Dollar bulls remain in ascendancy.

The dollar has overcome some technically overextended signs to rise to new highs against the euro and fresh three-month highs against the yen. European bonds are more influenced by the heavy tone in the U.S. bond markets than by the continued recovery of Japanese government bonds. The

Nikkei

eked out a minor gain and most major European bourses are struggling to maintain their modest gains.

The Bank of Japan injected 300 billion yen into the banking system to maintain the 1.8 trillion-yen surplus for the third consecutive session.

The weighted average of the unsecured overnight call rate, which is similar to the effective fed funds rate in the U.S., slipped 1 basis point to 0.03%. Overnight rates, at almost zero, are helping pull down other money-market rates. At 0.23%, for example, three-month time deposits offer their lowest rate in a decade. Some press reports suggest the Bank of Japan is considering using certificates of deposit and short-term financing bills (one week to three months) to guide money market rates lower.

The yield on Japan's benchmark bond eased another 8 basis points to 1.61%.

Earlier in the session, the yield had fallen to 1.54%. The dollar is approaching the 38.2% retracement of its decline form last August's high against the yen set near 147.65 yen. This retracement target is found near 123.30 yen and was being tested near midday in London. A convincing move through there would encourage sights to be set on the 128-yen area.

Economic news from Japan has largely been limited to January household spending figures. Household spending rose a seasonally adjusted 2.2% in January, the fifth rise in the past six months. Spending rose 1.4% on a year-over-year basis, for only the second rise in 15 months. The breakdown was encouraging as spending on durable goods, which is thought to reflect more discretionary purchases, rose 20.5%. Slowly it does appear that Japan's tax cuts and stimulus plans announced in 1998 are beginning to show some effect.

The European Central Bank meets today and the market ascribes little likelihood of a rate cut.

Monetary officials throughout Europe have argued that monetary policy is sufficiently accommodative and an additional rate cut could prove counterproductive, especially if long-term rates back up. Yet this is exactly what European bond yields have done over the past five weeks. The yield on the German 10-year bond is up 3 basis points on the day to 4.16%, the highest since the middle of last November. That yield, which is the benchmark for Europe, has risen more than 50 basis points since late January. The rise in long-term interest rates likely offsets the easing of policy derived through the euro's depreciation.

The dollar is struggling to convincingly rise through the 1.80 area against the mark, though it did edge to new highs for the move, briefly. While this could be the beginning of the next leg up, thus far it has not been confirmed by the Swiss franc, against which the dollar has not taken out the high set earlier this week. Market sentiment is still constructive and the overextended technical condition looks to be resolved by a consolidative phase rather than an outright correction. The key fundamental factor underpinning the dollar is the desynchronized business cycles that so overwhelmingly favor the U.S. I'd venture that even if the vocal German Finance Minister

Lafontaine

did not call for an ECB rate cut, the euro would still have suffered. On the other hand, ECB officials have expressed little if any concern about the euro's weakness, which is interpreted by market participants as sanctioning the move and reducing the risk of joining the bandwagon to sell Europe's new currency.

Sterling bounced nearly 2 cents off Monday's low, but has lost its momentum and appears to be preparing for another test on those lows.

Initial support for sterling is seen near $1.6045 and a convincing break could see another quick cent decline. The

Bank of England

left rates on hold yesterday, but few think that the current 5.50% base rate is the low point in the cycle. Expectations are generally for rates to be lowered another 50 basis points in the coming months.

Brazil's central bank meets today under new pressure from the IMF to raise rates.

The IMF's Mussa warned that Brazil may have to raise interest rates to defend its currency and resist price pressures in the wake of the collapse of the real. Mussa's comments were issued within 24 hours of the central bank's meeting and shortly before the IMF decides whether to free up the next tranche of aid. The $4.5 billion the IMF could make available would free up the same amount from other international donors.

In order to demonstrate its resolve, the Brazilian government has announced plans to cut as much as 1.45 billion reals in spending (on public-sector salaries and pensions and cutting tax exemptions for exporters). Recently Brazil hiked reserve requirements in an effort to soak up extra liquidity. The risk is that the Brazilian central bank hikes the TBAN rate, which is what the central bank charges for some overnight loans to commercial banks, from 41% to something around 50%. Of course, the higher rates will likely deepen the Brazilian recession and the IMF is likely to adjust its forecast from a 1% contraction this year to something more in line with the markets' guess of around a 5% fall in output.

Marc Chandler is an independent global markets strategist who writes daily for TheStreet.com. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

commentarymail@thestreet.com.