We have made it clear that we like the U.S. dollar and think USD/JPY is headed for a break of 103 and the EUR/USD down to 1.28. However, there are many skeptics out there who argue that the dollar doesn't deserve its current valuation, let alone further gains. Their reasoning has some merits, and eventually we believe that the dollar rally will lose momentum. But if there's one thing we have learned about the FX market, it is that currency moves can become more exaggerated and out of line with fundamentals than most people would anticipate. When the optimism reaches a peak, that's when the moves will reverse. And when that occurs, the correction can be brutal.

There are a few arguments floating around about why the dollar rally will not last. Some people believe that the Federal Reserve isn't in a rush to taper asset purchases, and when it

Everyone is talking about USD/JPY and the big breakout move that it experienced over the last 48 hours and while we do not underestimate the significance of breaking 100, we think that it is extremely important for investors to realize that this is not a USD/JPY story but a broader story of U.S. dollar strength. The greenback has soared against all of the major currencies and ends the week at 4 year highs against the JPY, 1 month highs against the EUR and NZD, 10 month highs against the AUD and 8 month highs against the CHF. No U.S. economic data was released today but the dollar extended higher after a speech from Bernanke. Traders were relieved that Bernanke did not say anything to imply that the Federal Reserve will rejoin the currency war by increasing stimulus or talking down its currency.

Just as equities can have an impact on

After weeks of consolidation, we are finally getting some action in the forex market. The rally in the U.S. dollar extended higher this morning, forcing the EUR/USD below 1.30, USD/JPY to a fresh 4 year high of 101.73 and the AUD/USD below parity (1.0) intraday. While the move in USD/JPY is stealing the headlines, there's no question that this is a broad based dollar rally because every major currency has lost value against the greenback. What started as a post jobless claims uptrend turned into the biggest 2 day move for the dollar in over a month and if next week's U.S. retail sales report confirm that job growth has translated into spending, the rally will continue. Investors are finally beginning to realize that the Federal Reserve is the only major central bank considering paring stimulus in a sea of policymakers who have just taken new steps to increase support

While no countries are willing to admit it - the currency war is on. Over the past week we have seen a number of central banks take action to devalue their currencies. The European Central Bank and Reserve Bank of Australia cut interest rates by 25bp to record lows and last night, we learned that the Reserve Bank of New Zealand sold its currency to cap its rally. Of course, we can't forget that the Bank of Japan fired a bazooka last month when they announced a 1.4 trillion quantitative easing program.

Techniques have varied but the goals have been the same - to stimulate their economies and boost their competitive advantage through a weaker currency. At a time when growth is a premium, every country could use a weaker currency because a stronger currency threatens the meager of amount of growth that most countries are expected to see this

The labor market is back and the U.S. dollar is rallying so expect a good day for risk and new highs for stocks. The U.S. dollar soared against all of the major currencies following better than expected labor market numbers. Non-farm payrolls increased 165K in the month of April and the unemployment rate dropped to 7.5%. Private sector job growth was very strong with last month's exceptionally weak report revised up from 88K to 138K. Average hourly earnings also increased 0.2% last month, but even though this morning's labor market report was solid and the feel good factor should last, the data was not unambiguously positive. Manufacturing payrolls were flat, average weekly hours declined and the broader U-6 unemployment rate increased to 13.9% from 13.8%.

Yet none of this matters because the sheer of relief that payrolls exceeded 150K will be enough to drive USD/JPY towards 100 and EUR/USD to

What a morning it has been in the forex market! The euro shot above 1.32 after the European Central Bank's rate decision but sold off aggressively when Mario Draghi said the ECB has an "open mind on negative deposit rates." Before the rate decision, we said a rate cut alone would not kill the euro rally, instead the ECB needed to be willing to do more and Draghi wasn't messing around when he said that "all options are open" and the "ECB stands ready to act if needed." The central bank delivered in a very big way today by cutting their main refinancing rate by 25bp, their lending rate by 50bp and extending their fixed rate allotment until July of next year - their willingness to consider negative deposit rates was just icing on the cake.

Based on the ECB's actions today and the number of times Draghi used the

There were some big moves in the foreign exchange market today but nothing compares to the sell-off in gold. In fact, describing the move in gold as a sell-off is an understatement because the 8% decline is the largest single day loss for the commodity in 3 decades. While gold is also considered a form of currency, it is a truly global commodity that is affected by broader and less country-specific factors than traditional fiat currencies backed by individual governments. Therefore, big moves in gold can be an important signal for currency traders. On a daily basis, gold may take its cue from the market's demand for dollars, but this time around, the sell-off in gold is sending a very strong message about investor appetite.

For the past few years, buying gold as an inflation hedge was one of the most popular trades championed by some of the most respected

Thanks to the FOMC minutes and weaker economic data abroad, the U.S. dollar enjoyed a nice rally against most of the major currencies this week. The mere possibility that the U.S. central bank could start to taper off its monthly asset purchase program as quickly as next month sent investors rushing to adjust their positions. The unevenness of U.S. data makes it hard to believe that the economy is strong enough to withstand less stimulus but Fed President and FOMC voter Dudley made it clear that small adjustments could be made to ease the pain of stimulus withdrawal. The question is now where Bernanke, our mild mannered inflation dove stands. The head of the U.S. central bank will be delivering his semi-annual testimony on the economy to Congress next week. It is always an interesting session to watch particularly since there is a colorful question and answer session. If he

Moody's dropped a bomb on the British pound half an hour before U.S. markets closed for trading on Friday. For the first time ever, a rating agency stripped the U.K. of its prized AAA rating. When the news broke, many economists argued that the decision by Moody's was expected and will not have a meaningful impact on the currency but based on the reaction that we have seen so far, FX traders are not acting as nonchalantly as the "experts" predicted. In the long term, these economists could be right in that the downgrade will not cause investors to abandon U.K. stocks and bonds but in the short term we could see the GBP/USD break 1.50 and maybe even test 1.45.

How the U.K. Downgrade is Different from the U.S. Downgrade

The main reason why experts say that the U.K. downgrade doesn't matter is because the markets took the U.S.

As the name suggests, there are 20 countries in the G20 and this is where I think the 20 nations stand on currency policy.

No issues with weak yen

• U.S. -- Treasury supports Japan's policies
• Canada -- Said G7 statement is a consensus and not aimed at singling out Japan
• China -- Guilty of persistent currency manipulation, so no finger pointing
• Japan -- Definitely won't be criticizing itself
• Germany -- Wants to leave Japan alone
• U.K. -- Plans to ease consistent with their own devaluation of currencies
• India -- Wants a stronger currency to tame inflation
• South Africa -- Currency has been weak, won't have any major issues with Yen
• Turkey -- Recently cut interest rates, calls for intervention
• Argentina -- Guilty of recent currency intervention
• Indonesia -- Has been guilty of recently intervening to support local currency

Supports

For the first time in 10 trading days, the euro weakened against the U.S. dollar. While the sell-off in the EUR/USD was caused by political uncertainty in Spain, even without the calls for Spanish Prime Minister Rajoy to resign, the currency pair was due for a correction. The European Central Bank has a monetary policy meeting this week and while their message is not expected to change, it will be difficult for Mario Draghi to avoid talking about the currency.

Over the past 2 months, the EUR/USD has risen nearly 7% and while we know that the central bank is comfortable with the EUR/USD between 1.34 and 1.36, the question is whether the recent rally has happened too quickly and if the central bank is worried about a 1.38 to 1.40 currency value. The EUR/USD is currently near its long term average, so we do not expect Draghi to call

Euro rose to an 11 month high today against the U.S. dollar, and many investors are now wondering how much further the currency pair can rise. From a technical perspective, the pair is poised for a move to 1.35, with the 1.3485-1.3525 level being the next major area of contention. In this zone, we have the big psychologically significant 1.30 level -- last year's high -- the 200-week SMA and 50% Fibonacci retracement of the 2011 to 2012 sell-off. This will be a very important level, especially since 1.35 is a big round number. The weekly charts also show an inverse head and shoulders pattern that supports the case for further gains.

From a fundamental perspective, the EUR/USD rally also has the blessing of the central bank. ECB Governing Council member Luc Coene said the level of the EUR is not a problem now, and there is no need for

The Bank of Japan increased their inflation target to 2% and announced an open-ended asset purchase program, which was exactly what the market had hoped for, right? Sort of.

On the surface, the Bank of Japan made some dramatic changes to monetary policy, but the details of their decision was far less aggressive. Here are 3 reasons why the BoJ killed the USD/JPY rally -- for now.

1. Decision To Adopt Higher Inflation Target Was Not Unanimous - The Bank of Japan shifted to a 2% inflation target, but the decision was not unanimous. Takehiro Sato and Takahide Kiuchi voted against the new target, saying that it was too high and that a growth strategy was needed first. Based on the central bank's CPI revisions, the members who voted for the target seemed to have very little confidence in achieving their goal. The BoJ upgraded their 2014 core CPI

Courtesy of the Bank of Japan, the currency war has heated up. With the yen falling 14% against the USD since November, it certainly seems that the Japanese are winning the war, but when it comes to a competitive devaluation, there are no real winners. We have been in the midst of a currency war for some time now, with some central banks devaluing their currencies through Quantitative Easing and others responding with intervention. At a time when growth is a premium, every country could use a weaker currency. A stronger currency can strip away the meager of amount of growth that most countries are expected to enjoy this year, which is why central banks have been fighting hard to prevent their own currencies from appreciating.

While the Federal Reserve, Bank of England, European Central Bank and the Bank of Japan have been particularly guilty of expanding their balance sheets

With only 2 more weeks to go before the end of the year, there still hasn't been any major progress on the Fiscal Cliff talks. This weekend there were reports that President Obama plans to reject a new proposal from House Speaker Boehner that some say involve a tax cut extension to all Americans earning $1,000,000 or less. Obama previously called this proposal unacceptable and his stance hasn't changed. The clock is ticking and if a deal is not reached by this Friday, we could see a wave of deleveraging sweep over the market as traders and investors reduce their exposure and hedge their positions ahead of the holidays. The market tends to be extremely quiet between Christmas and New Year's Day because many traders take the time off to spend with their families. If they want a peaceful vacation that does not involve checking their trading screens every day

Intraday volatility in the FX market increased last week on the back of stronger than expected U.S. labor market numbers and ECB comments. The year is winding down quickly but there could be one more push in volatility before everything settles down. Between this year's final FOMC announcement on Wednesday, the EU Leaders Summit Thursday and Friday and the December 16th general election in Japan, there is no shortage of event risks that could increase the volatility in the forex market. For currency pairs such as EUR/USD, we have already seen larger intraday moves even though it remains stuck in a broad 1.2680-1.3125 range. On the other hand, currency pairs such as AUD/USD and to some degree USD/JPY as well have seen limited intraday volatility over the past week. Of these 3 key events, the FOMC announcement will receive the most attention for 3 reasons - #1 the Fed is

The U.S. Presidential Election is finally here and it is one of the tightest races in recent memory. U.S. voters will go to the polls today and if we are lucky, by Tuesday evening we will know whether President Obama has been elected for a second term or if Mitt Romney will become the 45th President of the United States.

On Election Day in 2008, risk appetite was strong with gains seen in the EUR/USD, USD/JPY and stocks. However on the day that followed, the EUR/USD flatlined while USD/JPY and the S&P 500 fell sharply lower.

The price action of currencies and equities on the day after the election did not reflect the people's disappointment with the results - quite the contrary, America just made history by voting in its first ever African American President. Instead, the weakness in USD/JPY and the S&P 500, which

Now that Hurricane Sandy has come and gone, residents and businesses in the Northeast are slowly trying to return to normalcy. Power is still out for a large swath of New York City and many websites have had spotty service (ours included) due to damage to data center sites in the region, but the NYSE resumed trading for the first time this week. With most financial firms operating with a very lean staff, it should be no surprise that it felt like the day after a holiday on the New York Stock Exchange floor. Yet it is far from a holiday for most people in the Northeast who have spent the day cleaning up and recovering from the storm. Since we are lucky enough to escape with no major damage, our first thoughts are to the families impacted by the storm. Our second thought is how the storm

When Republican Candidate Mitt Romney won the first debate on October 3rd, the dollar weakened against all major currencies and stocks soared. When President Obama won the second debate, U.S. equities also enjoyed a nice rally, the EUR/USD appreciated but the dollar rose against the CAD and NZD. Today, most polls cite Obama the winner of the third and final debate and the dollar is trading higher against all of the major currencies - in other words, there has been zero consistency in the performance of the dollar after the debates.

Republican policies tend to be friendlier to business but based on a study conducted by Fidelity, U.S. stocks do better under Democrats than Republicans. Analysis of the past 12 elections over the last 48 years found that stocks enjoyed an average annualized return of 12% under Democrats and 6% under Republicans. The performance of the dollar is even more

With no major U.S. economic data on the calendar this week, the focus for currency and equity traders will be third quarter earnings. For the equity market, the significance of earnings is obvious, but for currency traders, the number of positive and negative surprises affects risk appetite and with it demand for U.S. dollars. Over the past 2 weeks, we have seen country specific factors such as the decline in U.S. unemployment and weakening Australian growth play a larger role in the daily price action of currencies, but that could change with a major surprise in U.S. earnings.

Earnings are receiving more attention than usual this quarter because they are expected to fall for the first time in 11 quarters. Q3 is expected to be the worst earnings season in 3 years. Last week, the Dow Jones Industrial Average climbed to its highest in nearly 5 years,