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Before you bust out your dancing shoes and do the Cha-cha-cha, realize that overall, the economy contracted by 2.4% in 2009. I don’t want to be the bearer of bad news but the contraction the US economy experienced last year was the worst since World War II! Still, the upside surprise proved to be a boon for the dollar, as it encouraged currency traders to buy it up against most major currencies.

Digging deeper, components of the fourth quarter GDP showed that consumer spending, which accounts for two-thirds of all economic activity, was actually on the low end during the period. Compared to the 2.8% rise seen in the third quarter, consumer spending printed a moderated 2% uptick during the succeeding quarter. Aside from that, business investment fell 17.9% in 2009, marking its steepest decline since 1942.

What contributed mostly to growth was the increase in manufacturing activity. Manufacturers stepped up their production during the last three months of 2009 in order to replenish their inventories. Stockpiles shrank by only $33.5 billion during the fourth quarter, a far cry from the $100 billion quarterly decline in inventories seen during the first three quarters of 2009.

What does this mean, now that GDP rose even more than what initially expected? Does this spell an end of quantitative easing measures? Or… a rate hike? Gasp!

In my blog last week, I talked about how there was dissension amongst Fed officials. Let me remind you what Thomas Hoenig, a.k.a “The Lone Fed Wolf” said last week. According to Hoenig, with US GDP rising quickly in the fourth quarter, this may lead to a sharp rise in inflation. In order to avoid such scenario, Hoenig said that the FOMC should reconsider its commitment to keep rates for an “extended period.”

However, as I pointed out, it wasn’t consumer spending that ultimately pushed GDP higher. Fed officials may take this as a sign that the economy still needs some stimulus measures. We may have to wait until a revision of the GDP data to see whether or not this growth can be sustained or not. Remember, the third quarter GDP figures started out pretty hot too, before getting cooled down once more data was made available.

Looking ahead, the new batch of economic reports will likely shape market sentiment this week. First off is the ISM manufacturing PMI which will be released later today. January’s index is seen to improve slightly to 55.5 from 54.9 (revised down from 55.9). Given the fresh inventories, unless consumer spending activity has picked up, we might see the index miss consensus.

There’s also the upcoming ADP non-farm employment change. Last month, the ADP saw a loss of 84,000 jobs. While this report does not always predict the government’s actual count, last month’s score proved to be somewhat accurate as the NFP also printed a loss of 85,000 jobs. For the month of January, the ADP estimates that 36,000 net jobs were lost.

Currency traders will also be sweating it out as they await the results of the grand daddy of economic reports, the US employment situation on Friday. The expectation is that a net number of 13,000 people were able to get out of their momma’s basements and get jobs, probably keeping joblessness in the country steady at 10.0%. Setting the volatile nature of the report aside, the dollar could still swing either way following the NFP’s release depending on how the market gobbles up the results.

While usually upbeat economic figures usually give the dollar a black eye, a strong reading on the upcoming employment report could add some fuel on the speculation that the Fed will raise its rates sooner than later. Couple this with the dollar-buying bias we’re currently seeing, I suspect that dollar trading is going to be steaming hot come Friday…