USD - The USD begins the week on strong footing against most of its major counterparts, lower against only the "safe-haven" JPY and CHF. In a historic move late Friday afternoon, S&P downgraded US sovereign debt one notch from AAA to AA+ after US authorities found it difficult to broker a solution for raising the debt ceiling and putting a plan in place to cut deficit spending. Fitch and Moody's have maintained a negative outlook on US debt, but no overtures of a downgrade have yet been made. While the move is certainly significant, demand for US debt remains strong with the yields on both short term and longer term instruments all moving lower in early trading. However, falling out of the AAA club does call into question the USD's role as the default global reserve currency, and China, the largest holder of US debt, has already been outspoken about the need for reserve diversification. But in the currency markets it remains a game of relative value, and despite the slightly higher risk premium normally associated with a lower credit rating, the US is not the only major economy facing significant financial and fiscal challenges. As such, the USD will likely remain well entrenched as a "safe-haven" currency, and thus benefit in the near term from an increase in market volatility. Much attention will be paid to the FOMC meeting this Tuesday and Wednesday, with investors looking for any hints that the Fed is concocting another round of economic stimulus.

EUR - After a brief euro relief against the US dollar last week from an announcement that the ECB will buy Spanish and Italian debt, the market started this week euro-negative as concerns over EZ debt trumped the fallout from the S&P downgrade. Last week, both countries saw yields on their 1 year bonds spike above 6% as markets in the Eurozone continued to melt down. The G7 issued a statement that they would join intervention if needed, however despite the policy's support the reaction in the markets has been flight to safe-haven currencies. Italy represents the third largest bond market in the world and if the ECB cannot prevent a panic selling, stress in the region's credit markets could continue to pressure the EUR/USD in the near term.

GBP - The GBP starts mixed, falling against the USD, but up against the majority of its other major counterparts. Despite weak economic data, sterling has gained against its mainland Europe counterpart on bets that the UK will remain generally well insulated from the fiscal crisis rocking the Eurozone's peripheral nations. The British government has been proactive in reducing its deficit, and as such, relatively safe British assets are drawing increased demand. However, austerity is clearly taking its toll on the economic growth in the UK, and a worsening outlook after three quarters of stagnant performance will limit any significant gains.

JPY - After last week's intervention by the MoF/BoJ, USDJPY has drifted lower. Currently in the middle of its pre and post intervention range (76.30 to 80.24), the USD has gained 0.9% since Friday's close with a bias for a slightly higher USD due to threats of additional intervention.

CAD - The CAD fell for a seventh straight day in the longest stint of losses in nearly three years after S&P downgraded sovereign debt of the US, Canada's main trading partner. The tumbling price of oil (down 12% in the past week), Canada's main export, is also weighing on the loonie as economists begin downwardly revising their outlook for the Canadian economy in the second half of the year. However, the cut in the US credit rating will likely enforce greater central bank FX diversification, and thus an increase in CAD holdings in the medium to longer term.

MXN - The Mexican peso took a dive against the greenback after Standard & Poor's cut the AAA rating on debt issued by the US, the nation's biggest trading partner. Domestically, IMEF index measuring manufacturing and services activities in Mexico posted negative figures during the month of July. At the headline level, manufacturing printed 50.4 vs. the 53.0 expected, and barely above the cut-off point for expansion. Service activities registered 52.5, still below the 52.8 expected. The US debt downgrade should continue to impact market sentiment in the near term, keeping the USD/MXN above the 12 figure.

AUD - The AUD continues its decline this morning, adding to last week's precipitous drop. In the past five trading days, the Aussie has dropped by 6% against the USD, 7% against the JPY and a staggering 10% against the CHF in a renewed wave of risk aversion. Tumbling stocks and commodity prices weighed on the high-yielding AUD, however after last week's downgrading of the US's sovereign credit rating may slow its losses as governments scramble to diversify foreign currency and debt holdings. Investors will take note of Australian employment figures later this week, but the AUD will struggle to post any sustainable gains until global stock indices slow their losses.