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Global Briefing: Dollar Firms as Price Pressures Remain Absent

Plus, a look at the ECB's reserve figures.

Global capital markets have opened the week on a subdued note. Equity markets are mixed, while most bond markets are lower. The dollar is little changed, but showing a slightly firmer tone.

Japanese 10-year government bonds slipped as dealers sold futures contracts to hedge their contingent exposure ahead of tomorrow's 1 trillion-yen sale of six-year bonds. The yield on the benchmark bond rose 2 basis points to 1.385%.

Japanese stocks were mixed.



managed to eke out a 0.2% gain but still closed below the 17,000 level. It has penetrated that ceiling several times on an intraday basis since early April but has closed above it only once.



, which rose to a new nine-year high, and

NTT Mobile Communications

led telecommunications issues. Chipmakers were mostly on the downside on news that prices for the 64-megabit chip (commonly used in PCs) fell 17% last month to $6.70.

Although the Nikkei is little changed over the past week or so, turnover continues to be strong. For the eighth consecutive session volume exceeded the six-month average. Other Asian bourses were mixed.

European stocks and bonds are mostly lower.

Dragged down by U.S. Treasuries and signs that inflation may have bottomed, European bond yields are near six-week highs. The 10-year German bund yield is 1-2 basis points higher. Among equities, the outstanding news development has been that


, the largest bank in Europe by market value, indicated it would buy

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Republic New York



Safra Republic Holdings

. This will allow it to increase its presence in the U.S. and double its private banking business, according to reports. HSBC shares fell on the news amid concern over potential share dilution. HSBC indicated it would sell more shares to institutions, and sell preferred shares and more subordinated debt to finance the acquisition.

News reports also support what the market has long suspected: The German government will nominate


council member Ernst Welteke to replace Bundesbank President

Hans Teitmeyer

, who will step down this summer when his term expires. Welteke is a Social Democrat from the state of Hesse and as president of the German central bank will also be a member of the

European Central Bank


U.K. producer prices rose more than expected in April

, but that reflects increases in energy and tobacco taxes more than genuine price pressures. Manufacturers', or output, prices rose 0.7% after the 0.6% rise in March. But core prices, calculated by excluding food/drink, tobacco and oil, were unchanged on the month for a minus 1.6% year-over-year rate. Raw material, or input, prices rose 1.1% in April but are off 1.3% from year-ago levels. Short-sterling futures contracts are posting minor gains despite the higher-than-expected producer prices, suggesting the news has not altered perceptions of the trajectory of U.K. monetary policy. Current prices imply a bias toward expectations of another rate cut.

The dollar is sporting a slightly firmer profile.

Last week, the market strung together the biggest and longest rally of the euro's brief history. The three days of gains is about what some technicians look for in a bear market. On May 6, this space

warned that the short-covering rally in the euro has largely run its course and nothing has changed to alter this view. Support near the $1.0700 level was successfully tested earlier today, a break of which would signal another half-cent pullback to the $1.0650 area.

Don't be misled by talk that the recent decline in reserves at the European Central Bank is evidence that it has been quietly intervening. Unlike other central banks, the ECB reports its reserve figures on a weekly basis. The lack of much history may confuse even experienced central-bank watchers. It is true that ECB reserves fell a cumulative 1.7 billion euros over four weeks ended April 30. But a more careful examination suggests the decline in reserves stemmed from the unwinding of some fiscal year-end adjustments that had caused ECB reserves to rise 16 billion euros in the week ended April 2. For the record, as of April 30, ECB reserves stood at 237.5 billion euros compared to 227.4 billion euros on Jan. 1, when the ECB came online.

Comments by various ECB officials would also support this benign view of the change in reserves. Last week, Tommaso Padoa-Schioppa, an ECB board member from Italy, said, for example, that members of the ECB "take the view that the euro will gain ground in the international financial markets on the basis of its own intrinsic merit." In addition, with the growth outlook recent downgraded for the eurozone, by the

European Community

, the


and individual countries, there does not appear much official appetite for a stronger euro. Today, Italy's treasury minister acknowledged that a strong euro would not help Europe's growth prospects. And the vice chairman of the ECB, Christian Noyer from Germany, indicated he was "satisfied" with the euro's rise last week.

Meanwhile the dollar is in about a one-yen range against the Japanese currency between 120.50 and 121.50.

This trading range could persist another day or two. Other major currencies are also little changed.

For the record, last Friday's U.S. jobs

report had no net impact on expectations for U.S. monetary policy. The fed funds futures strip was unchanged by the data. This leaves the collective wisdom of the market assessing (roughly speaking) a 20% chance of a 25-basis-point hike at the May 18 FOMC meeting; a 40% chance of a hike at the June 30 meeting, and a little more than a 70% chance of a hike at the August meeting. There are no key U.S. economic data until the end of the week, when both inflation measures (PPI and CPI), retail sales and industrial production reports will be released. Expectations for Fed policy are unlikely to shift significantly until this data is reported.

If the market is pricing in a bias toward tighter Fed policy, it is expecting Mexican interest rates to fall.

Before the weekend Mexico reported a weaker-than-expected rise in April inflation. Mexican inflation has consistently been reported this year below market expectations. Consumer prices rose 0.92% in April, the slowest pace in a year. Producer prices, which exclude crude oil prices, rose 0.14%, the slowest rise in a decade.

The strong peso helps contain price pressures. The peso is among the strongest currencies against the dollar this year. The report will likely encourage investors to bid for the government's paper at this week's auction.

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