US Dollar
The US dollar strengthened today, but if you ask anyone trading the currency market, they will tell you that it certainly doesn’t feel that way. The market’s primary focus is on the Japanese Yen, which has once against skyrocketed against everything in sight and reigniting talk of carry trade liquidation in the process. The Yen is now trading at a fresh 10 week high against the US dollar. The Dow, after having opened down over 200 points, staged a very impressive intraday rally that took it into positive territory, but for no more than a blink of eye before the index turned back into the red. For those able to peel themselves away from the big moves in the Yen, they would have noticed that the dollar strengthened against every other major currency pair. The most meaningful appreciation was against the New Zealand dollar, Australian dollar and the Euro. A dose of stronger US economic data has helped to stabilize the dollar and delay the market’s expectations for an interest rate cut by the Federal Reserve. Right now Fed Fund futures are pricing in a 100 percent chance of a quarter of a point rate cut by October. Earlier this morning, the market was showing a 100 percent chance of a cut by August. To the surprise of the market, personal income, personal spending, personal consumption expenditures and the ISM manufacturing survey all came out stronger than expected this morning. Both the Chicago PMI and Philly Fed index failed to correctly forecast the directional improvement in the ISM. On balance, these reports indicate that inflation is ticking higher and that certain parts of the US economy may not be weakening as significantly as some people may have initially thought. Although we could see a rebound in both the Dow and USD/JPY tomorrow given the lack of any meaningful US data, it will be difficult for either to recapture the losses that they have incurred this week. In fact, the longer term trend in both could still be downwards. The only piece of US data on the calendar is the final University of Michigan Consumer Confidence survey for the month of February. The problems that that the market was concerned about on Tuesday are still the problems that they will have to face in the weeks or months to come. The sub-prime lending market is at a tipping point, which will keep US investors very cautious.

Euro
For the second day in a row, the Euro has lost value against the US dollar. This time however, there was weaker Eurozone economic data to support the move. Eurozone manufacturing PMI increased from 55.5 to a less than expected 55.6, due to a drop in the German index. Both the French and Italian PMI indices accelerated in the month of February. Even though French producer prices for January and Italian consumer prices for February were stronger than expected, the Eurozone CPI estimate slipped form 1.9 percent to 1.8 percent. Even though the CPI estimate has been below the ECB’s target for a few months now, the central bank has played down the current state of inflation in favor of future inflationary conditions. The Euro is looking very vulnerable right now ahead of the Germany retail sales and Eurozone PPI numbers tomorrow morning. Domestic spending in Germany is expected to drop after rising a very impressive 2.4 percent the prior month. With no significant US data on the calendar tomorrow, Eurozone data will be particularly important.

British Pound
The British pound is weaker against both the US dollar and Japanese Yen, but stronger against the Euro. Economic data released this morning was mixed with a sharp rise in manufacturing PMI and an increase in mortgage approvals offset by a drop in the CBI distributive trades survey and a drop in net lending securities on dwellings. Money supply growth came out right in line with expectations. Inflation risks still remain to the upside, but for the time being, the Bank of England has no reason to stray away from their plans to leave monetary policy and interest rates on hold for the time being. UK Construction sector PMI is the only piece of UK data on the calendar tomorrow. The stability of the housing market should keep the index well in expansionary territory.

Japanese Yen
After a brief pause, the Japanese Yen resumed its rally as traders continued to liquidate out of their carry trades. This week’s big moves have made investors in the global markets much more risk averse which means that they will be reluctant to jump back into their long positions. With the Fed Fund futures pricing in a 100 percent chance of a rate cut, the market is clearly looking for slower US growth, which will make the US dollar (against the Yen) a far less attractive carry investment. At the same time, Japanese corporations will continue to repatriate yen back into their home country ahead of their fiscal year end. Whether or not the Yen will continue to rally will be contingent about how Japanese data fares this evening. The economic calendar is extremely busy with consumer prices, unemployment data, labor cash earnings and the PCE-Overall household spending reports due for release. Given the significance of spending and inflation data, any surprises will trigger a sharp move in the Yen.

Commodity Currencies (CAD, AUD, NZD)
The Commodity Currencies are all weaker against the US dollar today as carry trade liquidation takes a hit at the high yielders. The New Zealand dollar has suffered the most with the currency slipping over one percent against the dollar. Commodity prices are mixed with crude prices unchanged and gold prices slightly lower. Overnight, New Zealand reported weaker visitor arrivals while Australia reported the strongest manufacturing PMI index in 4 years. Unfortunately that strength gave way to a disappointing fourth quarter expenditures data. Looking ahead, we have Australian retail sales, current account and PCE reports due for release along with Canadian GDP and consumer spending tomorrow morning. Australian consumer depend is expected to be strong thanks to the stability of the overall economy. Canadian GDP is also expected to reflect the upside surprises in fourth quarter data that we saw throughout the month of January.

Kathy Lien is the Chief Currency Strategist at FXCM.