USD - Last week, America's currency was the clear beneficiary of the nascent economic recovery in the US, as well as the safe haven flows stemming from the budget crises plaguing the Eurozone. The dollar's gains were also temporarily exacerbated by the unexpected 25-bps hike in the Discount Rate (DR)-the rate at which the Fed lends emergency funds to commercial banks. A string of mostly robust US data last week and this morning helped to paint an economic picture colored with hues of hope and promise: Empire Manufacturing (24.91 in Feb. vs. 15.92 prior); Philadelphia Fed Manufacturing (17.6 in Feb. vs. 15.2 prior); CPI (0.2% in Jan. vs. 0.3% exp.); Net TIC Treasury Flows ($60.9B in Dec. vs. $30.7B prior); Leading Indicators (0.3% in Jan. vs. 0.5% exp.); Chicago Fed Index (0.02 in Jan. vs. -0.58 prior). The ameliorating economic landscape, coupled with the Fed's surprise tightening of the DR, have market participants believing that an eventual increase in the Fed Funds is likely to follow in H2'10. In fact, current Fed Funds Interest Rate Futures now show the highest implied probability of tightening YTD (47.1% chance of at least a 25-bps increase on or before the 9/21/10 FOMC meeting). Nevertheless, the dollar appears to have lost some of its luster this morning, as a disappointing Dallas Fed Manf. report (-0.1% in Feb. vs. 10.0% exp.), coupled with gains in US equities (10,406.15 as of this printing) and other global stock markets, have damped demand for lower-yielding assets, namely the USD and JPY. Markets will be closely attuned to two key Fed commentaries this week: The first, scheduled for later today, will be SF Fed President Yellen's perspective on the economy; the second, will be Fed Chairman Bernanke's testimony to Congress on 2/24 regarding the decision to hike the DR. Markets will look to this week's battery of key data for further insight into the health of the world's largest economy, and the direction of its currency.

EUR - The euro rebounded modestly to begin the week at 1.36 levels vs. USD following news that Germany is preparing plans for Eurozone nations

to assist Greece. The single currency fell to 9-month lows of $1.3442 last week after the Fed's surprise move raising its discount rate. Earlier in the week, the euro had managed to stabilize as market jitters over a potential Greece debt default were soothed as E-16 nations pledged support. News that the Region's PMI was above forecast at 53.7 in February also provided some relief to the euro, but the currency remains overshadowed y signs that the US economy is on firmer footing.

GBP - The GBP opened sharply lower today at $1.5470 after weak local economic data and the surprise rate hike in the US. Last Friday showed a nine-month low at $1.5342 after British retail sales fell 1.2% in January (vs. -0.5% exp.)-more than twice as much as forecast. The BoE last week cut its forecast for UK economic growth, and predicted inflation will undershoot its target over the next two years. The GBP declined on concern the Central Bank will be forced to continue measures to revive Britain's economy as the US leads other nations in withdrawing emergency monetary stimulus. This Thursday's Q4'09 preliminary GDP release is expected to show a slight quarterly increase (0.2%); however, the y/y release is still expected to show a significant -3.1% reading.

JPY - The yen is trading weaker after risk appetite picked-up, with Japan's Nikkei up 2.7% to its highest close in three weeks. The rally was supported by exporters whose shares were lifted by a stronger USDJPY. The yen was also weighed-down by talk that Japan's second-largest life insurer, Dai-ichi Mutual Life, plans to sell about 1.07 trillion yen of shares in Japan's largest IPO. Meanwhile, Japan continues to combat deflation. Japan's Ministry of Finance Kan said a CPI of 1% is esirable. Last week, the BoJ left rates unchanged as expected.

CAD - The loonie saw a general uptrend against the USD last week with intermittent periods of reversal as it continues to hold its ground on strong commodity prices and steady, incremental improvement in data. Manufacturing Sales (1.6% vs. prior 0.1%) and Consumer Pricing (0.3% vs. prior -0.03%) saw up-ticks month-over-month and Core CPI jumped to 2.0% year-over-year from 1.5%. However, Wholesale Sales, likely due to seasonality, dropped to 0.7% in December from November's 2.5%. Crude oil produced the real catalyst for the loonie last week gaining 8.5% on the week for a high of $80.05/bbl at the close. Canada's Finance Minister Flaherty tightened rules last week on the country's mortgage industry, as record activity prompted talk of a housing bubble fueled by government easures that encourage consumer debt.

MXN - The peso also benefited from improvements in commodity prices. Crude oil accounting for 35% of Mexican exports as well as a general attitude amongst the investment community that the peso is one of the more undervalued currencies amongst the majors provided a base for continuing appreciation against its largest trading partner. The peso gained 1.3% vs. USD in last week's session for a low of 12.7930, it is holding under 12.75 as of this writing. Mexican peso bonds rose last week pushing the yield on the benchmark 20-year note to the lowest since May, boosting demand for emerging-market assets. Mexico's central bank kept its benchmark interest rate unchanged last week at 4.5% as the recovering economy doesn't appear to be fueling inflation, and increases in state-ontrolled prices and taxes aren't causing second-round effects.

AUD - The Aussie remains well supported vs. the USD at $0.90. The AUD also hit 25-year highs vs. GBP as expectations of interest rate hikes underpin the currency. Markets are forecasting interest rates to rise 1.09% over the next 12-months in response to strong economic conditions. With interest rates presently at 3.75%, the AUD was among the best performing currencies last year-rising 28%-which is expected to continue as demand for the high yielding currency continues.