Global Briefing: Euro Tumbles to New Lows vs. Dollar

Global capital markets are generally calm to open a holiday-shortened week, as the approach of the end of the quarter and the Japanese fiscal year-end dampen trading. The dollar has retained the lion's share of the preweekend gains that carried it above the 120-yen level and pushed the euro to new lows. The next objective is found near $1.05, which would correspond roughly with last year's U.S. dollar high.

Japan's bond and equity market posted minor declines.

Trading was light as the fiscal year end approaches. There was some market talk that Japanese financial institutions need to buy dollars to cover the writing off of nonperforming dollar loans extended to Asia. There was also talk that Japanese exporters have dollars to sell in the 120.50-121-yen area. Fixed-income trading was sluggish ahead of this week's two- and four-year bond sales. Tomorrow Japan sells $4.16 billion of two-year bonds and on Thursday will auction $8.3 billion of four-year bonds. With money-market rates hovering just above zero, investors have been forced to move out on the curve. Yet the long end is volatile. The intermediate sector has outperformed the long end on a total-return basis over the past three months.

The government's much-followed business sentiment survey, called the

Tankan

report, will be released next Monday and some market participants have begun to turn their attention to it. Ideas that the survey will pick up the improvement in sentiment may also be deterring bond-buying. A number of Japanese officials have been arguing that the Japanese economy has stopped contracting after shrinking for five consecutive quarters.

But if output has stopped falling, it remains in the trough, despite what implications one may wish to draw from the rally in the

Nikkei

over recent weeks. Earlier today Japan reported an unexpected decline in February industrial production. The consensus forecast got the sign wrong. Rather than rising 0.5%-0.6%, industrial production fell 0.6%, fully offsetting the 0.4% rise in January.

Pressure continues to mount on the European Central Bank to cut interest rates.

Many observers blamed the persistent (some would say shrill) calls by Germany's former finance minister,

Lafontaine

, on the ECB to cut interest rates as fueling the euro's weakness and the recalcitrant attitude by the ECB members. The subsequent decline of the euro demonstrates these woes cannot be placed fairly or squarely at Lafontaine's feet. The antagonistic former finance minister has support from two appreciated allies.

First, U.S. officials continue to press the EU to do more to stimulate economic growth, including reduce interest rates.

Second, the

Financial Times

reports today that the

IMF

has weighed in to urge the ECB to reduce interest rates to head off the risk of a recession. Slowly, but surely, a couple of ECB officials have expressed concern about the deteriorating growth prospects in the eurozone. The ECB's chief economist,

Issing

, in a German radio interview warned that the growth outlook was weakening significantly. At the end of last week Issing and Noyer, the ECB's vice president, appeared to upgrade their perceptions of the threat of deflation. At the same time, Issing has called on eurozone countries to do more to reduce public spending.

As many ECB and national officials indicated a lack of concern about the euro's decline throughout the first quarter, a weak currency does not appear an insurmountable obstacle to an ECB rate cut. The ECB meets on April 8.

German business confidence is at a 2 1/2-year low, as reported recently. Today France reported that business confidence in the manufacturing sector slid to its lowest level since October 1996, culminating a seven-month decline. Weak exports, falling prices and overstocked inventories were the culprits. France became the second eurozone country after Italy to officially revise downward its growth forecasts for this year. French Finance Minister

Strauss-Kahn

revised France's growth forecast to 2.2%-2.5% down from 2.7%. Changing a GDP forecast by a couple of tenths of a percent demonstrates a sense of humor well beyond Jerry Lewis' slapstick schtick. The official forecast remains above most private-sector guesstimates.

European bond yields are little changed and remain near three-week highs

. European bourses are posting modest gains, apparently fueled by merger and acquisition issues. The upticks appear half-hearted and vulnerable to a setback on Wall Street. The Greek stock market, one of the most sensitive to developments in Yugoslavia, opened higher, but reversed course. The Greek drachma is continues to lose ground. Greece's central bank intervened to support the drachma at today's fixing.

The Federal Reserve Open Market Committee meets tomorrow.

Few, if any, expect a change in policy. Some focus is on the policy bias and many in the market suspect the

Fed

will adopting a tightening bias. While chins may wag, a policy bias lacks substantive appeal. There is little correlation between the Fed's bias and its next policy move. To be clear, a tightening bias does not mean that Fed will tighten. If the FOMC meeting is a nonevent, the other potential highlight of the week, March jobs data, will be reported on Friday, when the markets will be mostly closed, which will prevent a reaction.

U.S. Treasuries finished last week on a soft note, vulnerable to additional downticks early this week. Supply concerns are just as much a factor as robust economic data, if not more so. After last week's slew of corporate offerings, reports suggest another $3 billion could hit the market this week. Often, underwriters of corporate bonds sell U.S. Treasuries as a hedge. In addition to the supply of U.S. corporate bonds, note that several emerging market countries, especially in Latin America, are also selling dollar-denominated bonds. Fears that Brazil was going to default have receded and this has helped rekindle investors appetite.

J.P. Morgan's

index of Latin American eurobonds (sovereign and corporate) has risen 15% since the Brazilian devaluation and is at the highest level since last August.

The resumption of borrowing on the international capital markets by Brazilian banks and corporations means capital inflows into Brazil. This had helped strengthen the real and lowered interest rates in Brazil. However, to be filed under "you have to be careful what you wish for," the strength of the real proved too much and the Brazilian central bank intervened last week, reportedly on more than one occasion, to slow its rise. Officials may be aided in their efforts by the fact that almost $4 billion in bonds are maturing next month, compared to $1.8 billion that matured this month. Maturing bonds often mean capital outflows if global investors do not roll over their proceeds into new instruments.

The strength of the peso is causing Mexican officials some consternation.

The peso is trading near seven-month highs against the dollar. The substantial inflation differentials with the U.S. warn that in real terms, the peso may become uncompetitive. Due to the holiday at the end of the week and the two-day settlement period, Mexico will hold its weekly auction today instead of tomorrow. Many look for the key 28-day cetes (T-bill) rate to fall as much as 50 basis points at the auction.