USD -The USD begins the first week of 2012 on the defensive, dropping against all of its major counterparts, most notably the high?yielding commodity?linked currencies. However, in a broader view, the dollar remains well supported against its peers despite the Fed's increasingly dovish position. Since reaching an all?time low in early 2008, the dollar index has appreciated by nearly 13%, and is today little changed from its value two decades ago at the end of 1991. This long term stability reflects the USD's continued role as a store of value and also helps explain why the US is attracting record demand for its ever growing issuance of bonds that the Treasury is using to finance a budget deficit greater than $1 trillion. Moreover, the US economy is showing signs of life with encouraging data released this morning in both the manufacturing and housing sector. Focus will fall early on Fed policy with the minutes from the FOMC's December meeting due this afternoon. Investors will also take note of key labor market data set to release this week, with private payrolls, job cuts and weekly jobless claims due before the all?important Non Farm Payrolls and Unemployment reports on Friday. After several straight weeks of improving jobless claims, expectations for a larger?than?normal gain in the NFP number are high, and a strong reading could set the tone for the labor market for at least the first half of the year. Finally, all eyes will be on politics as the GOP takes a step closer to nominating the Republican presidential candidate today with the Iowa primary.

EUR -The euro begins the year on a stronger note following better economic data from Germany despite continuing worries over the debt crisis. The single currency rose to a high at $1.3067 overnight, rebounding from last week's low of $1.2856 in thinned holiday trading. Germany reported a decline in unemployment by 22,000 in December while the jobless rate declined to 6.8%??a post reunification low??from 6.9% previously. The stronger data casts a glimmer of optimism amid an otherwise darkening outlook for the region. Greece warned that it will have to leave the euro if it fails to clinch a deal on a second EUR 130 billion bailout by March. The unusually stark public warning was intended to shore up domestic support for reform measures and emphasize the potential fallout to its lenders. Given the continuing severity of the situation Europe faces, the euro's gains are likely to remain short lived with the pressure for a way forward hanging over the currency into the new year.

GBP -The GBP begins the new year on strong footing against both the USD and EUR. Improved risk appetite, and better than expected economic data have provided support as investors look to assets with a higher yield than the USD and JPY. British PMI manufacturing data registered stronger than anticipated this morning at 49.6 versus 47.7 last month. Nevertheless, the index still remains in decline with 50.0 marking the divide between contraction and expansion. With little major data set for release this week, investors will take note of PMI services on Thursday, which has fared a bit better than the manufacturing index over the past year.

JPY -JPY is up 0.3% vs the USD but falling on the crosses as markets rally on improved manufacturing data releases in China and Europe. USDJPY continues to trade below its December range between 76.89 and 78.22 as technicals indicate an increasingly bearish bias. Although USD/JPY remains above levels at which officials last intervened. The acceleration in downward movement is likely to prompt protectionist rhetoric from Japan's ministry of finance.

Commodity Currencies -The Commodity Currencies were the best performing overnight, led by gains in the MXN and NZD, but closely followed by the AUD and CAD. Concerns over rising tensions in the Middle East are adding pressure to already high raw good prices. Oil is up nearly 4% this morning to $102.50/bbl on escalating concerns that Iran may take advantage of the US departure from Iraq to impede the flow of OPEC oil. Combined with the encouraging manufacturing data out of the US, Canada's main trading partner, the CAD has strengthened by nearly a percent against the USD. On a more positive note, the strong manufacturing report has also pushed the price of copper, the metal used in a wide array of industrial applications, up nearly 2.5%. Along with Australia's G10?leading interest rates, the rising price of the metal is providing support for the AUD. For the week ahead, investors will take note of trade and retail sales data due in Australia and the most recent reading of the unemployment rate in Canada.

MXN -The MXN gained sharply against the US dollar after upbeat manufacturing data from US and China boosted optimism about the global economy. With Mexico sending about 80% of its exports to the US, the MXN rallied nearly 1.70% after US manufacturing picked up in December and construction spending there hit a 1 ½ year high in November. In addition, Mexican stocks rose 0.65% to 37,579 points after Chinese manufacturing data showed expansion in December. After opening the year with a sharp rise, the MXN looks to level out and maintain its current strength this week as it anticipates positive data from the US and the globe.

CNY -China's currency continued its strengthening trend as USD/CNY saw a fixing rate of 6.300 last Friday, its strongest level since 2005. Also expected to continue to support the Yuan was the release of Manufacturing PMI data that came in at a better?than?expected 50.3 level vs. expectations for 49.1. The release should help allay concerns of an economic slowdown. Look for investor sentiment to improve and the Yuan to post another record high value when the Chinese market resumes trading tomorrow.