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• US Dollar Follows Momentum as Risk Appetite Eases and Data Comes out Mixed
• British Pound Wins a Long Over-Due Relief Rally
• Japanese Yen Extends its Retracement as Deflation Sets In and Fujii Weighs in on Intervention...Again
• Euro Growth Outlook Bolstered by Retail Activity, Confidence but Market Little Impressed

US Dollar Follows Momentum as Risk Appetite Eases and Data Comes out Mixed
The US dollar appreciated through Tuesday's session; but the headway the world's most liquid currency made was limited. On a trade-weighted basis, the currency produced a second consecutive, daily advance that has led to its highest close in three weeks. The same reversal has developed for most of the majors. EURUSD has carved the inverse of what the index has produced, showing a slow reversal pattern. In most cases for the majors, we saw the slow extension of a measured greenback advance; but there were a couple of standouts. Overriding the dollar's tepid strength, GBPUSD would actually rally on the day for its first positive close in five sessions. Another noteworthy pair was USDJPY. Though this risk-confused pair was falling in line with the rest of the majors, its fundamental drivers are far more complicated than the rest.

As for the fuel supplying the dollar's lift, there were only a few economic indicators worth mention. The first release to cross the wires was the S&P/Case-Shiller Home Price Index for July. For market impact, this release has a significant lag to other sales and inflation reports for the housing sector; but it is nonetheless valuable as a confirmation tool. Through the severe recession and financial crisis of the past two years, Americans suffered the most acute drop in their wealth on record. The slow rebound in home values and the stock market marks the first step towards rebuilding their personal wealth. For this indicator's part, the 1.2 percent rise in home prices from June represented the biggest monthly increase in four years. At the same time, the 13.3 percent contraction through the year was the smallest in 17 months. Ultimately, it is the trend that has developed behind this series that brightens the economic outlook for the dollar and bolsters its strength. The same consideration for longer-term development should be applied to the other notable release for the day: the Conference Board's consumer confidence report. Though the sentiment gauge for September unexpectedly fell back to 53.1 (against expectations of a hearty advance to 57), optimism has shown a consistent and meaningful recovery from its lows earlier this year. For contrast, today's confidence gauge directly contrasts the jump in University of Michigan figures for the same period, which reported highs not seen since January of 2008. Some consider the Conference Board's report more sensitive to employment; but what is certain is that there is far more detail to be had from this release. Both present situation and expectations faltered; but it was the disappointing outlook for employment, wages, business activity and spending that presents real concern. At this point though, this offers the same sense that growth forecasts have shaped - a recovery is underway; but it will be measured.

Aside from economic data, a couple Fed Presidents would also weigh in with commentary that supports a strong dollar. Early in the US session, Dallas President Fisher suggested that given the lag between policy implementation and a response from the economy during the recession, the central bank should start removing stimulus as soon as it is clear that the recovery has gained traction. Philadelphia head Plosser was equally as hawkish. Looking beyond the recovery through the second half, the central banker forecasted 3 percent growth through 2010 and 2.7 percent expansion the following year. For rate watchers, the real value his warning that the Fed may have to curb inflation aggressively in the future.

British Pound Wins a Long Over-Due Relief Rally
The British pound finally snapped its aggressive sell off today with a round of economic data and second-hand comments that provided some respite to speculative fears. On the docket, we had a long list of releases to factor in. For scope, the final reading of the 2Q GDP was the most important. The uptick in the quarterly figure to a 0.6 percent contraction was in line with expectations; but the annualized 5.5 percent reading would unexpectedly keep the measure at its worst pace on modern record going back to 1956. Notable revisions in the component data included a 0.6 percent slump in services (previously unchanged) and a moderating 0.8 percent drop in manufacturing (which was originally a 2.2 percent dip). More timely data was just as mixed. The second quarter current account balance ballooned more than expected to 11.4 billion pounds - its largest shortfall since 2007 and 3.3 percent of GDP. The proprietary CBI Distributive Trades report for September - essentially a retail activity gauge - rose to its highest level in five months with those respondents reporting a year-over-year increase in sales outpacing those that reported declines by 3 percent. Credit health was another theme for the session. Mortgage approvals for August were just off an April 2008 high - which was set in the previous month with today's revision. Alternatively, net consumer credit reported a new record contraction of 300 million pounds, highlighting the struggle that a recovery will be. With so much contradictory data, why was the sterling so strong? In the end, it was commentary that would bolster the struggling currency. A seminar hosted by BoE Deputy Chief Charles Bean gave market participants a progress report on the bank's efforts to revive the economy. Attendees offer a second hand account of the event saying the policy authority was not on the verge of cutting the deposit rate and there they expressed surprise and concern over the speculation in response to Governor King's recent comments.

Japanese Yen Extends its Retracement as Deflation Sets In and Fujii Weighs in on Intervention...Again
Like the sterling, the yen has seen a swift reversal of pace over the past 36 hours; however, unlike its counterpart, the Japanese currency is retracing rather than appreciating. The more immediate concern for currency traders (and the dynamic that ultimately led the unit to an eight-month high) was commentary from the nations new Finance Minister, Hirohisa Fujii. Seemingly countering his vow to avoid intervention on the yen's behalf just a week ago, the policy maker said that if the currency market moves abnormally, we may take necessary steps in the national interest. It may seem that Fujii is flip-flopping on his position; but really he is just telling the market that such a step would only be considered under unusual circumstances - really no country can really write it off. For those with a fundamental concern that moves beyond a week, price pressures are another problem. The annual, national CPI reading for August plunged a record 2.4 percent. It seems deflation is setting in.

Euro Growth Outlook Bolstered by Retail Activity, Confidence but Market Little Impressed
The euro doesn't seem to be in control of its own fate at the moment as cross market fundamental concerns have generally swept the currency into sharp moves; but the balance economic outlook for this region received a boost in economic data this morning. Bloomberg-measured retail PMI indicators reported the strongest pace of activity for this sector in the Euro Zone in 16 months. In addition, the employment component marked its best reading since August of 2008. The round of confidence data was similarly supportive. Economic confidence hit a year high and consumer sentiment match a 15 month high. Tomorrow, the German employment report represents top event risk.

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Written by: John Kicklighter, Currency Strategist for