The dollar has dropped 1 yen overnight in Tokyo and Europe. As noted in's Friday closing report, the forex market had no real incentive to hold long dollar positions over the weekend and has taken the opportunity to push the dollar lower. Dollar/yen is now trading at 105.30 after selling off in Japan with no apparent intervention by the Bank of Japan.

This yen rally occurred despite the larger than expected decline of 1.4% in Japanese GDP for the October to December period of 1999. Although these data were weak, there is a general expectation that the next figures will be much stronger. Traders also felt that the Japanese authorities missed an opportunity to show their desire for a weaker yen when they failed to reinforce these poor growth numbers with clear support for the dollar.

Following its slightly better performance towards the end of last week, the euro has gained further ground against the weak dollar. After closing on Friday at $0.9628 the euro is now trading around $0.97 having gained 0.68% over the weekend. Concern over the outlook for U.S. equities markets has been supported by comments by

European Central Bank

Vice President

Wim Duisenberg

that he was concerned over the inflationary threat from the euro's weakness. This was interpreted as indicating higher euro interest rates in the future. There is a slightly increased possibility that the


will raise euro zone interest rates at the meeting on Thursday. Thus traders were able to see some positive news for the euro on the two issues currently in the markets view -- U.S. stocks and eurozone interest rates -- and some euro buying was reported.

Not surprisingly in this atmosphere the volatile euro/yen cross has been bounced around in choppy trading and is now just above the 102 level after holding between 102 and 103 on Friday. Euro/yen saw session lows within 1% of its all-time low of 100.90.

The pound has benefited from the dollar's weakness and currently trades in London at $1.5805, firmer than Friday's close in New York. This week sees a number of important economic releases in the U.K. and the pound remains trapped between a possible need to raise interest rates for domestic reasons and the Government's wish to avoid pushing the currency higher in euro terms. Today's announcement that the U.K. Producer Price Index for February was unchanged (and was only up 0.4% year over year) left the view that interest rate rises in the U.K. were less likely. The euro/sterling cross has firmed above 61 pence and is presently somewhat firmer at 61.4 pence.

Bank of England


Eddie George

, speaking in Switzerland, indicated that he saw interest rates rising generally in the next few months.

Dollar/Swiss franc has firmed with the euro and is trading at SF 1.6590 after last week's close at SF 1.6710. Forex markets are choppy and still lacking clear direction. Trader sentiment remains skeptical towards the euro and recent trading has given few solid reasons to revise this opinion.

Over the weekend the euro has benefited from some negative dollar sentiment associated with doubts over the immediate outlook for the major U.S. stock indexes. It is clear that further major declines in the


and the


will have repercussions on the dollar and could set up significant moves in dollar/yen and dollar/euro. This would tend to trigger moves in the euro/yen cross which is the prime measure of the market's perception of the euro. As noted on Friday, the euro will have to stage a more solid rally than any seen recently to establish a firm base from which to stage a general recovery.