USD - The dollar is headed into the weekend higher against most of its major counterparts as stocks and commodities struggle to rebound from yesterday's steep losses. With no major economic data due to influence investors otherwise, the dollar remains well supported in its role as a safe-haven asset. Moody's downgraded more than a dozen major international banks yesterday after the closing bell on Wall St., but the cuts have had a limited effect on investor sentiment as they proved to be no more than the ratings agency had forecast. The USD also continues to regain support now two days removed from the most recent Fed meeting at which there was no discussion of an imminent third round of quantitative easing. However, should the recent string of disappointing economic data extend through the summer, policymakers clearly have the room to act with inflationary pressures on the decline. Data this morning showed that gas prices have dropped more than 6% on average this month alone. Moreover, with the Fed having now extended Operation Twist so that its expiry coincides with forthcoming reductions in federal spending, an end to the payroll tax holiday, and the expiration of the Bush-era tax cuts, expectations are likely to grow that policymakers will attempt to backstop the economy from the impact of the fiscal tightening. While Bernanke has often warned lawmakers of the fiscal cliff the economy is nearing, it appears he and FOMC have now formed a similar monetary cliff at the same juncture. In the interim, the dollar will likely gravitate back towards the stronger end of its broad ranges as the ongoing debt crisis in Europe and slowing global growth spur on risk aversion.

EUR - The euro consolidated towards the lower end of its recent ranges overnight as a disappointing reading of the German IFO survey largely offset the announcement of relaxed lending terms from the ECB. The Bank eased terms for collateral that can be used to secure Bank funding, prompting expectations of a third LTRO program. The first two LTROs were quite effective in relieving the pressure on Eurozone governments struggling with surging debt yields, such as Spain and Italy, and a third program would likely ease the pain as well, at least temporarily. However, initial EUR gains were quickly pared as the German IFO report fell short of expectations at 105.3 versus the 105.6 anticipated. Moreover, the forward looking portion of the survey fell to 97.3 from 100.8 in the previous reading in just the latest sign that Germany, the region's economic engine, is not immune to an economic slowdown.

GBP - Sterling is headed into the weekend at the bottom of its recent ranges on growing expectations of further monetary easing from the BoE. Policymaker Martin Weale told reporters this morning that easing inflation is providing appreciably more room for further monetary stimulus. Weale was amongst the BoE members that voted for no change at the Bank's last meeting, overruling Governor King and three others. With stimulus now appearing to be a foregone conclusion, the GBP is losing some of its appeal.

JPY - The yen continued to weaken overnight, extending its push above the key 80 handle. Investors are widely expecting further rounds of QE from the BoJ and a hike in the consumption tax rate appears imminent, which when hiked in the past has led to yen weakness. However, with the ongoing problems in Europe and with it appearing like the Fed and ECB will ease policy in the near term, the yen's recent weakness could prove temporary.

Commodity Currencies - The commodity currencies are generally higher as financial markets bounce back after yesterday's declines. Raw goods are mostly up with oil at $79/bbl, gold up to $1564/oz and copper flat at $330/lb. The CAD rebounded as the price of oil, Canada's primary export, edged higher, and as expectations grow that the BoC may hike rates before the end of the year. The MXN gained after Mexican CPI pushed above the central bank's target as the weak peso supports consumption. Expectations of an imminent rate cut have all but vanished, with investors beginning to price in a possible hike before year's end. The AUD and NZD are both marginally higher as a bit of risk taking provides support.