Global Briefing: Euro's Tumble Slows a Bit

A French official says further weakness in the new currency isn't desirable.
Author:
Publish date:

Led by technology shares' rally in the U.S. yesterday and strong earnings reports, global bourses are posting solid gains. Bond markets are mostly steady, though the Japanese government bond yields continue to fall. Foreign-exchange traders are taking their cues from perceptions of official intent and have pushed the dollar higher against the yen, but lower against the euro.

The market seized upon reports that French Finance Minister

Dominique Strauss-Kahn

broke from the admitted official neglect to comment that further euro weakness is not desirable to take profits on long dollar positions. The euro's downside momentum slowed yesterday after being pushed to new lows. The market was vulnerable to a bit of a short squeeze. Strauss-Kahn's comments are not as euro-friendly as may appear on first blush and the euro's recovery appears to be driven more may market positioning than real concern that the

European Central Bank's

pain threshold has been found.

Strauss-Kahn was quoted saying that further decline in the euro "doesn't appear" to be desirable

and that its current level isn't worrying as it helps exporters, which in turn helps promote economic recovery. He did suggest that the euro had approached the bottom end of a reasonable range.

En toto

the comments do not appear to be that strong. Nor do they implicitly threaten intervention to stabilize the euro.

The euro's upticks are also being fueled by unwinding of long-yen-short-euro positions. The euro lost nearly 5% against the yen this month, until this week, when the yen has begun weakening. The euro has recouped about half of this month's losses since Monday and appears poised to tack on additional gains. From the current 127.70-yen area, the euro has scope toward 129 yen over the next couple of sessions. Against the dollar, the euro needs to rise above the $1.0680-$1.0720 area to trigger another round of short-covering.

Rumors that Monday's G7 meeting could produce a communique that in some fashion endorses a weak yen made the rounds

after a Japanese paper claimed that the major industrial countries would issue a statement about the foreign-exchange market. Japanese officials refused to comment on the speculation according to reports. However, officials have verbally protested the strength of the yen seen last week and earlier this week. It seems particularly unlikely and un-G7 like to explicitly endorse a weaker yen. Instead, look for the G7 to press Japan for more measures to ensure domestic-led growth, as U.S. Treasury Secretary

Robert Rubin

did yesterday. The dollar is bumping against resistance in the 120.30-120.50-yen level and convincing penetration would encourage a run toward 122 yen over the next few sessions.

Good demand for municipal and corporate bond offerings underpinned the government bond market. Municipalities and corporations raised some 580 billion yen (almost $5 billion) today after the government sold 1.4 trillion yen in 10-year bonds yesterday. Japanese investors are hungry for top-rated, higher-yielding issues, some of which are guaranteed by the government. Utilities and insurers have tapped such demand and are expected to bring more paper to the market in coming weeks. The yield on the new 10-year benchmark bond fell 5 basis points to 1.485%.

European bonds are mostly flat.

The ECB meets today but after the 50-basis-point rate cut earlier this month, the outcome is a foregone conclusion. If the eurozone countries report soft data in April and May, speculation of another rate cut will likely increase. But for the time being, monetary policy is on hold, as are rate cut hopes. While the recent rate cut will likely be praised at the G7 meeting, Europe may still face criticism that it needs to do more to stimulate its domestic economy.

France reported disappointing industrial output data earlier today. The consensus called for around a 0.2% rise in February industrial production; instead, output fell 0.6%. Weakness was particularly evident in the manufacturing sector, which fell 1.7% -- significantly more than the 0.1% decline the market had expected. Elsewhere, U.K. March retail sales rose 0.4%, for a 1.9% year-over-year increase. This was largely in line with expectations. Although the early Easter may have contributed to the rise, consumer sentiment appears on the mend, with the help of lower interest rates.

The Bank of England has cut key lending rates six times for 225 basis points since last October.

The monetary policy committee meets again in early May and is likely to sit tight. The June short sterling futures contract (similar to the eurodollar futures contract) is 3 ticks lower and is off 12 ticks on the month, as the market prices the likelihood of unchanged policy.

After falling to two-week lows yesterday, the

Nikkei

roared back today, posting its largest advancing session in a week. The 1% rise was led by technology shares and exporters, after the recovery of the

Nasdaq

in the U.S. yesterday and softer yen.

Fujitsu

, Japan's largest computer maker,

Sony

(SNE) - Get Report

, the country's largest consumer electronic manufacturer, and

Softbank

, one of the largest investors in the Internet (and an investor in

TheStreet.com

to boot), led the Nikkei higher. Asian equity markets were generally higher, with Hong Kong's

Hang Seng's

3.1% rally leading the pack.

European bourses are also higher, posting 1%-1.75% advances near midday on the continent.

Technology shares, like

SAP

(SAP) - Get Report

,

Nokia

(NOK.A)

and

Ericsson

(ERICY)

are among the leaders. Financial shares are also higher following a strong earnings report by

UBS

, Europe's largest bank.

The U.S. economic calendar is light today, with only the weekly initial jobless claims to be reported. Although labor markets appear tight, labor costs, when adjusted for productivity, remain tame. Next week's release of the employment cost index will attract more attention than today's volatile time series.

In lieu of economic data, market participants will hear Federal Reserve Chairman Alan Greenspan's testimony

before Senate Banking Committee about developing economies that use the U.S. dollar as the main currency. Several Fed governors are also scheduled to make public appearances. Also, some reports indicate that U.S.-Chinese officials hope to finish up WTO negotiations today. This would ostensibly allow a congressional vote later this summer. The June bond future faces key resistance near 122-20 and unless this area is successfully breach, the will beckon again. Initial support is seen near 121-16 - 121-20.