USD - The dollar begins the week higher against nearly all of its major counterparts as optimism emanating from a surprisingly productive EU summit last week quickly fades. The dollar has also gained support as the riskoff trade intensifies after ISM manufacturing in the US fell into negative territory for the first time in nearly three years. The gauge fell to 49.7 after last month's reading of 53.5 and worse than even the most pessimistic forecast with a figure less than 50 indicating contraction. Moreover, the prices paid component tumbled to 37.0 from 47.5 in a possible foreshadowing of increased deflationary pressures and the new orders measures dropped to 47.8 from 60.1. The weak data has led financial markets lower after the S&P 500 had the best June in more than a decade. As such, the dollar is gaining back towards the higher end of its recent ranges, but its longer term gains remain limited by the increased possibility that the Fed could unveil further stimulus measures in the coming months. For the week ahead, investors will take note of factory orders on Tuesday and then weekly jobless claims, ADP employment change, and ISM non?manufacturing all due on Thursday. The week closes out with the monthly reading of nonfarm payrolls and unemployment on Friday with a modest improvement expected in both.

EUR - The euro retraced much of its recent gains over the weekend as optimism wanes following an EU summit late last week. While the decision to allow the EFSF and ESM to lend capital directly to struggling Eurozone banks is a step in the right direction, it won't solve the Eurozone debt crisis by itself. As such, attention is quickly shifting to the next major event, which is an ECB meeting set to conclude on Thursday July 5th. In light of the broad economic slowdown throughout the region, investors are widely expecting ECB President Draghi to cut interest rates by at least a quarter percent to a fresh all?time low. However, with Eurozone unemployment rising to historic highs today at 11.1%, policymakers may be considering deeper cuts as they hope to stave off a region?wide recession. Investors will also being paying attention to a budding French fiscal struggle with the national auditor announcing this morning that the federal government needs as much as €43B in savings this year and next. New French President Hollande campaigned and won on a strong antiausterity platform, and it will be telling to see whether his administration pushes on with progrowth strategies and higher taxes or if he capitulates with austerity measures. In the meantime, the EUR will likely ease back towards the lower end of its ranges as investors await the ECB's meeting on Thursday and US nonfarm payrolls on Friday.

GBP - Sterling begins the week lower against the dollar, but higher against the euro as the risk?off trade gains momentum. Despite registering slightly better?than?expected, PMI manufacturing contracted in June, stoking expectations of further BoE stimulus measures when they meet later this week. Investors will take note of PMI services and a gauge of house prices, both due on Wednesday before the Bank's announcement on Thursday. However, even should the Bank expand its quantitative easing measures, the pound's downside remains limited as investors widely expect the ECB and Fed to ease further as well.

JPY - The yen strengthened back towards the top end of its recent ranges against both the USD and EUR overnight, supported by risk aversion as stocks and commodities decline. The yen has also found support as the outlook for the Japanese economy improves, albeit modestly. The quarterly Tankan survey was released over the weekend with the most important forward looking manufacturing and non?manufacturing components both surprising to the upside at +1 and +6 respectively.

Commodity Currencies - The commodity linked currencies are generally lower this morning as waning sentiment puts a damper on recent gains. Raw goods are in the red this morning with oil falling back to $82/bbl, gold at $1598/oz, and copper down to $346/lb. The CAD is marginally lower as the falling price of oil - Canada's primary export - and the weak data out of the US - Canada's main trading partner - both weigh. Similarly, the AUD declined on the drop in investor confidence, but remains well entrenched towards the higher end of its recent ranges. The RBA is set to kick off this week's round of central bank meetings tomorrow with most investors expecting no change to Australian monetary policy after the Bank cut rates in both of their previous two meetings. While evidence of a worsening slowdown in the US, China and the Eurozone will likely limit any substantial gains in the commodity currencies, the Canada and Australia's AAA sovereign debt rating is increasingly drawing investor demand.

MXN - The Mexican peso recovered last week following gains in the global equities market and also after Mexico's IRP regained control of
the country's top office. The peso also found support as AB InBev agreed to buy Grupo Modelo for $20.1B worth of MXN. However, risk taking eased after the US showed signs of slowing. With Europe's economy still bleak, many economists believe the peso will remained pressured due to risk aversion.

RMB - CNY fixing came in at 6.3146, stronger than the previous reading of 6.3190 with a fairly quiet session given the holiday in Hong Kong. HSBC Manufacturing PMI for June fell to 48.2 the lowest level since last November. The new orders index fell by 0.6%to 49.2 with transport equipment and electrical machinery orders showing improvement and indicating that new funding from the central government has helped modestly, but has been hampered by a broad based recovery.