Global equity markets are generally firmer, but early gains in Europe, half-hearted when compared with yesterday's up move on Wall Street, were reversing near midday in London. European bonds were softer after advancing over the past three days. Ten-year yields are 2-3 basis points higher. Japanese bonds edged higher to bring the benchmark yield down almost 7 basis points. The dollar is firmer across the board, rising above the 119-yen level, while the euro has been pushed back to the lower end of its well-worn ranges.

Contrary to what appeared to be the case a few days ago, the euro's string of lower weekly closes since its birth looks set to continue. In fact, the euro is poised to slip to new lows against the dollar. A convincing break of the $1.08 level will encourage participants to look for a move to $1.07, roughly where it would have been last May when the members and bilateral currency fixings for monetary union were established. Below there, longer-term players have their sights set on the $1.05 level, roughly corresponding to what would have been last year's low for the euro.

There is good news and bad news from the EU today.

The good news is that after much haggling, officials have hammered out a seven-year budget agreement. The bad news is that EU officials have hammered out a seven-year budget agreement. The failure to strike a deal would have been yet another blow to officials, after the EU Commission's resignation, public debates over monetary policy, rancorous debates over reform, and a new currency that can't sustain an uptick (on a weekly basis) for the entire first quarter.

Nevertheless, the deal struck is disappointing, not only from an objective point of view but also relative to what the EU hoped to achieve. An agreement was possible because no hard choices were made as key reform-minded officials failed to secure a spending freeze. Neither agriculture nor regional aid has been subject to the reforms that are required to bring the EU into the 21st century and lay the financial foundation for EU enlargement.

The key highlights of the agreement include:

  • Germany will receive funds to help rebuild its eastern states, but will not see a large reduction in its 11.5 billion-euro contribution, which was one of the main objectives of the German government.
  • Austria, the Netherlands and Sweden had their contributions to the EU cut marginally.
  • The U.K. largely retained its controversial rebate. However, it did agree to a change in the way it is calculated. Reports suggest this will result in a reduction of around 220 million euros of its roughly 3.2 billion-euro rebate by 2006.
  • France made minor concessions, but managed to retain 22% of EU's farm spending.
  • Spain, Portugal, Ireland and Greece negotiated a small increase in infrastructure assistance.
  • The way in which the EU contributions are determined will progressively shift from VAT receipts to relative GDP.

The lack of more substantive reforms on agriculture subsidies may work to the detriment of launching another round trade liberalizaton talks under the WTO auspices, which were to begin late this year.

The ECB reported the eurozone's money-supply figures for February.

There is something for everybody. Looking at the 12-month growth rate, much of the press coverage focuses deceleration of M3 growth to 5.2% in February from 5.6% in January. However, the ECB itself uses a three-month annualized rate as its reference. Under this measure, M3 growth accelerated to 5.1% from 4.9%. The ECB's reference target is 4.5%. Although the ECB refers to money-supply growth, many suspect that it, like the


before it, would not let money-supply growth interfere with a rate cut, if it so desired. And indeed, the recent acknowledgement by ECB officials that deflation remains a real risk, is encouraging ideas that a rate cut will be delivered in the next quarter.

The war in Yugoslavia is having only marginal impact on Europe's financial markets.

Of note, Greek asset markets, which were hit initially, are modestly recovering. Some leveraged players have viewed the pullback in the drachma as a new opportunity to put on carry trades. Market talk suggests fund interest in buying the Greek drachma and selling the Swiss franc. Greek bond spreads against German bunds have also narrowed from their peak above 200 basis points at midweek.

The war is also adding a disruptive element into Italian politics. Of the leftist parties that make up the center-left governing coalition, many are pressing for a condemnation of the bombings. Nevertheless, the issue seems unlikely to topple the government even if the Communist Reformation party makes good its threat to recall ministers.

Strong dollar demand from U.S. names and Japanese life insurers and pension funds reportedly provided the fuel to lift the dollar back toward the 119.50-yen level.

The buying forced a short squeeze among interbank dealers, as many had expected the yen to strengthen further ahead of the fiscal year end next week. The next dollar bull objective after the 119.50-yen territory is successfully captured is 120.00-120.30.

This said, there is a reasonable chance that the dollar can test the 121-yen area next week. Japan released two data series of note earlier today. First, March CPI figures for Tokyo were reported. Consumer prices fell 0.5% on a year-over-year basis after February's 0.2% increase. Deflation remains evident. Even the core measure contracted 0.2% on a year-over-year basis. Second, February auto output was reported to have declined 5.7% on a year-over-year basis compared to a 7.8% year-over-year decline in January, marking the fourth consecutive month in which the year-over-year rate was negative. Domestic demand remains weak.

Next week's FOMC meeting is a nonevent.

The April fed funds futures contract reflects little perceptible chance of a hike. A


survey of 23 Fed watchers found only two who thought a hike was likely. The July fed funds futures contract settled at 95.17 yesterday. This implies an expectation for fed funds to average 4.83%, or about a one in three chance that the


will hike rates either at the May 18 meeting or the June 30 meeting.

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