This week has begun slowly as participants await fresh trading incentives. Bond markets are modestly firmer, while equity markets are mixed, and the dollar is generally lower. Trading volumes are reportedly light.



tacked on a 1.9% rise on top of last week's 4% advance. Higher equity prices will help make Japanese fiscal year-end book closings more attractive, but foreigners have reportedly been the featured buyers fueling the recent rally. Many global equity fund managers have been carrying underweight Japanese equity positions. Given the poor showing of Japanese equities in recent quarters, being underweight Japan has actually helped global equity managers improve their results

vis a vis

benchmark indices.

The 8% rise in the Nikkei this year in dollar terms puts it among the top performers, and being underweight Japanese equities means that global equity funds are now underperforming their benchmarks. Thus it is not surprising to see that many investment houses recommend boosting exposure to Japanese equities. This said, there still is the risk that after the start of the new fiscal year, domestics will return to the sell side, leaving foreigners holding the bag.

The Bank of Japan continues its generous stance in open-market operations.

The surplus of 1.3 trillion yen in the banking system assured that Japanese banks had no problem meeting today's reserve requirements. While U.S. banks have a two-week statement period, at the end of which reserve requirements must be met, Japanese commercial banks enjoy a one-month period that runs from the 16th of one month to the 15th of the next. The ample liquidity is keeping the overnight call rate just above zero and is helping to drag down other money-market rates as well. Earlier today the three-month certificate of deposit, a benchmark for money-market rates, fell to a record low of 0.10%.

The market continues to digest the implications of last week's sudden resignation of German Finance Minister


. Initial reports suggesting that the German government would take another look at tax reform, which has raised the hackles of many German businesses, have been denied. Nevertheless, many participants look for the government to adopt a more accommodative posture toward business. The economics minister has suggested that he favors greater cuts in corporate taxes than originally planned. Keep in mind that direct comparisons between countries' corporate tax levels is misleading. As it turns out, because of the various exemptions and loopholes, corporate taxes make up a relatively smaller proportion of German tax revenue than the relatively high tax rate would suggest.

Germany reported that its factory orders rose in January for the first time in half a year.

Factory orders rose 1.8%, which was much more than the consensus had forecast. Domestic orders rose a hefty 3.4%, which was more than enough to offset the 0.6% decline in foreign orders. Overall, orders for the December-January period were unchanged from the October-November period. Despite the favorable data, German equities are having difficulty building on the sharp gains posted before the weekend in response to Lafontaine's resignation. In particular, those sectors like insurance and utilities that heaved the greatest sigh of relief to Lafontaine's departure have fallen victim to profit-taking today.

In general, it seems that European bourses are vulnerable to a pullback this week.

Look for the


to test the 4970 area; a break would signal potential for another 100-150-point slide. The French


is trading heavier today. Initial support is seen near 4100. But of the major European indices the


looks the most vulnerable. Momentum indicators are showing bearish divergence. The FTSE has potential to slide toward 6100 from the current 6230 area.

The dollar is slipping, unable to maintain the recovery momentum of Friday after Thursday's knee-jerk

selloff in response to Lafontaine's resignation. Without fresh U.S. economic data until the second half of the week, dollar bulls will remain on the defensive, with the likely result being range trading. Expect the euro to be confined to a $1.09-$1.1050 range. This should translate into a dollar range of 1.7700-1.7950 against the German mark and 1.4550-1.4700 against the Swiss franc.

Today marks the seventh consecutive session in which the dollar has recorded a lower high against the yen.

The first sign that the dollar's correction against the yen is ending will be a break in this pattern. The dollar initially found some support around the 118-yen level, but has since broken through the 117.80-yen level, which could fuel another round of dollar selling and push the greenback another 1% lower. Dollar bulls will likely wait until the beginning of the new fiscal year before making a strong stand.

There continues to be scattered talk that some large speculative forces have sold short the Saudi riyal and are using the proceeds to finance long oil positions.

The Saudi riyal is fixed at 3.75 to the dollar. The weakness in oil prices has weakened the country's already poor economic fundamentals. The economy is stagnant at best and the budget deficit this year is likely to surpass last's year's 9.4% of GDP. Saudi Arabia has very little foreign debt as the deficit is financed domestically. Nevertheless,


has a below-investment-grade rating on Saudi debt. Official reserves stand at around $7 billion, but the

Saudi Arabia Monetary Agency

, unlike most central banks, may keep reserves in other investments and pension funds. The lack of transparency is a problem for foreign investors and speculators.

Saudi Arabia, like other oil producers, is caught in a difficult policy cycle to break. When oil prices are weak, there is great pressure for fiscal reforms, but when the price of oil recovers, the enthusiasm for reform disappears. Feeling emboldened by the events of the past 18 months, where rigid currency regimes have toppled, some large speculators apparently think Saudi Arabia could be the next one to go. Nevertheless, the short riyal/long oil positions may still be profitable with a break of the peg provided oil prices continue to recover.

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