Global Briefing: Dollar Keeps Rising

The greenback is near two-month highs against the yen.
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Global bond markets are higher after yesterday's biggest advance in U.S. bonds in six weeks.

Major equity markets are mixed. The

Nikkei

slipped, while most of the European markets are higher, except for the

FTSE

, which is giving back some of yesterday's strong gains. The dollar is trading near two-month highs against the yen. The euro is slightly firmer after recovering yesterday when the German Green Party did not insist on a unilateral cease-fire in Yugoslavia.

The benchmark 10-year Japanese government bond continued its bull run

with the yield falling 4.5 basis points to 1.23%, the lowest since the middle of last December. In its monthly report, the

Economic Planning Agency

left its assessment unchanged. The economy, it said, is "still in a very severe situation." Finance Minister

Kiichi Miyazawa

confirmed that around the middle of next month the government will unveil news measures to boost employment and competitiveness.

In a bid to cut the excess capacity, the Japanese government is thought to be considering tax incentives for businesses to close idle and unused factories. While this may address the latter problem, it would seem to aggravate the former. In addition, Miyazwa indicated that the measures under consideration do not require new spending. Japan's current parliament session is slated to end June 17, but the odds of an extraordinary session are increasing.

The Nikkei slipped almost 0.25%.

Among the highlights,

Honda

(HNC)

reported an unexpected 4% rise in profits, as sales in the U.S. offset some of the company's other challenges. Still, investors are concerned about future earnings and the stock fell about 80 yen. The 19% fall in

Fuji Photo

(FUJIY)

net income was more than expected and is the first decline in six years, according to reports. It was hurt by lower sales in Japan and price competition in the U.S. with

Eastman Kodak

(EK)

.

Other regional equity markets were mixed.

Bourses in Hong Kong, Australia and South Korea were on the downside. Taiwan and Malaysia were among the best performers. The former rose 2.4%, helped by bank shares, which reports suggest were lifted by a widening spread between borrowing and lending costs. Malaysian shares posted their biggest advance in three weeks, rising 4%. There is speculation that

Morgan Stanley Global Index

may reinstate Malaysia in its benchmark shortly.

For the most part, European bonds and stocks are higher, with the U.K. the notable exception. Ten-year bond yields on the continent are 3-5 basis points lower, helped by the rally yesterday in the U.S. Treasury market. Equity markets that were closed yesterday are playing a bit of catch-up, with many gaining around 1% today.

Deutsche Telekom

(DT) - Get Report

and

Vodafone

(VOD) - Get Report

are leading telecommunication issues higher. Rumors that

Ericsson

(ERICY)

may bid for

3Com

(COMS)

have resurfaced. News that

SAP

(SAP) - Get Report

may enter a cooperative agreement with

Qwest

(QWST)

and

Hewlett-Packard

(HWP)

helped push its shares to a new five-month highs. Rebounding oil prices are lending support to shares of companies in that industry.

Economic data from Europe has been light and largely limited to a better-than-expected Italian March industrial production report.

It rose 1.4%, more than twice the increase economists had been forecasting and off 2.3% from year-ago levels. Italian industrial output has not increased two months in a row since last summer, so it is hard to get too excited by today's report.

In Germany, there has long been a split in the Green Party between the fundamentalists and the "realos." The former appear mostly interested in staking out the moral high ground, while the latter are interested in influencing the course of events, by sharing power. Yesterday's vote at the party's special congress demonstrated that the realos are still in control. The party did not pass the resolution that called for an immediate and unilateral cease-fire in Yugoslavia. This will help keep the governing SPD-Green coalition intact. The euro recovered after testing the $1.06 level.

The euro's upticks also reflect that the market is taking the Russian impeachment hearings in stride.

Tomorrow's vote is unlikely to resolve the issue, even if the

Duma

impeaches

Boris Yeltsin

on one of the counts. Russian courts will likely have to issue a constitutional interpretation, which it appears would not lead to the removal of Yeltsin from office. Many commentators do not expect Russia to default on its Eurobond obligations. Some observers are even suggesting that an interim government may be more pro-market than the previous government, which Yeltsin dismissed earlier this week. Exactly what that means in a country that does not know the rule of law escapes me.

But perhaps most disappointing is that some investment banks, which did not expect last year's devaluation or default, perhaps because of their own exposure to Russia, have accused the

IMF

of seeking to protect its own balance sheet. Russia reportedly accounts for 20% of the IMF's exposure. File this under the pot calling the kettle black. Note that the new IMF aid package is contingent on Russia passing additional reform measures. Earlier today, the

World Bank

indicated that new loan programs to Russia will be delayed (though existing loan programs will continue). Meanwhile, after recovering from earlier losses yesterday, the Russian equity market is higher today, boosted by oil shares.

Helped by the advance in U.S. Treasuries, Canadian bonds rose the first time in 10 sessions yesterday and registered their biggest gain in 4 1/2 months. At the same time, the Canadian dollar posted a minor reversal, but sufficient to suggest the five-day correction is over. Look for the U.S. dollar to test the month's low near C$1.4450, with penetration likely, making the C$1.44 level the next target.

The favorable outlook for the British pound outlined here yesterday was wrong, or at least premature.

It did look good yesterday and even closed near the session's high against the U.S. dollar. But an outside down day is being recorded, which has negative implications. Unwinding of long sterling and short euro positions seems to be the main culprit. The next support for sterling is seen near this month's low of around $1.6065. The euro appears to have entered a consolidative phase, with the $1.0700-$1.0720 area marking the initial ceiling.

Lastly, note that Brazil reported a 1% rise in first-quarter GDP yesterday.

In part, this means that Brazil may not have to draw from the remaining $23 billion IMF assistance package. Most economists had expected GDP to contract. The rise was led by an 18% jump in agriculture output, which accounts for only about a tenth of GDP. Output form the service sector rose 0.9%. Manufacturing output eked out a 0.1% gain. Arminio Fraga, the head of the central bank, indicated that there was still scope for lower rates. Another rate cut could be delivered as early as next week.

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 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

commentarymail@thestreet.com.