Considering how bad full text translation programs are, let's just forget about them altogether and think about how to fix the Auto-Translater.
As I see it AT problems generally fall into three categories: the user selects the wrong word or phrase (<Right> instead of <Yes> for instance), the user can't find the words to correctly convey his message, or the user is a moron and thinks Japanese players will understand <man>nequin. Players generally select the wrong word because the word they select has multiple meanings in their own language, but not in the one being translated to. Contextual hints are necessary, as pointed out by Threx, and the solution offered is simple enough, but the translated text probably doesn't need to include the context hint. As long as the context going in is correct, the context going out will probably be too. As an example, the player uses the AT to write:
<Goblin World-Ruiner><Position><Right(Direction)><Be careful!>
His party members should see:
Player: <Goblin World-Ruiner><Position><Right><Be careful!>
And this is enough information received.
Not being able to find the words is probably more a function of the fact that the menus for finding phrases in FFXI is clunky, and trying to guess what phrases are included is a crap-shoot. Better menus are needed. This is something they need to hire a linguist for, someone who knows how people form their ideas and turn them into words, so that menus can be created based on how people think. This could actually be a very time-consuming and costly project, but undoubtedly very helpful for a multilingual game where cooperation is paramount. Perhaps another way to help players create AT sentences is to have them type a whole sentence, then suggest several combinations of AT phrases so they can choose the one that most closely resembles their original intent. It's kind of like a full text translator, but with more control over the output and that still uses the fragmentary messages we've come to love. As an example, a player enters:
/sh Does anyone have a Horned Goblin Codpiece I can buy? 2000 gil.
and then hits Tab. The AT might spit out something like:
/sh <Horned Goblin Codpiece><Looking to buy> 2000 gil.
and perhaps a few variations. This makes the AT much easier to use. This might also be very difficult to implement.
As for the third problem, the idiots, I can only think of a mandatory crash-course for using the AT with a short lesson on translation and a community effort to educate genuinely ignorant players while shunning those who misuse the AT simply because they can't be bothered to try. Seriously, <man>nequin?