Dollar Slides on Weaker Data, BIS Warning and Snow's Acknowledgement of Reserve (page 2 of 2)

The market still expects the ECB to raise interest rates at least twice, possibly even three times this year, but a year can be quite long and judging from ECB President Trichet's comments yesterday, any rate hikes by the ECB will probably be well spaced out.

Trichet has even said that "we don't want to raise rates at every meeting and everyone understands this." Therefore, the end of the Fed tightening cycle may have a more immediate impact than another one-off round of tightening by the ECB.

British Pound

The British pound rallied strongly today, erasing all of the past week's losses thanks to broad dollar weakness, central bank buying and more encouraging secondary reports.

Riding on the coattails of the stronger retail sales numbers released earlier this week, the John Lewis and Liberty department store chains both reported stronger. Fourth quarter GDP forecasts by NIESR were also notched higher from 0.4 percent to 0.5 percent Q/Q. They believe that growth will continue to increase this year and that so far, another rate cut may not be warranted.

The leading economic index released today also improved modestly from -0.4 percent to zero with the coincident index increasing from 0.1 percent to 0.2 percent. There has been a lot of talk of reserve diversification into British pounds. This is quite interesting since the trade between Asian nations ex Japan and the UK is far less significant than its trade with the US, Japan and Europe.

Japanese Yen

The Japanese yen fluctuated within a very tight range against the dollar but sold off extensively against all of the major currency pairs. Talk of intervention by the Bank of Korea to weaken the Won also weighed on the Yen.

Economic data released last night was slightly weaker than expected as machinery orders increased 2.3 percent in the month of November. This compares to the previous month's 4.8 percent increase and the market's 5.2 percent forecast.

However with October and November data both positive, the market did not worry too much about the weaker release since overall, it still shows that the manufacturing sector is gradually improving.

Tokyo department store sales increased by 2.1 percent last month, which is the second back to back month of positive sales. In the week ahead, Japanese data releases are expected to continue to pick up with trade data, the current account, consumer confidence and leading economic indicators scheduled for release.