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Global Briefing: Dollar Looks Vulnerable

It slipped 1% against the yen and is poised to slip against European currencies as well.

Jawboning by Japanese officials has helped fuel almost a 1% decline in the dollar against the yen, and additional losses look likely over the near-term. The dollar had tried several times to rise through the 122-yen level and was struggling.

The official comments hit a technically vulnerable market. A break of the 119.80-yen level, this week's low, could see the greenback slip toward the 118.25 area. Although the

Economic Planning Agency's

Sakaiya suggested that the dollar moving toward 125 yen would not surprise him, the market chose instead to focus on the

Liberal Democratic Party's

Ochi, who expanded on his recent comment that the 125-yen level was not acceptable, by suggesting 105-120 yen is the acceptable range. The low end is somewhat lower than the market had thought.


Bank of Japan

most recently intervened on a on a break of the 110-yen level and some press reports recently suggested the lower end of the officially sanctioned range was nearer 115. The market is also concerned that comments emanating from a meeting of


Summers with Japan's


could also weigh on the dollar.

Meanwhile, the Nikkei bucked the global trend and rose 0.80%.

Japanese equities rose despite the third successive decline in Japanese government bonds. The yield on the benchmark bond rose 4 basis points to 1.92%. This effectively erases half the gains in the JGBs since Feb. 12 rate cut.

Finance Minister


suggested that bond yields in the 1%-2% range were not worrisome. Addressing himself to the overnight rate, BOJ Governor Hayami said he could tolerate a zero rate as funds are pumped into the banking system to encourage money-supply growth. The weighed average of the unsecured overnight call rate averaged 0.12%, unchanged from yesterday.

The dollar is also looking increasing vulnerable against European currencies.

The dollar's technical condition is overextended. The 14-day relative strength index of the dollar against the mark rose to its highest level yesterday since early August 1997, when its cyclical peak was recorded. Although a high reading on the RSI is by itself not a reliable sell signal, it ought to make the bulls a bit more cautious, especially in an environment where the dollar is also heavy against the yen, which has led the move.

Look for the dollar to slip back toward the 1.75 level against the German mark. This would suggest the euro can recover toward the $1.1150 area and perhaps toward $1.1200. Sterling has steadied against the dollar after dipping below the $1.60 level yesterday. The recent slide in sterling has left it overextended too. Sterling's 14-day RSI has hit its lowest level since May 1998. A recovery in sterling against the dollar could happen even as sterling trades lower against the euro, as suggested in this space


German Finance Minister Lafontaine has been castigated

for repeatedly warning of deflationary pressures in the eurozone and calling upon monetary officials to ease policy. We ought not to dismiss his arguments, even though the

European Central Bank

shows no signs of capitulating. Today's final cost of living data (similar to other countries' consumer price index) for January saw a 0.2% decline in the month-over-month rate for a 0.2% year-over-year rate. This compares to a 0.4% year-over-year rate in December.

Recall too that


officials have acknowledged that this time series may overstate price pressures by 0.75%. If disinflation is a slowing in price increases and deflation is a decline in general prices, Lafontaine is right that Germany risks deflation. And the preliminary February data show more of the same. Two states have already reported their February figures. There suggest the year-over-year rate will remain near 0.2%.

It's not just Germany. France confirmed yesterday that its consumer inflation also rose 0.2% year-over-year in January. Adjusting nominal interest rates for the low inflation and one gets fairly high levels of real interest rates in Germany and France. High real rates weigh on business confidence. For example, France reported today that its business confidence eroded in February for the fourth consecutive month. The balance of optimists to pessimists fell to minus 16 in February from minus 10 in January.

The U.S. reports durable good orders and existing home sales today, but this is not the stuff that generally moves the capital markets.

While the consensus calls for some weakness in both series after strong December reports, today's data may be too old to influence trading considerations today. Moreover, weakness in today's reports will be overshadowed by expectations of an upward revision to fourth-quarter GDP, which will be reported tomorrow. Most are looking the report to confirm that the U.S. economy expanded by more than 6% at an annual clip in the fourth quarter.

U.S. bonds got pummeled yesterday and without fresh incentives may have difficulty the repairing the damage in the near term, even though yields have risen to levels that were expected to entice some buyers. Resistance in the March contract is seen near the 122-16 area. Note, though, that many in the market still do not expect the

Federal Reserve

to raise rates any time soon. Most of the 21 economists polled by


expect the Fed to remain on hold for the entire year, even though the odds of a hike in the second quarter has increased from 30.2% in the Feb. 1 poll to 38% in this week's survey.

Marc Chandler is an independent global markets strategist who writes daily for 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