Gains across the risk spectrum resembled all signs of a fully fledged risk rally overnight with the commodity bloc leading an offensive higher against the out-of-form greenback. There were a series of dollar-negative themes floating about with this week's FOMC policy decision on the top of the list. We've seen positivity surrounding central bank action from both sides of the Atlantic govern risk trends, and expectations ahead of the Fed's policy decision on Thursday continue to work against the US dollar. The greenback is innately averse to the prospect of QE3 and markets are looking at the U.S data pulse in the context of how it affects chances of Fed stimulus, which was particularly apparent after the poor U.S jobs print last Friday.

In addition, comments by Moody's further diminished the dollar's appeal with the ratings agency noting the United State's Triple-A rating is at risk should government fail to reach a consensus on the budget. Known as the "fiscal cliff," the US has around $US1.2 trillion of tax increasing and budget cuts due to kick in January 2013. In August 2011, ratings agency Standard & Poor's made the unprecedented step of downgrading US debt in a move induced by the political floundering and brinkmanship after debt ceiling talks stalled. S&P cited at the time a lack of "effectiveness, stability, and predictability" from policy makers and its clear things have changed little since, at a time when political bipartisanship is of utmost importance.

The Euro rose to 4-months highs against the greenback as markets continue to look favorably on this evening's German Constitutional Court ruling, exacerbated by a decidedly weak greenback.  It's clear the Euro has come a long way in a short period of time with markets pricing in a grand effort by ECB President Mario Draghi and were rewarded accordingly. Nevertheless, there remains a strong potential for critical event risk to play into the hands of euro bears with this evenings ESM ruling the first of a long list. Mario Draghi's grand rescue efforts unveiled last week could all be in vein should the German Constitutional Court rule the European Stability Mechanism to be outside the boundaries of German law. Although a growing number of pundits believe the court will rule in favour of the ESM, any conditions, limitations, or legal amendments may also pose considerable short-term risks to sentiment.

The Aussie dollar made a solid break to the upside of 104-figure, while the CAD continued to forge higher against the greenback with the USDCAD pair falling to fresh 12-month lows. By the close, US equity markets failed to reflect the same vigour seen across risk currencies, still, stocks remained supported with the DOW clocking up a 5-year milestone high to finish 0.53 percent higher on day. Given the level of speculation building ahead of Thursday FOMC policy decision, we consider gains across the risk spectrum, in particular commodity currencies such as the Aussie and Kiwi to be tentative as the risk of disappointment grows.

Locally, the day ahead will see the release of the Westpac Consumer Confidence Index and second-quarter housing starts.  We anticipate there will be reluctance by local traders to go against the grain set overnight, which implies supportive behaviour for the local unit before we hand over to Europe. At the time of writing the Australian dollar is buying 104.3 US cents.

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