What the U.S. economy needs the most right now is jobs. It is the missing ingredient in the U.S. recovery that has frustrated Federal Reserve officials the most and explains why the dollar fell sharply following this morning's U.S. economic reports. 

The sell-off in the U.S. dollar drove the euro above 1.32 towards 1.33, the pound above 1.58, USD/JPY to 82.50 and the Aussie back above parity.

Producer prices increased and the trade deficit widened, but the jump in jobless claims overshadowed the dollar positive reports by reminding traders about the sluggishness of job growth. Jobless claims rose 445k for the week of Jan 8th, the largest increase in 2 months. Continuing claims declined but the 4 week moving average edged higher. After Friday's disappointing non-farm payrolls report, investors really needed jobless claims remain low to ease their concerns about job growth. Unfortunately the latest jobless claims report has only reminded them of the difficult road ahead.

In the meantime, inflationary pressures are on the rise with producer prices increasing 1.1 percent in December. This gain was due entirely to higher food and energy costs, a problem for many countries. Excluding food and energy prices, producer prices rose only 0.2 percent. Inflation is on the rise along with inflation expectations, but for the time being, price pressures are not significant enough to prompt the Federal Reserve to respond. The improvement in the trade balance on the other hand was a welcomed surprise. The deficit was expected to increase but instead shrank to $38.3B from a revised $38.4B. Exports and imports both increased with a sharp rise in oil imports offset by large gains in civilian aircraft and consumer goods exports. The dollar weakened significantly between September and the first week of October, providing support to the export sector. 

ECB President Trichet is delivering his regular post ECB meeting press conference as we speak and so far he has spent the majority of his speech talking about inflation and how it could increase further which has accelerated the gains in the euro. He said monetary policy remains accommodative for the time being due in part to the downside risks to their economic outlook.