The dollar continued to firm against the sterling following weak UK economic data, rising to its highest level in 4-months at 1.9813. However, the greenback was slightly softer against the yen and euro following the weak Philadelphia Fed survey.

The final reading for Q3 GDP was unchanged from the preliminary figure, with the economy expanding at the robust rate of 4.9%. The Q3 core PCE prices was slightly higher at 2.0%, up from 1.8%. The housing investment growth plunged by 20.5%, its lowest since Q1 2001. Weekly jobless claims also edged up to 346k, from 333k in the previous week. Pushing the dollar lower, however, was an unexpected dip into negative territory by the Philadelphia Fed survey at -5.7 in December, versus an 8.2 reading in November. The employment component of the survey dropped to 0.5 from 4.8 – its lowest level since February.

China moved to cool down its heating economy again today, lifting its benchmark lending rate by 18-basis points to 7.47%, its highest level in 9-years and the one-year deposit rate by 27-basis points to 4.14%. The move was China's sixth rate hike this year and meant to stall inflationary pressures, particularly after the latest CPI report revealed a 6.9% increase in November. The increase in rates will likely prompt renewed pressure on China to hasten its move toward greater currency flexibility.

In the Treasury's semi-annual report to Congress, it said the Yuan is substantially undervalued but refrained from labeling China as a currency manipulator. The report said, “China should significantly accelerate the appreciation of the RMB's exchange rate in order to minimize the risks that are being created for China itself as well as the world economy, of which China is an increasingly critical part”.

JPY Edges Higher

The yen crept higher across the board, benefiting somewhat from China's interest rate increase. The Bank of Japan, as largely expected, voted unanimously to leave interest rates unchanged at 0.50%. BoJ Governor Fukui said that downside economic risks were escalating but maintained there was no change in the Bank's fundamental economic scenario. He added that the positive economic mechanisms remain in place, but need to closely monitor the impact of rising costs on small firms.

In the Bank of Japan's monthly report, the central bank downgraded its view on the Japanese economy attributing slowing growth to the housing slump. The BoJ said Japan's economy remains on a moderate expansion trend but the pace of growth likely to slow in the interim. It also said that housing investment remains sluggish now, but the Bank anticipates a gradual recovery.

Data released from Japan also revealed an unexpected 12.2% drop in the November trade surplus to 797.4 billion yen, falling short of estimates for a 1.0% increase to 917.5 billion yen.

Sterling Falls on Soft UK data

The pound extended its losses against the majors after data revealed a larger than expected Q3 current account deficit, and more than doubling the previous quarter's deficit. The data showed a 20.04 billion sterling deficit, sharply exceeding calls for a slight increase to 11.5 billion sterling from 9.05 billion sterling in Q2. The final GDP figures were largely unchanged at 0.7% q/q and 3.3% y/y.

Traders will look ahead to November retail sales reports in the Friday session, with the monthly reading reversing October's 0.1% decline, increasing by 0.2% and unchanged at 4.4% y/y.