Dollar sees largest one day slide in four years (page 2 of 2)

Overall, we see a stronger reason for the European Central Bank to remain hawkish in the first quarter of 2006. According to their latest press conference and recent comments, the ECB still feels that monetary policy is "accommodative," but knowing that their recovery has been engineered by the weakness of their currency, they remain cautious about prematurely following up their December move with another quarter point hike.

British Pound

The weakness in the US dollar has driven the GBP/USD currency pair higher by 270 pips today. The breakout move mirrors that of the EUR/USD but the relatively smaller rise and the complete divergence in pound performance against other currencies indicates that the dollar's weakness is masking the market's real perception about the health of the British pound.

The UK manufacturing sector index for the month of December increased marginally from 51.0 to 51.1 last month. The rather anemic performance best sums up the country's overall performance last year, which is growth albeit but weak unimpressive below trend growth.

In fact, according to a survey by the FT, most economists believe that the Treasury and Bank of England's forecast for economic growth this year is too optimistic. There are also fears that colder weather may have dampened sales during the usually strong Christmas shopping season. As we start the New Year, the Bank of England still maintains their neutral policy, but will continue to be watching for signs about whether another rate cut may be needed.

Japanese Yen

With the Japanese markets closed overnight, US and European traders had their way with USDJPY today. Typically Japanese traders will inject a bit more two way action when they join markets, but with trading only open for half of a session tonight, there is little hope that USDJPY could recuperate its losses.

According to a poll by Nikkei Net, most traders are expecting USDJPY to trade lower in the year ahead. The primary reason is the market's expectation that USDJPY will be gradually becoming a less attractive carry trade investment.

With the US Fed beginning to slow rate hikes and the Japanese government debating about when to drop its quantitative easing policy, the future attractiveness of USDJPY is beginning to fade.