Dollar Rallies on Strong Empire State and Hawkish FOMC Minutes (page 1 of 2)

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. Yesterday'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 Fed'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 Fed'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 government's unwillingness to participate threw cold water on that attempt.

The Eurozone's largest member believes that the ECB'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.