USD – The US dollar remains weak against major currencies not because of fragile US data, but because of recovery around the world. Investors have been using the dollar as a funding currency to buy riskier assets overseas. Last week, the Federal Reserve decided to keep monetary policies loose for the time being. Many analysts are expecting a bias towards more dollar weakness in the medium term. Recent data had been mixed. Initial jobless claims and the University of Michigan surveys of consumers unexpectedly improved, but durable goods orders tumbled 2.4% in August, the largest decline since January, while existing home sales unexpectedly fell in August to 5.10 million units, but sales of newly built single-family homes rose 0.7% to a 429,000 annual pace, indicating a gradual recovery of the housing market. Out this week would be the important nonfarm payroll report for September, released on Friday. Manufacturing, consumer, and gross domestic product reports will also be focused on. Overall, U.S. growth is rebounding. If this week’s data comes out healthy, the dollar could weaken further as investors put their money in riskier, higher-yielding assets.

EUR – The euro paused, consolidating above 1.46, following last week’s run up to 2009 highs. The single currency rose to 1.4842 after the Fed announcement holding rates unchanged at near zero for the foreseeable future. Investors aggressively sold the dollar following the announcement which bolstered the view of the dollar as a low yielding currency. The euro also benefitted from continuing signs of economic recovery in Europe. The Euro Zone Purchasing Managers Index (PMI) made further inroads into the 50 territory separating growth from contraction, climbing to 50.8 in September. Industrial New Orders rose 2.6% in July, a drop from the previous month’s 3.1% in a sign the recovery remains fragile. The euro is likely to remain supported as the global economic recovery takes root and interest rate differentials between the two economies takes on a more prominent role.

GBP - This morning the GBP fell for a fourth day against the dollar, reaching its lowest level in four months as stocks dropped worldwide, sapping demand for riskier assets. The GBP mainly unchanged against the EUR, erasing earlier declines that pushed the GBP the lowest level since March, after Chancellor of the Exchequer Alistair Darling said he will meet with the U.K.'s four top lenders to ask them to stop paying automatic bonuses. In recent months the UK economy has shown many signs of recovering from the historically deep recession it entered in 2008. Industrial production is starting to rise again, PMI data and leading indicators point to further improvement ahead, and housing has shown clear signs of improvement in both sales and house prices. However, there is still widespread uncertainty about the strength of the recovery and the sustainability. This week releases on Nationwide house prices and PMI will be the main focus.

JPY – The Japanese yen appreciated to 88.23 yen against the dollar, its strongest since late January after Japan’s Finance Minister Hirohisa Fujii hinted recently that he does not support a weak yen. Speculation that the new government, which took office for the first time this month, was unlikely to intervene in the FX markets unless it went below 85 yen gave people the green light to sell the USD against the JPY. Japan’s new government seems to be in favor of a strong JPY in contrast to the view of the previous Liberal Democratic Party-led government supporting a weak JPY. However, Fujii toned down his comments today after seeing the market’s reaction. Some fear that a rise in the yen would be tough for Japan’s exporters, which pushed the Nikkei share average down below 10,000 for the first time in two months. Out this week is Bank of Japan’s Tankan survey, which is expected to show the economic recovery is too
weak for companies to boost investments. Expect more yen gains in the near-term. USD/JPY may reach a year’s high of 87.10.

CAD – The CAD touched the weakest level in more than three weeks amid speculation Bank of Canada Governor Mark Carney may reiterate concern that a stronger currency may hold back an economic recovery. The CAD has dropped 1.2 percent over five days against the USD. With equities now off their highs and oil trading back in the mid-$60s, USD/CAD has climbed well off its lows. As long as the outlook for global growth remains positive, and the BoC does not soften its stance and create a change in relative monetary policy expectations, the CAD should remain biased for appreciation into year-end, interrupted by periods of weakness.

MXN – The peso strengthened as a rally in US equities helped boost risk appetite for higher-yielding, emerging-market assets. In the past quarter, the peso has weakened 2.5% against the dollar with concern that lawmakers will fail to approve President Felipe Calderon’s tax reforms needed to rein in the budget deficit. The government projects the budget gap will grow to 3% of the GDP this year from 2.1% in 2008. A drop in output at the state oil monopoly and the deepest economic recession since the 1930s in Mexico has caused a reduction in tax collection. Calderon will need the support of opposition party PRI’s backing to win approval for the budget.

CNY – The Chinese yuan is higher vs. the dollar at 6.8275. The yuan is expected to remain rangebound between 6.825-6.835 ahead of holidays in China. Domestic markets will be closed for 8 days beginning October 1 to celebrate 60 years of communist rule.