Dollar Slides on Weaker Data, BIS Warning and Snow's Acknowledgement of Reserve (page 1 of 2)

• Dollar Slides on Weaker Data, BIS Warning and Snow's Acknowledgement of Reserve Diversification

• Euro Rallies on Evidence of Continued Economic Growth

• Intervention by Bank of Korea in Won Weighs on Japanese Yen

US Dollar

The resolve of dollar bulls have been tested today and unfortunately for some, is seems that they have had little conviction in keeping the greenback bid.

The dollar sold off across the board against the majors following weaker US economic data with the move exacerbated on the back of the BIS' official warning that the dollar could fall and Treasury Secretary John Snow's acknowledgement that some central banks may be diversifying away from the dollar.

It was quite interesting to watch the price action after the 8:30am EST US numbers because the knee jerk reaction was very different from the day's eventual move. The reason why the dollar first rallied, then sold off was because the headline numbers painted a slightly different story than the details of the reports.

Even though producer prices increased a whopping 0.9 percent in the month of December, core prices increased a less than expected 0.1 percent.

Since the Fed prefers to focus on core prices, the weaker trend suggested that the data was actually dollar bearish rather than dollar bullish. However when it comes to inflation, the market knows that the Fed favors CPI over PPI, therefore any strength in the PPI report tends to have its significance discounted. Furthermore, retail sales were equally confusing.

The headline retail sales figure for the month of December was slightly weaker than expected at 0.7 percent versus 0.9 percent expected. However, at the same time, there was a strong revision to the November figure from 0.3 percent to 0.8 percent.

Therefore the confusion comes when you have to look at the less autos component to get the real story of how sales are doing since sales excluding autos actually increased a less than expected 0.2 percent. Automobile sales only increased last month due to discounting and other various promotions, which is never a good basis for maintaining sales.

With the interest rate environment looking more and more unfavorable for the automobile sector since higher rates equals higher car financing costs, there is little hope that sales could really continue its current pace for much longer.

Next week, the US calendar is chock full of important US economic data including industrial production, the consumer price index and net foreign purchases of US securities, all of which has the potential of causing some more interesting volatility in the markets.

Euro

It seems that the market has all but forgotten Trichet's comments yesterday. The Euro strengthened significantly against the dollar shortly after the US economic releases. The Eurozone releases this morning offered little surprise as third quarter GDP for the region was confirmed at 0.6 percent with increases in both government and household spending.

Although exports were the driving force of growth in Q3, increases in investment spending is also promising. As evidenced by recent economic data, the Eurozone is expected to continue to gradually strengthen. Meanwhile on the inflation front, French consumer prices increased a softer than expected 0.1 percent last month.

Despite the disappointment, inflation pressures are still prevalent. In the week ahead, we will see even more inflation figures from Germany, Italy, as well as the entire Eurozone.