The expiration of options before the weekend and the start of a new month served to dampen trading enthusiasm today, leaving the foreign-exchange and fixed-income markets subdued. Equity markets, however, remain on the defensive amid concerns that the correction in the U.S. has more room to run.


Bank of England's

Monetary Policy Committee meets Tuesday and Wednesday. The latest string of data suggest that the pace of the economic slowdown is moderating. Today's purchasing managers survey and consumer credit reports are consistent with that recent trend. The

Chartered Institute of Purchasing & Supply

survey saw the diffusion index rise to 45.5 from 44.0 in February. While the index is still below 50, reflecting continued contraction, the pace of deterioration has slowed for the fourth consecutive month. Export orders jumped to 48.5 from 44.9, as CIPS indicated that sterling's pullback has boosted exports to the U.S. Consumer credit rose 1.383 billion pounds in January, which was a larger bounce than the market expected as bank borrowing reversed the decline posted in December. The MPC has delivered a rate cut in each of the of past five months. Look for it to sit tight this week.

The European Central Bank meets on Thursday.

Few if any look for that august body to loosen its grip on monetary policy.

Wim Duisenberg

reiterated that monetary policy is sufficiently accommodative. In his defense, he can now cite the acceleration in the eurozone's money supply. The three-month moving average of M3 rose to 4.9% in January from 4.7% in December. The target is 4.5%. Overnight deposits accelerated and private sector lending rose sharply.

The ECB may also not look very favorably to the wage settlements in Germany. Over the weekend, OETV, the public sector union, appears to have struck a deal for a 3.1% pay increase, beginning next month, which is thought to be in excess of productivity gains.

Duisenberg is right: The mandate for the ECB is not just the large countries, like Germany, but rather policy must be set for the entire bloc. He singled out Spain and Benelux countries as enjoying fairly robust growth. This is disingenuous as nearly three quarters of the bloc's economic activity takes place in Germany, France and Italy. Recall that inflation in Germany and France is running at the same rate as in Japan (0.2% year-over-year) and is by official admission overstated. Italy is widely expected to cuts its official growth forecast for this year, which of course has knock-on effects on its fiscal position.

Purchasing managers' surveys form Germany and Italy today did show some semblance of stability, but both diffusion indices remain below the 50 boom-bust line. Export orders have contracted for seven consecutive months in Germany and the domestic economy is not strong enough to offset it. The diffusion index has been below 50 in Italy for five consecutive months.

European officials appear content to let the euro bear the burden of adjustment.

The ECB's Noyer was quite clear on this. He said that a $1.10-$1.20 range for the euro was acceptable and if it slipped a bit lower, that would not be a problem either. More than one European official has noted that when key decisions were made last spring of who would participate in monetary union and what bilateral fixings would be used, the euro was worth around $1.07.

Treasury's Summers told Japan not to pursue a weak yen policy directly, but that it ought to provide more monetary stimulus.

As an eminent economist, Summers knows that in the current context, such a policy would likely result in a weaker yen. Japan cannot be fairly accused of exporting its way out of its mess. Exports have fallen on a year-over-year basis in Japan for the past four months. Japan's export sector is acting as a drag on the economy. To the extent the trade balance has improved it is because of an even larger drop in imports which is partly a function of the weak domestic economy and partly a reflection of falling prices for commodities such as oil that Japan imports. The


Fischer appeared to sanction a weaker yen insofar as he claimed that the yen could fall a little more without damaging other Asian countries.

Japan's foreign exchange reserves unexpectedly fell in February by $741 million.


Bank of Japan

indicated this decline largely reflected the depreciation of the euro. Barring intervention, Japanese reserves tend to rise $1 billion-$2 billion a month, largely reflecting the yield stream on its large holdings. Meanwhile, Japanese auto sales fell 9.9% in February on a year-over-year basis after a 0.9% decline in January. It is the 22nd consecutive month auto sales have declined. The yield on the benchmark bond slipped 3 basis points to 1.86% ahead of tomorrow's 1 trillion yen sale of six-year bonds. The Bank of Japan maintained a surplus of 1.6 trillion yen in the banking system, which pressed the overnight rate 2 basis points lower to 0.08%.

Australia reported a larger than expected trade deficit for January, but after falling on the news, the Australian dollar has bounced back and is set to post additional near-term gains. The January trade deficit was reported at A$1.38 billion, almost three times the December shortfall. The 4% rise in imports reflects healthy domestic demand. The 5% decline in exports likely reflects the sluggishness in Asia rather than an overvalued currency. A showing today would suggest the Australian dollar can recover toward US$0.6260-0.6300 over the next several sessions.

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