Better than expected US economic data was like a breath of fresh air for the currency markets today. Producer prices fell less than expected last month while manufacturing conditions in the Empire State and Philadelphia regions improved. The dollar rebounded against the Japanese Yen indicating that risk aversion is abating, albeit modestly. The overwhelmingly pessimistic investors will not be easily swayed by a few pieces of secondary economic data, especially since all of the numbers are still in negative territory. Looking ahead, we will have another busy day in the currency market with US consumer prices, the Treasury International Capital flow report, industrial production and consumer confidence due for release.

The euro staged a strong rebound in early European trade this morning rising all the way above the 1.3600 handle, but news of greater than expected job losses in Germany halted the advance at that level for the time being. The rally in the pair started in Asia as bargain hunters reemerged near the 1.3500 figure attracted to the relative value in the pair after three straight days of selling. The push higher caught the shorts by surprise and EUR/USD quickly ran through the 1.3600 barrier after triggering a slew of stops.

Trading in equities very closely mirrored yesterday’s volatile session. It is clear that investors are still uncertain, as direction in the Dow has been largely range-bound. Equities have swerved between two extremes, at one time positive by more than a hundred points. Even though the excitement and enthusiasm behind the newly proposed relief program has managed to give equities a new leg, we are still undeniable seeing the levels of concern that have pervaded the markets for most of last year. This level of fear was a big factor that led to the original implosion of the equities market. Trading in the dollar has been likewise mixed, with strength against the euro and yen, but weakness against the pound and commodity currencies.

The resonance of the New Year is starting to show its true colors at the start of the first full trading-week this year. The Dow finished a volatile day lower, in some ways ruining the sense of stability that pervaded in last week’s market. Volatility in equity prices was complemented by some extreme moves in the fx markets. Looking at today’s biggest percentage movers we can see the sheer magnitude of price action today, with some moves extending to more than 3.0%. The dollar in particular was heavily mixed across the board. We have seen some substantial gains against the euro and yen, in conjunction with weakness against the pound and commodity currencies. Today’s trading was a truly unorganized and unpredictable force.

The US dollar sold off modestly today on stronger European economic data and weaker US data. The dollar’s weakness was seen against every major currency except for the Canadian dollar which followed oil prices lower. Trading remains extremely quiet in the foreign exchange market and any moves that we have seen thus far are still nominal. The only currency pair that is really moving is the EUR/USD, but thin liquidity could be exacerbating the pair’s trading ranges.

The US dollar appears to be unfazed by this morning’s mixed economic reports. Thin trading conditions continue to dominate in the currency market, leading to inconsistent trading for the US dollar. The greenback strengthened against the Japanese Yen and British pound but weakened against the Euro. The latest reports on the US economy were weak but not as weak as the market had expected. There was the potential for really bad numbers and the fact that they did not materialize has actually helped the dollar.

With Japanese markets closed for Emperors birthday, currencies spent the night in quiet pre-holiday trade essentially marking time until dealing desks close tomorrow evening for the Christmas holiday. The euro made another run at the 1.4000 level boosted by better than expected French consumer spending and Current Account data, but the rally fizzled into the early European session as traders continued to square up their books.

It is the first trading day of what is typically the least liquid period in the financial markets. As a result, there was no consistent trading pattern in the US dollar today. The greenback weakened against the Euro but gained strength against the British pound and Japanese Yen. We still believe that the US dollar has hit a top and could be at the cusp of a major reversal. The EUR/USD’s resilience to the US stock market sell-off indicates that we are finally seeing the weak outlook for the US economy reflected in the weakness of the US dollar. In 2009, the greenback may no longer be the market’s safe haven currency of choice as yields on Treasury bills sit at zero to negative levels.

Evidence of oncoming holidays was all around the currency market tonight, as trading slowed to a crawl and the economic calendar was essentially barren of any significant data. Nevertheless, the euro managed to stage a rebound rally pushing above 1.4000 once again as better risk appetite in Asian markets and the oversold conditions in the unit created a perfect set up for a short covering bounce.

The anti-dollar rally continued in Asian and early European trade today in the aftermath of yesterdays surprising -75bp cut by the Federal Reserve, but the pace of gains was decidedly more muted as currency traders booked profits in the wake of lackluster equity market performance and downcast economic data from UK.

After several straight days of triple digit gains both EUR/USD and GBP/USD stalled in early European session as traders locked in profits ahead of the FOMC decision scheduled for 17:15 GMT later today. In relatively quiet night of trade the euro fell back from the 1.3700 level hitting a low of 1.3628 as data from the EZ showed continued weakness in both service and manufacturing gauges. Cable dropped even harder to 1.5210 after reaching a high of 1.5477 yesterday despite hotter than expected CPI numbers.