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Global Briefing: Looking for a Fed Shift

The dollar is weaker across the board.

Global capital markets have stabilized but remain in a precarious position.

The markets do not appear to have much appetite for risk right now and surprises may prompt stronger moves than may seem justified by events themselves.

The key focus remains on today's

Federal Reserve

meeting, the results of which will be known shortly after 2:10 p.m. EDT. About half of those surveyed by

Bloomberg News

expect the Fed to shift toward a tightening bias. If such a bias is not announced, U.S. bonds and equities could stage a strong rally, dragging up Canadian and Latin American markets in their wake. No one surveyed expects an actual rate hike. So if one were to be delivered, it would likely send shock waves through the markets.

The dollar is weaker across the board today.

Japanese exporters were reportedly the featured dollar sellers in Asia. The dollar had approached the 124-yen level, which represents the upper end of the dollar's six-month trading range. It tested this area in late November 1998 and again in early March. The near-term risk is for the dollar to drift lower in the days ahead as the technical tone is weakening. The dollar is posting an outside down day, having taken out yesterday's high and then yesterday's low. A close below yesterday's low, near 122.70 yen, would likely signal a move back toward 121.60.

The euro is firmer but well within the 1-cent range it seems to be consolidating within.

This means that gains should be limited to the $1.0730-$1.0740 area, while support is seen in the $1.0640 area. One potential risk for the euro is renewed concern about Russian President

Boris Yeltsin's

health. Part of the reason the


didn't impeach Yeltsin over the past weekend is that there seems to be no clear acceptable alternative to him. A critical power vacuum would develop with his demise. Yeltsin's health has been a perennial concern for the markets, and news he canceled his meeting with visiting Spanish Prime Minister Jose Maria Aznar highlighted the issue once again.

News that Standard & Poor's raised Australia's credit rating to double-A-plus spurred a rally in the Australian dollar

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to within striking distance of its recent highs, offsetting part of the concern of a tightening in U.S. monetary policy. The move was not totally unexpected as recent comments by S&P officials hinted such a move was in the offing. S&P cited Australia's fiscal restraint, strong growth and improved debt situation as reasons for the upgrade.

Australia's debt rating is now the same as New Zealand's and there is a risk that the latter will be downgraded, as it has been on negative watch since last year. The Australian dollar encounters selling pressure in the $0.6740-$0.6750 area. Pullbacks should be limited despite the softness in gold prices and the mounting stockpiles in copper -- two metals the Australian dollar is perceived to be sensitive to.

Japanese equities were narrowly mixed.



slipped 0.3%, while the broader


index managed to post a 0.1% gain. Turnover was the lightest in almost three weeks. Of particular note,



is reportedly in negotiations with


to form a European parts alliance. Contrary to expectations,

NTT Mobile Communications

was not added to the

Morgan Stanley Capital

international indices, and this weighed on the issue.

Most other regional markets were higher.

Singapore's bourse posted a 2.2% rise, boosted by its abolishing limits on foreign ownership of its banks. The six-day losing streak on the Korean bourse ended with a 1.6% rise. Reports suggest

LG Electronics

will sell 50% of its liquid crystal display business to


(PHG) - Get Koninklijke Philips N.V. NY Registry Shares Report

. This would be the largest single foreign investment in a Korean company. Korean bank shares continued to trade heavily.

Japanese bonds fell early amid increasing calls for a new supplemental budget to buoy the economy.

The yield on the 10-year benchmark rose 4.5 basis points to 1.275%. It may be difficult for the 10-year yield to fall below its recent low near 1.21% ahead of next week's monthly 10-year bond sale. Finance Minister

Kiichi Miyazawa

indicated that the new employment measures, to be announced shortly, may require new spending, but would not necessitate a new budget. Nevertheless, a senior adviser to Prime Minister

Keizo Obuchi

suggested that a supplemental budget would indeed be necessary. A consensus of such does appear to be forming, but is still seen as unlikely until later in the summer.

European bourses were posting moderate gains near midday.

Features include



, which posted a 9% increase in sales during the first four months of the year;

Marks & Spencer

, which reported a smaller-than-expected decline in sales; and a favorable report from

Deutsche Telekom

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Warren Buffett

indicated he was buying into a British company but would give no details. Today a British paper published the skinny. Apparently, the Sage of Omaha has bought a 2.2% stake in

Allied Domecq

, a U.K. beverage company that owns

Dunkin Donuts

. The value of his stake is worth an estimated $196.3 million. Allied's shares rose almost 7.5% on the report.

April's U.K. retail price index rose 0.7% for a 1.6% year-over-year increase, led by automobile and housing costs. The government's targeted measure, which excludes mortgages, fell to 2.4% on a year-over-year basis from 2.7%. The government's target is 2.5%. The decline appears to be largely a statistical fluke. For example, last year's gasoline tax fell out of the calculations, and this year's hikes in property and water taxes were not as large as last year's.

The fall in the RPIX below the government's target did little to offset to hawkish comments from the

Bank of England's

Deputy Governor Mervyn King. King said the BOE could no longer rely on falling import prices to curb inflation. These comments weighed on short-sterling futures contracts, which are sensitive to interest-rate expectations. The British pound itself is little changed, leaving it stuck in neutral.

Two emerging markets to note.

First, the Israeli shekel rose 0.6% to its best level in more than three weeks on news of a victory by Labor's prime minister candidate,

Ehud Barak

. Hopes of a greater regional stability, which would mean greater foreign investment, appears to be the main consideration. There is also some talk of a possible interest-rate cut as early as the end of this month.

Second, Mexico holds its weekly cetes (T-bill) auction today. Higher U.S. market rates and fears of tighter U.S. monetary policy will likely force short-term Mexican rates higher. The yield on the benchmark 28-day cetes are could rise 30-40 basis points from last week's 20.08%. The Mexican peso itself closed yesterday at its weakest level since late April and further profit-taking could push the dollar toward 9.45-9.47 pesos, from 9.37 pesos late yesterday. But the interest rate differential with the U.S. is still likely to be more than sufficient to cover the probable near-term currency weakness.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he held no positions in the stocks, currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at