The resignation of the entire European Commission spurred a selloff in the euro, which brought the new currency within striking distance of its recent lows against the dollar. The news broke early in the Asian session. Expecting follow-through selling once the European centers opened, participants in the Asian time zone established short euro positions. European traders, aware of the market's reaction and positioning, were reluctant to sell the euro in the hole. This led to a bit of a short squeeze, allowing the euro to recover modestly from its lows. Key support for the euro is cited near the lows seen earlier this month just below the $1.08 levels. The $1.0880-$1.09 area should cap euro gains.

The short-term vagaries in the foreign exchange market ought not dissuade us from appreciating the significance of the European Commission's resignation. The unelected 20-member commission acts as executive for the European Community. An investigation found widespread financial corruption and mismanagement. Though the issue emerged a few months ago, it had died down recently, but the findings of the investigation made it immediately evident that the 625-member European Parliament would contemplate the commission's removal. European Parliament elections are scheduled for June.

The scandal confirms some of the market's worst fears about Europe.

Many perceive Europe's penchant for centralized bureaucratic solutions as large an obstacle to economic reform and modernization as the socialist-inspired programs. Already concerned that monetary union preceded political union, many will be disturbed by the lack Europe's lack of strong leadership, which can only be aggravated by today's resignations.

The resignations could not have happened at a worse time. The

European Union

is engaged in several critical negotiations. Internally it has begun a substantial reform effort called Agenda 2000 that includes a seven-year budget plan and the overhaul of farm and regional aid. These reforms will help the EU incorporate


newest members (Poland, Hungary and the Czech Republic) into its economic and social institutions. Early reports suggest that the European Commission may stay on in a caretaker capacity until a replacement commission could be named. It means that the March 24-25 Berlin Summit will not benefit from the presence of a strong commission, which sometimes seems needed to overcome national differences. The EU is also engaged in important trade negotiations with the U.S. on bananas, aircraft mufflers and genetically modified food.

Outside of the euro's decline, the market's reaction to the second surprise resignation in as many weeks was muted. European bonds are little changed. Major bourses opened stronger, helped by the continuation of the rally in the U.S. and Japan. Financials and pharmaceutical issues led the way higher in the early going. The German stock market is holding up best, while the French stock market is struggling to sustain its upside bias.

The Nikkei closed above the 16,000 mark for the first time since last August to bring its two-week climb to 13%.

A couple of Japanese officials, including the finance minister, attributed some of the Nikkei's and yen's recent strength to foreign buying. Ahead of the fiscal year-end at the end of this month, there is a happy confluence of foreign buying on portfolio allocation grounds and domestic repatriation. Whether the latter will carry over into new month is questionable. And if signs that the long-awaited economic recovery are not seen soon, the foreign appetite may wane, as it has in the past when the signs of spring turn out to be false.

Japanese officials are more cautious than many of the strategists at the global investment houses that have recommended buying Japanese stocks in recent weeks. The

Bank of Japan's

monthly report and the


report upgraded the economic outlook by indicating that the five-quarter-long contraction has probably ended. Neither anticipates a quick economic recovery. The BOJ noted that consumers remain cautious and warned that business investment could still fall. While financial markets have stabilized, Japanese officials are concerned that banks' lending stance has not improved.

Meanwhile, Japanese officials offered conflicting assessments of the yen's strength over the past week and a half.


suggested that insofar as yen's rise reflected new optimism about the Japanese economy as foreigners invested in Japan, it was fundamentally driven.


warned that recent rapid appreciation of the yen was not desirable. Methinks both are exaggerating the significance of short-term swings in the foreign exchange market, especially given the proximity to the fiscal year-end. The dollar is testing resistance in the 118.50-118.80 yen area. A move above here will prompt a retest on the 120-yen level over the next day or two.

The economic data released by Japan earlier today give the optimists little on which to hang their hats.

Money supply, measured by M2 and CDs, rose 3.5% on a year-over-year basis in February, compared to a 3.6% rise in January. The money-supply growth was somewhat weaker than expected. The BOJ may be providing financial institutions with plenty of liquidity, but the demand for money remains weak. Pushing on a string, anybody?

Japan also reported that rather than rising 0.8% as it initially estimated, industrial production rose only 0.4% in January. The year-over-year decline is put at 7.9% rather than 7.5% as originally reported. Lastly, and perhaps most importantly, department-store sales in Tokyo fell 3.4% in February after rising 4.5% in January. The January rise was a bit of a fluke, largely reflecting a clearance sale by a single large store. In any event, Tokyo department-store sales have fallen in eight of the past nine months on a year-over-year basis, as the Japanese consumer remains in hibernation.

The slate of U.S. economic releases are unlikely to produce a significant market reaction today.

The housing market remains strong even if the

Market News Service

consensus is correct that housing starts and permits fell 2.4% and 2.1%, respectively. The market is well aware that the manufacturing sector is one of the few weak spots in the economy, so news that industrial production was flat in February is unlikely to be too troubling for the market. Yet some data suggest that the manufacturing sector is beginning to recover, so if there is a surprise with today's report it would be for a stronger rather than a weak number.

The capacity utilization figure that is released with the industrial production report should confirm that U.S. growth is not bumping against capacity constraints. Since March 1, the July fed funds contract has rallied 14 ticks, reflecting the reduced likelihood of


tightening. During the same time, the yield on the 30-year bond has fallen 14 basis points to 5.52%. There is scope for bond yields to decline another 4-6 basis points before entering a consolidative phase.

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