After approaching key levels last week, the dollar is pulling back today.

Japanese bond and equity markets retreated. In Europe, equity markets are moving higher amid merger and acquisition activity, while bond markets are a touch lower. The focus during the U.S. session today will be on the economic reports that will help solidify expectations for the U.S. jobs data at the end of the week and on the ongoing crisis in Brazil.

The dollar approached key retracement levels against the European currencies last week seen near 1.7275 against the German mark and 1.4230 against the Swiss franc.

The market lacks sufficient incentive to push the greenback through these areas, and the faltering upside momentum is encouraging the weak dollar longs to take their profits. A consolidative tone rather than a deep correction is likely as the market awaits fresh developments. The dollar is trading heavier against the yen amid talk of Japanese exporters selling dollars. Initial support for the dollar is seen near 114.50 to 114.75 against the yen.

Japanese bonds tumbled, with the yield on the benchmark #203 bond rising to 2.11% at one point before finishing at 2.035%.

In addition to the worries about the supply and demand of the government bonds, there is growing concern about the supply of bonds from local governments. According to some press reports, local Japanese governments may issue up to 5 trillion yen (roughly $43 billion) in the coming months. This is a 25% increase from last year. Last week, local governments raised around 168 billion yen in bond sales, but the demand was light. Fixed-income investors also did not like the news reports that suggested the

LDP

may propose that the government should buy equity from companies seeking to reduce their cross-shareholdings. Among other things, there is a fear that such purchases would be financed through new bond sales.

Meanwhile, real sector data in Japan continue to disappoint. Earlier today, Japan reported that new vehicle sales fell in January for the 22nd consecutive month. They fell 6.2% year over year after a 23.5% year-over-year fall in December. One bright spot -- the sales of imported vehicles rose 3%. Lastly, note that the

Bank of Japan's

reserves rose $6.26 billion in January, the second-largest rise in the past three years. The rise partly reflects the dollar-buying intervention in the middle of last month. Without intervention, Japanese reserves tend to rise a little more than $1 billion a month, largely as a result of the interest earned on its vast dollar holdings.

News that Societe Generale is buying Banque Paribas and reports of other consolidation in the financial industry are helping boost European bourses today.

European bonds continued their recent pattern of trading inversely to equities. The

European Central Bank

meets this week, and despite official acknowledgment that economic growth is weaker than previously expected, no policy action is expected. According to a

Bloomberg

survey, only 1 in 31 economists, traders and analysts polled expect a move at this week's meeting. Nearly half of those surveyed expect a cut by the end of the first quarter, while almost 80% expect a cut before the end of the first half of the year.

The

Bank of England's

monetary policy committee also meets this week. They have reduced rates at each of the past four meetings. While the market generally expects further rate cuts from the U.K., which are largely reflected in short sterling futures contracts, it is divided on the outlook for this week's meeting. Although the CIPS manufacturing survey reported earlier today showed further deterioration, the rise in export orders may herald the trough of the manufacturing sector, which contracted most last year. According to the data now available, on balance, look for the U.K. to stand pat.

The Federal Reserve begins its two-day policymaking meeting tomorrow.

Rather than slow in the fourth quarter under the weight of the global financial turmoil and the credit crunch conditions that prompted the Federal Reserve to reduce interest rates three times at the end of last year, the U.S. economy accelerated. Indeed, because of the lag time, the full impact of those easing moves has not yet fully worked its way through the economy. The Federal Reserve is most definitely on hold. Even if the estimate for fourth-quarter GDP gets revised lower at some stage, there is little doubt that the U.S. economy finished last year on a strong note. The real issue now is whether that momentum has carried into the new year.

Today's release of December personal income and consumption data will help shed light on the possible revisions to fourth-quarter GDP, but the market's focus will be on data for January. This means the National Purchasing Managers Association survey today and the nonfarm payroll report on Friday. There has been some talk that the U.S. manufacturing sector may be bottoming out. If such talk is indeed reflected by a stronger-than-expected NAPM report today, U.S. Treasuries are likely to push back from the key 128 area tested before the weekend. In addition, with new supply looming, look for profit-taking to weigh on U.S. bond prices ahead of the jobs report.

Starting today, Brazil will no longer publish its daily capital outflow figures.

This is the second time in six months it has suspended the release of this data. Brazil officials claim the data are misunderstood. Capital outflows do not necessarily mean a loss of reserves. Brazil will now release the capital flight figures every 15 days, and it will begin reporting its reserves on a daily basis starting today. Meanwhile, market participants suspect Brazilian officials are looking for a bold move to shore up market confidence. The window for such an opportunity is closing rapidly.

Marc Chandler is an independent currency strategist whose column appears Mondays, Wednesdays and Fridays.