Short answer: keep strength training.
Longer answer: When you start to build muscle, your water retention will increase because muscle cells hold onto 3 water molecules where fat cells will hold one. But as time goes on, your muscle cells will increase your basal metabolic rate (BMR, the calories you burn by existing) and will help you create a calorie deficit so you can lose fat. Keep doing what you're doing.
Also, its important to remember to keep track of inches lost as well as weight lost. I've been bouncing around 160 for about a year but I've seen lost inches in my waist and hips and increased in my shoulders. This comes from the fact that I've increased muscle mass and decreased fat. Muscle is denser than fat so takes up less room.
Edited by: LEC358 at: 5/15/2013 (12:49)