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• Euro Rally Toward 1.50 Continues as Industrial Output Rises for Fourth Month
• British Pound Mostly Lower as Job Losses Add Up, Average Earnings Fall
• Japanese Yen Mixed as BOJ's Shirakawa Signals End to Liquidity Measures

US Dollar Down as DJIA Tests 10,000, FOMC Minutes Signal Bernanke & Co. Still Fairly Dovish
The US dollar took a beating on Wednesday as increased investor confidence favored equities and carry trades, as evidenced by the rally in the Dow Jones Industrial Average to 10,000 for the first time since October 7, 2008, while the minutes from the Federal Reserve's last policy meeting suggested that the central bank is not quite as bullish as previously anticipated. That said, without a close above 10,000, the push higher in the Dow doesn't really qualify as a true break. Furthermore, we often see knee-jerk reactions to news events reverse later in the day, so traders should be cautious of the US dollar's spike lower.

Why were the minutes from the Federal Open Market Committee's (FOMC) September meeting so bearish for the greenback? For the most part, it was because some members indicated that they were open to expanding MBS purchases, running contrary to speculation that the central bank was looking to put an end to their liquidity and lending facilities in the near-term. Regarding the outlook, FOMC members expressed uncertainty on how the economy would fair without government aid, as consumers were likely to remain cautious and they saw substantial slack in the labor market in coming years. Nevertheless, many members raised their economic projections for the second half of the year, though exact forecasts were not published yet, while the staff economic outlook showed projections for unemployment to fall to 9.25 percent by the end of 2010, and 8 percent by the end of 2011.

In other US economic news, advance retail sales for the month of September were not quite as bad as expected, as the headline rate fell 1.5 percent, compared to forecasts for a 2.1 percent decline. This was still the steepest drop since December when sales decreased 3.2 percent, though, as a 10.4 percent plunge in spending on motor vehicles and parts weighed heavily. Indeed, in previous months, the cash for clunkers program has helped boost demand for autos, and thus, consumption as a whole. Aside from autos and gas, retail sales rose a better-than-anticipated 0.4 percent, thanks to increases in the furniture, food and beverages, health and personal care, clothing, and general merchandise components.

Related Article: US Dollar Faces Lineup of Major Event Risk from US Retail Sales, FOMC Minutes

Euro Rally Toward 1.50 Continues as Industrial Output Rises for Fourth Month

The euro continued to push toward 1.50 - a level that could offer significant resistance - on Wednesday amidst broad US dollar weakness and after data showed that Euro-zone industrial output rose for a fourth month in August, this time at a rate of 0.9 percent from July. Meanwhile, the annual rate fell 15.4 percent, the slowest contraction in eight months, which added to evidence suggesting that the region is in the process of emerging from recession. On Thursday, the final reading of Euro-zone CPI is anticipated to confirm that the annual rate fell to -0.3 percent in September from -0.2 percent. That said, the ECB has said many times in the past that they expect inflation rates to remain negative before returning to positive levels in coming months, so readings in line with expectations shouldn't have too much of an impact. However, a surprisingly steep drop could prevent the currency from making any additional headway.

British Pound Mostly Lower as Job Losses Add Up, Average Earnings Fall

The British pound lagged against most of the majors, despite news that UK jobless claims only rose by 20,800 in September, the smallest increase since May 2008, pushing the claimant count rate up to 5.0 percent from a downwardly revised 4.9 percent. Likewise, the number of people looking for work between June and August rose by 88,000, the smallest increase since the period of May through July 2008. Nevertheless, mounting job losses do not bode well for the consumption outlook, especially since average earnings excluding bonuses slowed to an annual pace of 1.9 percent in the three months through August, the weakest result since at least 2001.

Related Article: British Pound Weekly Trading Forecast

Japanese Yen Mixed as BOJ's Shirakawa Signals End to Liquidity Measures

The Japanese yen rallied overnight ahead of the Bank of Japan's policy meeting, as the markets anticipated that the central bank would announce an end to its credit-easing programs. Ultimately, the BOJ left rates unchanged at 0.10 percent and kept their liquidity programs, but with BOJ Governor Masaaki Shirakawa saying that the environment for corporate debt issuance is in good shape, except low-rated debt, and that there is receding need to support the market, it seems very likely that they will wind down the programs before year end. As a result, the Japanese yen was able to maintain some of its strength against the US dollar and New Zealand dollar, despite sharp rallies in equities, though the currency did drop versus the rest of the majors.

Related Article: Japanese Yen Volatility Likely on Currency Intervention Threat

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com