USD - The US dollar finished last week on a firm note primarily due to the European troubles that are permeating across the financial market. Global financial markets started the week in a risk-averse mode, with equity indices in the red and the safe-haven JPY and USD generally gaining. This past weekend's G7 meeting yielded no new policy measures and market participants are voicing their concerns in the sovereign debt markets with record yields for Greece and a poorly performing bill auction in Italy. Share prices are also showing weakness on investors' fear that a Greek default would adversely affect the capital positions of French lenders in the absence of a recapitalization plan from government officials. The main mover in the US this week is Retail Sales data. July's report surprised to the upside but it is uncertain how consumers responded in August following the financial turmoil. Consumer confidence tanked in August, a warning that we could see some retrenchment in consumption. Consensus looks for a rise of 0.2% m/m in both core and headline sales, but some downside risk to this is expected. Other indicators of interest will be the Philly Fed, Empire Manufacturing Index, and CPI. The regional surveys will be of particular interest after last month's weak readings.

EUR - The euro plummeted vs. the dollar as investors fretted over a potential Greek debt default. The single currency fell to a 7-month low vs. the dollar at $1.3499 overnight and has shed over 6 cents since last week. With no end in sight to Greece's fiscal woes and money running out, Greece's troubles have a spurred a selloff in global equity markets. A G7 meeting over the weekend provided little assurance to markets that were already worried after German Chancellor Merkel's party began openly discussing default as a possibility last week. The ECB also changed its policy stance to neutral last week amid signs of a sharp slowdown in the economic recovery. The central bank's announcement acknowledging downside risks to the economy effectively took further interest rate hikes off the table which had propelled the euro's gains over the past six months. Amid this backdrop, the euro is likely to face further pressure until Eurozone leaders convince investors that they have a plan to deal with Greece and the other at risk countries.

GBP - Sterling begins the week mixed, falling against the USD on increased risk aversion, but gaining against the EUR with Greece appearing ever closer to default. Yields on British government notes fell to an all time low this morning as investors sought their relative safety, but the increased demand apparently came mostly from Eurozone investors, translating into gains against the EUR. However, speculation has increased that the BoE will soon need to enact another round of quantitative easing. CPI data due tomorrow will be closely watched, with persistently high inflation providing the main resistance to further stimulus.

JPY - JPY is outperforming on risk aversion, up over 0.7% vs. the USD as market participants drive safe-haven flows. USDJPY is back in the middle of its two month range, reversing recent upward movement seen last week following weak domestic economic data. BoJ minutes released in the Asian session highlighted officials' growing concern over the strength of the JPY and its impact on economic activity. Lastly, the Japanese trade minister has been replaced following a public gaffe that saw the outgoing official make disparaging comments about the area devastated by the Fukushima nuclear disaster.

CAD - The CAD extended its losses this morning to reach the lowest levels against the USD since late January. The loonie was back at parity with its North American counterpart as a resurgence in risk aversion sent investors for the exits on riskier, cyclical assets, like the CAD. However, Its early morning declines have been slowed by the unexpectedly buoyant price of oil, Canada's main export, the Obama administration appears close to presenting the US Congress with a proposed jobs bill. With little data due in Canada this week, the CAD will derive its direction from overall market risk appetite and progress on Obama's jobs plan.

MXN - The Mexican peso touched its weakest level in a year over concerns of Europe's sovereign debt crisis and continued US economic slowdown. Domestically, consumer prices for August fell to 0.16% vs. the previous 0.48%, while industrial production y/y posted a gain of 3.2% vs. the previous 3.7%. Mexico's 2010 budget draft indicated a contraction on overall government spending to a growth of 2.5% of GDP, down from 4.1% in 2011. With inflationary pressures easing, the central bank may lower interest rates in the near term, which will contribute to a weaker peso.

AUD - The AUD is at its lowest levels in three weeks, extending its declines from Friday, on growing concern that a Greek default is imminent. As such, the Aussie has suffered as investors grow increasingly averse to risk and the price of Australia's main exportscopper and iron, pare recent gains. Trade data released overnight suggested that the relatively strong AUD may also be weighing on the economy as exports outpaced imports by less than expected. Although the RBA kept interest rates on hold last week, it has become increasingly clear that their bias is towards easing rather than tightening, with futures currently pricing in over 140bps of cuts in the next 12 months.