Global Briefing: Dollar Resumes Its Rally

Last week's brief correction was just a pause.
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Recent patterns in the global capital markets remain intact. Major equity markets are struggling, while most bond markets have seen yields back up. Underpinned by growth differentials and apparent official verbal support, the dollar is firm. Last week's brief consolidative phase against the euro and Swiss franc has ended as the greenback has recorded new highs for the move.

Japanese equities slid a little more than 2% to register their largest single-day decline in two months, on good volume. Financial institutions were rumored to have been heavy sellers of


futures to hedge their equity positions for the fiscal year-end on March 31. Other reports warn that some cross-shareholdings may have been unwound.

Japanese government bonds bucked the heavy global tone and moved higher for the third consecutive session.

The yield on the benchmark bond fell 4.5 basis points to 1.815%. Japan's debt market was encouraged by the better-than-expected reception to the 1 trillion-yen sale of six-year bonds. Japan also reported its January unemployment rate was unchanged at a record high of 4.4%.

At the same time, encouraged by domestic and international pressure, the

Bank of Japan's

open-market operations suggest it is in the process of becoming even more accommodative. The BOJ increased the surplus in the banking system for the sixth consecutive session. The 1.8 trillion-yen surplus is the largest surplus since the end of the fiscal half-year last September. The weighted average of the overnight call rate slipped to 0.07%.

If U.S. officials have cautioned the Japanese from seeking a weaker yen to export their way into recovery, international officials apparently have picked up the call. The


Fischer was unequivocal. Japan is in a liquidity trap and the Bank of Japan could be more accommodative. Fischer acknowledged that this will lead to a weaker yen, but suggested that there was still scope for yen depreciation without hurting other countries in Asia. He specifically cited the 130-yen level against the dollar as an important threshold. Market whispers have suggested this is also the pain threshold for U.S. and Japanese officials, though confirmation will remain elusive.

Ahead of their meeting on Thursday, European Central Bank officials continue to defend their current monetary stance.

One of the key assertions in their argument is that a cut in short-term rates would trigger a counterproductive rise in long-term yields. While it is possible, look what the market has done.

Benchmark 10-year yields in Europe have risen to four-month highs since recording historic lows at the end of January. The 10-year German bund, for example, is yielding around 4.09%-4.10% compared to 3.62% at the end of January. The yield on the German two-year is near 3.20%, an 11-week high. Arguably a rate cut would help stabilize the situation. It would no longer be hanging over the market -- which is, at least, part of the logic deployed to explain the surprise rate cut in December.

The ECB's reluctance to deliver a rate cut may be forcing the euro to bear a greater burden of the adjustment process than has to be the case.

The euro has slipped to new lows against the dollar and sterling. This has put the dollar near an old psychologically significant area at 1.80 German marks. Similarly, sterling is approaching the 2.90 level against the mark. The dollar reached a high of around 1.8565 marks last year and this represents my target over the next couple of months and translates into something close to $1.05 for the euro. Sterling was boosted by the average earnings report, which helps raise confidence of some players that the


will not deliver a rate cut at its two-day meeting that ends tomorrow.

Mexico has not suffered much from the backing up in U.S. rates or the spillover effects from Brazil. The Mexican peso is trading near seven-week highs against the dollar, buoyed by strong investment flows. Inflation in the first half of February was reported at 0.69% compared to the almost 1% that the market was talking about and the 1.62% recorded in the first half of January. The benchmark 28-day cetes, or T-bills, yield near 27%. The high nominal and real yields continue to attract funds. Yesterday the yield on the one day T-bills fell 225 basis points to yield 25.25%.

In contrast, the Brazilian real fell to 2.14 to the dollar yesterday, suffering its largest single-day decline in six weeks.

The central bank, which intervened on at least three occasions last week, was noticeably absent yesterday. This may have emboldened some of the dollar buyers. Many players are concerned that the $1.7 billion of debt maturing this month puts more downward pressure on the currency. The Brazilian investment bankers association confirmed yesterday that domestic businesses was unable to borrow any money from abroad in January and February, compared to $10.4 billion borrowed during the same period last year.

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