The economic calendar was not very favorable for the US dollar at the start of this new week, though the currency’s weakness was clearly visible well before the release of this morning’s only indicator. Looking out over the light docket, dollar bulls may struggle to regain there footing as European monetary policy decisions threaten to dim interest rate differentials.

In terms of price action, the greenback began to loose ground against the majors when London session liquidity came on line. EURUSD spent much of the Tokyo session slowly climbing in a ten-point channel that eventually developed into a test of resistance at 1.35. Holding close to its euro counterpart, the Swiss franc was able to advance 90 points on the greenback’s weakness to carry the pair on a test of 1.2215. In its own rally, GBPUSD was able to break above resistance at 1.99, though there was little change in the moves relative strength the round number fell. Finally, the carry prone USDJPY made a sharp 60 point retracement to 121.50 though the steady up trend remains intact.

As predicted, the dollar’s steady advance lost traction Monday as technical resistance met a weak fundamental push from the US calendar and overwhelming event risk from the other economic calendars. Initially this morning, the sharp drop in the Chinese equities market seemed promising for the dollar. US investors – retail and institutional – have pushed a significant amount of capital into the booming Asian economy; and past contractions have resulted in considerable withdrawals in order to avoid undue risk. However, the 7.7 percent drop in the Shanghai Composite Index didn’t generate the same flight to quality that was seen in late February. While European and US equities felt the fear, there wasn’t enough capital transfer to benefit the dollar. Perhaps this is testament to the low volatility conditions in the currency market and traders comfort with taking on leveraged risk. On the other hand, market participants may just be waiting for a day of follow through to confirm things are truly unraveling.

Back in the US, the only indicator on tap was the lagging factory orders indicator for April. As expected, the gauge rose for the third consecutive month, though its 0.3 percent pace was far cooler than March’s impressive 4.1 percent pick up. The modest advance has cast doubt on the imminent rebound in factory activity and business investment, possibly suggesting the economy-wide inventory sell off is not yet complete. On the other hand, the inventories component rose 0.5 percent, the most since September. While this report did have fundamental value, its market impact was limited. Traders had already found their factory activity readings from the durable goods and ISM manufacturing reports released well before this Commerce Department figure ever hit the wires. Looking ahead this week, the dollar will be drawn between interests inside and outside the US boarders. The ISM services report and later released trade balance will play its part in driving the currency; but the G8 meeting and ECB and BoE rate decisions may end up playing a bigger role in the majors’ fluctuations. In recent weeks, the market has fully priced out a cut in the Fed Funds rate this year (and has even seen modest speculation of a hike). However, should the European Central Bank and Bank of England pursue another rate hike, the dollar’s slight expectations for a boost would hardly be able to compete with truly hawkish central banks in the other main FX hubs.

Equity markets were trading lower Monday morning as caution generated from the Shanghai Composite put US investors on their guard. By 16:05 GMT, the Dow was on the weakest path, giving up 0.16 percent to trade around 13,646.25. The Nasdaq Composite was off only 0.7 percent at 2,611.98 while the S&P 500 was unchanged at 1,536.37. Skimming through the top volume and price movers, there were few big names leading the overall market. One newsworthy headline was handheld pc maker Palm’s announcement that it was selling 25 percent of the company to a private equity firm for a reported $325 million. Shares of palm jumped 8 percent to $17.37 on the news. In other news, though Accredited Home Lenders Holding survived the sub-prime credit crunch and its regulations changes and defaults, it hasn’t faired as well as some had thought. Today, Accredited officials have reportedly agreed to be acquired by Lone Star Fund V for $400 million in cash. Shares of the lender surged 10.5 percent to $15.20 on the news.

Treasuries advanced the most in two weeks in contrast to the weak performance of worldwide equities markets. The ten-year note was trading 5/32nds above the open at 96-20 as its yield shed 2 basis points to 4.931 by 16:00 GMT. By the same time, the bond was up 13/32nds at 95-22 as its yield lost 3 basis points to trade 5.030.

John Kicklighter is a Currency Strategist at FXCM.