US Dollar Rallies Ahead of Payrolls, but Watch Out for a Disappointment (page 2 of 2)

Even though the housing market is softening, the manufacturing sector is strengthening, which is supporting growth. The rise in input and ouput prices may have triggered the comments from monetary policy committee member Besley who said that inflation may not fall as fast as the BoE may be expecting. The main focus on sterling traders will continue to be the timing of the next central bank hike. The BoE minutes released last week suggests that another rate hike may not come until the second quarter but if data begins to turn upwards, we could see an earlier move.

Japanese Yen

There has been little follow through to yesterday's sharp Yen rally as the market continues to predict whether Yen weakness will be a main theme at the G7 meeting next weekend. Yesterday the comments from US Treasury Paulson triggered speculation that Japan could be criticized for their currency's weakness at the meeting. According to Dow Jones today, a senior Japanese government official said that it will unlikely that the G7 will discuss "a particular form of currency policy coordination" and that Japan should not get a "beating at the formal session." The weakness of the Japanese economy gives Japan a good argument for keeping their interest rates low and the Yen weak. However many countries around the world are becoming angered with the currency's movement. Senators Grassley and Stabenow are now supporting a bill that would create the role within the Office of the US Trade with the primary goal of investigating illegal trade practices.

Commodity Currencies (CAD, AUD, NZD)

Weakness in the New Zealand dollar is dragging the Australian dollar lower. With no major data on tap, the kiwi came under significant fund related selling pressure that may potentially be attributed to carry trade liquidation. The currency fell 1.3 percent against the US dollar and 1.25 percent against the Japanese Yen. Australian manufacturing PMI also dropped in the month of January from 52.4 to 51.3 as weaker performance of new orders, employment and exports offset growth in deliveries and stocks. The Australian trade balance is due for release tonight. The deficit is expected to widen as domestic demand boosts imports while the strong currency hurts exports. The Canadian dollar is slightly weaker as oil prices stabilize; there is no Canadian data due for release on Friday.