USD - The dollar begins the week higher against nearly all of its major counterparts as the risk?off trade gains momentum. Financial markets opened lower this morning as investors begin to lose hope that global central bank stimulus can stave off further economic weakness. The result has been an intensifying flight to safety, thus pushing the dollar index to its highest level in more than two years. The current wave of jitters, clearly emanating from
the ongoing financial crisis in Europe, also amplified lower expectations for quarterly earnings set to kick off this afternoon. In the week ahead, there is no major data due until the middle of the week. On Wednesday, investors will take note of both the most recent reading of the trade balance and wholesale inventories. Thursday sees the release of the import price index, monthly budget statement, and weekly jobless claims, which will be closely watched after last Friday's disappointing NFP report. The week closes out with University of Michigan confidence and PPI data with slower price gains expected. While an improvement in data could help restore a bit of confidence, the dollar will likely remain well supported at the top of its recent ranges as slowing global growth and the ongoing European debt crisis provide plenty of reasons for investors to hold USD.

EUR - The euro fell to a fresh two?year low against the USD in early trading as the outlook for the Eurozone worsens. The common currency fell as low as 1.2250 during the Asian session before rebounding modestly after EU finance ministers met in Brussels to further discuss the implementation of the ESM - the region's proposed permanent bailout fund. The break lower also comes after the ECB cut interest rates last Thursday to an all?time low of 0.75%. However, investors continue to expect further cuts or other unconventional forms of monetary easing after ECB President Draghi told reporters that last week's cut may have only a muted impact on the Eurozone as growth remains weak with heightened uncertainty. Giving the market a new reason to worry, the yield on the Spanish 10?Yr government bond broke the key psychological 7% barrier this morning, a level that the government has previously deemed unsustainable. Despite last week's substantial declines (?3.3% against the USD and ?3.6% against the JPY), there appears room for further weakness with the 2010 low of 1.2152 versus the USD now the next clear level of support.

GBP - Sterling is slightly higher, but remains towards the bottom end of its recent ranges against its major counterparts. Weakness will likely persist in the near term as investors expect that the BoE's recent moves to pull the economy out of recession will have a limited impact. Data this morning showed that UK output unexpectedly contracted and business confidence dropped to the lowest level of the year. For the week ahead, there is not much economic data due out of the UK other than industrial production on Tuesday.

JPY - The yen steadily gained against its counterparts last week, and has extended those gains this morning as deteriorating regional data prompted a surge in demand for its relative safety. Japanese machine orders plunged by 14.8% versus the 2.6% contraction that was expected, and inflation in China cooled, adding to concern that global economic momentum is quickly slowing. However, sharp yen gains have been muted by expectations of forthcoming BoJ policy easing after Governor Shirakawa told reporters that the Bank is fully committed to powerful monetary easing until the 1% inflation target is met. The BoJ wraps up a two day meeting on Thursday, with range?bound trade in the yen to be expected ahead of any decision on future monetary policy.

Commodity Currencies - The commodity linked currencies are all marginally weaker this morning as risk aversion trumps modest gains in raw good prices. Oil rose to $85/bbl, gold was up to $1588/oz, and copper gained to $343/lb. The CAD reversed early losses against the USD as the price of oil, Canada's main export, pushed higher. However, the loonie remains near an all?time high against the EUR as Canada's AAA sovereign debt rating and 1% interest rates look increasingly attractive after last week's ECB rate cut and deteriorating sovereign debt market. The AUD fell to a monthly low against the USD after the Chinese CPI data unexpectedly fell, but has since rebounded modestly as commodity prices continue to push higher. As the main destination for Australian exports, Chinese economic growth has a substantial impact on the Aussie dollar. However, Australia has also retained its top AAA credit rating, making AUD ?denominated assets quite attractive to foreign investors. Data released this morning showed that foreign holdings of Australian debt rose to a record high in the second quarter with overseas investors now holding 76% of total Australian debt.

MXN - The Mexican peso stayed weak against the US dollar after Deputy Governor Manuel Ramos Rancia said the peso may remain volatile for years as Europe's sovereign debt crisis persists. Domestically, Mexico's annual inflation rate rose for a second month in June, accelerating to 4.34% from 3.85% the month before. Consumer prices climbed 0.46% in June, fueling an annual increase of 4.3%. However, central bank Governor Carstens predicted that inflation and consumer prices will ease towards the end of the year, and that much of the growth will depend on the US economy.

RMB - USD/CNY has weakened 0.1% from Friday's close after weaker CPI and PPI data. June's CPI rose 2.2% vs. a 3% rise in May y/y, below the government's target of 4%. PPI fell 2.1% after a 1.4% fall in May y/y. Premier Wen has cautioned of downward pressures to growth ahead of additional data due out this week which will include trade, new loan figures, IP, investment, retail sales and GDP. Expectations for Q2 GDP are 7.7%, lower than the 8.1% pace seen in Q1. Analysts expect that renewed activity by central bank officials will help to ensure a soft landing for GDP.