9 percent from 8.3 percent.  Consumers are not very happy in France as the countryââ,¬â"¢s consumer confidence indicator dropped from -21 to -25. This is no surprise given the recent weakness in the economy.  Inflationary indicators however were slightly stronger, validating the European Central Bankââ,¬â"¢s plans to raise interest rates again next week.  Producer prices in France fell less than expected while the inflation estimate was bumped up from 1.6 percent to 1.8 percent.  Annualized third quarter GDP also increased from 2.6 percent to 2.7 percent.  Over in Switzerland, consumer prices were flat in the month of November, after having risen by 0.3 percent the prior month.  The franc has shrugged off this report, having rallied against both the Euro and the US dollar.  

British Pound
The British pound came within a pip of 1.97 this morning, earning it the status as the dayââ,¬â"¢s biggest market mover.  In fact, since Thanksgiving, the pound has been one of the currency marketââ,¬â"¢s best performers.  House prices continue to increase with mortgage lender Nationwide reporting a 1.4 percent rise in prices during the month of November.  Other data released this morning was not as encouraging unfortunately with the CBI retail sales index falling from -4 to -9 and the Gfk consumer confidence dropping from -5 to -7 in November.  The data suggests a strong housing market does not always translate into a strong consumer.  Manufacturing sector PMI is due for release tomorrow.  This number should fare a lot better than retail sales.  For the time being, the pound is still very much in demand.  The strength of the currency should keep any chances of a rate hike by the Bank of England minimal. 

Japanese Yen
Japanese economic data once again surprised to the upside last night with small business confidence tipping back into positive expansionary territory.  The weakness of the Japanese Yen is finally delivering some benefits to the economy.  Even though USD/JPY has melted down, the Yen has remained weak against the British pound, Euro, Australian and New Zealand dollars.  This keeps carry trades intact for the moment, especially after Bank of Japan Governor Fukui hinted earlier this week that they do not plan on raising rates anytime soon.  The government is quite happy with the stimulative impact of a weak Yen as evidenced by the comment from Chief Cabinet Secretary Shiozaki, who said that the government should not react too much to the strong Euro.  Aside from confidence, housing starts and construction orders were also decent and we continue to expect stronger economic data over the next few weeks.

Commodity Currencies (CAD, AUD, NZD)
The only currency that the US dollar rallied against was the Canadian dollar.  Even though oil prices continue to tick higher, Canadian GDP came out sharply below expectations, falling by 0.3 percent which was the first time in 18 months indicating that there was a contraction in the economy.  The sheer weakness of this report made the market far more bearish Canadian dollars than US dollars.  This number should not be much of a surprise though as the combination of a strong currency and lower oil prices in the third quarter took a big toll on growth.  Looking ahead, the economy should fare much better as oil prices rise and the currency weakens.  The Australian and New Zealand dollars both accelerated significantly against the US dollar after the robust Australian retail sales report last night.  Sales increased 0.9 percent in the month of October, boosting the annualized pace of growth to the fastest rate since August 2004.  Total credit was also firmer than expected, but capital expenditure dropped in the third quarter.

Kathy Lien is the Chief Currency Strategist at FXCM.