US Dollar
Today was a perfect day to continue the dollar strength that had been seen over the past couple of sessions. Ahead of the looming G7 meeting this weekend, traders continued to bid the greenback higher against the majors whether on book squaring or profit taking. Sparking momentum in the morning were strongly hawkish comments from St. Louis Federal Reserve Bank President William Poole. Speaking to the AAIM Management Association today, Fed bank president Poole noted that inflationary pressures were expected to reside below the 2 percent comfort target instituted by the Federal Reserve. However, he quickly added that should pressures rise above and remain uncomfortably high, there would be no question to hiking rates further in curbing inflation that would be “unacceptable”. The words spoke loudly to market traders looking for further reasoning n bidding the dollar higher before the New York close. The comments rang even louder considering the dearth of US economic data that was present on the day and will likely play into Bernanke’s testimony to Congress next week. Incidentally, more Federal Reserve news contributed to market action later in the afternoon as press releases began to mount on the March 30th resignation of Governor Susan Bies. The longest tenured board member on the Federal Reserve, Susan Bies was noted as the central bank’s leading regulatory figure, backing recently hawkish decisions of the Fed. Now, her departure leaves two vacancies on the board and a world of possibilities as the current administration must find replacements in the near term. For hawks, this may deal a blow as she will not be attending the March meeting.

Euro
Euro action broke the three day momentum following the European Central Bank’s decision to keep rates steady yesterday. Aside from profit taking ahead of the G7 meeting this weekend, the price action succumbed to a worse than expected piece of economic data in the overnight lending to a dip from the 1.3050 session high. Posting for the month, both Italian and French industrial production was less than expected by the consensus, but surprisingly better than the previous month’s figure. The survey was boosted by an increase in carmakers and manufacturing goods in France, while a 1.1 percent climb was added by mines and utilities. Although positive for the euro, the figures did come in lower than previous estimates and contributes to the possibility that a higher euro may be slowing down overall demand for European based exports. Incidentally, the survey’s results are being reflected in the widening trade deficit for the region. Bulging to a record, the trade balance saw another consecutive shortfall since June 2004. Exports from France rose by 8.6 percent while imports surged by almost 10 percent higher on the month.

British Pound
Weighing on the pound, the December trade balance survey added to bearish momentum from yesterday’s slide taking spot lower by almost 150 points on the day. Recovering slightly, there might be little left to support the pound at this level following the record gap that was amassed just two months ago. According to the Office for National Statistics, the goods trade deficit widened to 7.1 billion pounds. The shortfall comes far wider than the previous month’s 6.87 billiion pounds and pushes higher to the biggest levels not seen since the 1697 inception of the survey. Although notably volatile and unreliable, the figure still calls to question the momentum at which the economy is currently running at and will surely be taken into consideration by Bank of England Governor Mervyn King. Granted, there still is plenty to be hawkish about, but with a wider deficit likely to deplete future growth, inflationary pressures may not be so threatening in the near term. The sentiment will place plenty of focus on next week’s upcoming retail sales and consumer prices report in establishing further short term direction of the pound sterling.

Japanese Yen
Finally the weekend has arrived and it seems that the markets are betting on the likelihood of a pass on any heated mentions of the Japanese yen. After a week long schedule of comments from central bankers and policy makers around the world, it seems that the market remains attentive of the meeting. However, the anxiety that we saw in the beginning of the week seems to have turned into sheer skepticism that any real changes will be enforced by the finance ministers in Essen. Comments by US Treasury Secretary Henry Paulson voiced today summarized the overall sentiment. Although trading near a trade weighted 20-year low, Paulson stated that “the yen is market determined” and is widely lower on the condition of the teetering economy. Nonetheless, the policy maker is expected to make heavy considerations by European officials this weekend in pressureing Japanese officials to counter the recent yen depreciation.

Commodity Currencies (CAD, AUD, NZD)
Rising the most in seven months, the Canadian dollar gained on the US dollar in the New York session and overshadowed both the Australian and New Zealand currencies. Attributed to the spike higher to 1.1715 on the day was a far better than expected employment picture in the world’s ninth largest economy. According to the Statistics Canada report, employers added 88,900 jobs in the month. The figure outpaced estimates of a 14,000 job addition and sparked some speculation that the economic soft spot may be strengthening. However, the overall unemployment rate ticked 10 basis points higher to 6.2 percent. The increase was widely attributed to more individuals entering the labor force which increases the pool of labor potentials. Ultimately, the report was coupled with higher crude oil prices in supporting the Canadian dollar. Crude oil on the NYMEX traded above $60 for the first time since Jan.3rd.

Kathy Lien is the Chief Currency Strategist at FXCM.