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• British Pound Weighed by a Drop in Growth Estimates, Factory Activity
• Euro Bolstered by Upgrade on German Growth but Offset by IMF Outlook for Policy
• Australian Dollar Rallies Following an RBA Hike that Surprises Economists but not Traders

• Canadian Dollar Reaches Yearly High on Strong Ivey Release, Weak Greenback

US Dollar Decline Turns into a Tumble as Reserve Rumors Circulate
There was little, tangible economic data for the US dollar to respond to today; but the currency was nonetheless active. It comes as no surprise to the astute currency trader that the greenback is still finding its direction and pace from general risk appetite and exercising the currency's role as the unwanted safe haven and burgeoning funding currency. Standing in as the proxy for investor sentiment, the Dow Jones Industrial Average advanced 1.37 percent on the day and consequently closed its best daily performance since August 21st. The greenback responded in kind by forcing EURUSD above 1.4675 to two week highs and encouraging the commodity bloc to exaggerate an already prosperous run. However, it is important to indentify the catalyst behind today's bout of optimism and consider whether it will last as the week wears on. The temperament of speculation can shift for any number of reasons; and the responsibility for today's rally has been attributed to a varied field. Yet, sheer momentum following yesterday's strength and the collaboration expected from the world's policy officials at the annual meeting of the IMF and World Bank are the most likely culprits. Will this good will hold through tomorrow? Unless there is promising commentary in an official capacity from the gathering or impromptu remarks made on the sidelines, probably not.

Risk appetite is an unquestionable source of strength and weakness for the world's most liquid currency today; but it is just as vital to the bearing of the currency to gauge its correlation to this underlying current. Since the financial crisis spread the crippling impact of the United States' subprime meltdown, the call to diversify away from the dollar has grown louder. To this point though, genuine threats of trading the greenback in as a reserve currency have been largely isolated to theory and emerging market banter. This explains the concern surrounding an article ran in UK periodical The International in which there were suggestions that major oil producers in the Middle East were in talks with China, Russia, Japan and France to swap the dollar for a basket of currencies when dealing with crude. Officials from Saudi Arabia, Qatar, Kuwait and Russia among others all denied they were holding such a discussion. However, even if this is a mere rumor, it points to a genuine concern among investors and policy officials - that the dollar is slowly losing its status as the world's benchmark currency. Considering the struggle the struggle the economy will have in returning to growth and working down its ballooning deficit, not to mention the world's desire to avoid another crisis of last year's magnitude, this is likely a reality. In effect, it would be another step towards correcting the world's imbalances (a long-term goal supported at this past week's G-20 meeting). Yet, this is a change that will likely take years to play out.

British Pound Weighed by a Drop in Growth Estimates, Factory Activity
How long can the British pound suffer? Considering the state of today's economic data, the currency could lag for quite some time. Remember, in the Forex market, a currency doesn't have to fundamentally struggle. It just has to underperform its peers. With the rest of the G20 economies on the path to recovery, the United Kingdom's struggle to keep pace is growing more apparent. With the unexpected extension of the nation's recession to a record 5.5 percent annual pace through the second quarter as a backdrop, today's NIESR GDP estimate wasn't well received. The National Institute of Economic and Social Research suggested growth in the three months through September (essentially the third quarter) was unchanged. This is another blow to an economy that is running out of options from a fiscal and monetary stimulus stand point and is endanger of developing long-lasting problems that can evolve from maintaining extremely loose monetary policy for an extended period. Without doubt, this will influence projections for advance reading of third quarter GDP statistics which are due in just two weeks. Further supporting the sterling's malaise today, factory activity unexpectedly plunged through August. Industrial activity fell 2.5 percent for the month to match its worst plunge since June of 2002. The real concern with this data is that the manufacturing activity index subsequently hit a 17-year low. This will be another substantial anchor to a meaningful recovery. All of this data (including the bullish turn from the Halifax housing report and the 18 month high in the Nationwide consumer confidence series) should be kept in mind when heading into Thursday's BoE Rate decision.

Euro Bolstered by Upgrade on German Growth but Offset by IMF Outlook for Policy
The euro seems to be stuck in neutral. Both a forecasted return to growth and speculation of a timely revival of hawkish monetary policy have both lost their edge over the past months - and for good reason. For growth, a German government official said today that they had upgraded their outlook for 2009's economic contraction from 6 percent to between 4 and 5 percent (which is expected to be confirmed on October 21st. German and France both reported expansion through the second quarter and set the pace for the rest of the western world. However, the Euro Zone is also accounts for lingering recessions for Italy and Spain among others. On the interest rate front, speculation of a near-term rate hike has been consistently talked down by ECB President Jean-Claude Trichet; but projections from an IMF senior economist added additional weight to the outlook. With inflation expected to hold well below trend through next year, the economist saw little cause for hikes within a year.

Australian Dollar Rallies Following an RBA Hike that Surprises Economists but not Traders

For a fundamentally light session, the Reserve Bank of Australia's rate decision proved to be the most noteworthy event. The policy authority took the responsibility of being the first among the G20 to take a hawkish policy stance. This title alone won the already strong currency bullish points; but was this outcome really a surprise? The official consensus among economists was for a hold at the 49-year low 3.00 percent. On the other hand, there were quite a few contributors to these surveys that were expecting a hike; and more importantly, swaps revealed the market was already heavily pricing this outcome in. Currently there is an 82 percent probability of a follow up rate hike on November 4th; but the central bank is unlikely to take such an aggressive pace. This perhaps suggests the Aussie dollar is extended on exuberant speculation.

Canadian Dollar Reaches Yearly High on Strong Ivey Release, Weak Greenback
While there were notable moves across the majors, none of these pairs made the meaningful break that USDCAD won. While the drop below 1.06 can be partially attributed to the dollar's ills, it was also a factor of strong Canadian data. The Ivey business activity/spending index for September jumped far more than expected to a 14-month high 61.7 with a notable improvement in the employment component.

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com