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Global Briefing: The Euro Rises

The new year rings in with higher bond and equity markets in Europe and Asia.

The euro rose primarily on its novelty in Asia before settling back in early European activity. Activity, as it usually is at the start of the year, is relatively light, and many interbank participants are more concerned about the smooth implementation of their accounting systems than placing a substantial bet today. The euro was also higher against the yen and British pound as well. Thus far, the launch of the euro has been smooth and has also taken some of the shine off the Swiss franc, which until now had benefited as a safe haven from the uncertainties surrounding the new currency.

The strength of the euro helped lift European bonds, where, for example, the 10-year German bund yield fell about 9 basis points to 3.78% and is holding just above the record low yield of 3.74% set on Oct. 5, 1998. U.S. Treasuries are also trading more firmly. Meanwhile, the dollar is holding its own against the yen, currently hovering around the 114 level.

In addition to the advent of the euro, there are three other highlights of the week. First, the

Bank of England's

monetary policy committee (MPC) meets Wednesday and Thursday. While the short-sterling futures strip has a rate cut priced in during the first quarter, it is notoriously difficult to fine-tune expectations using the three-month contract. Generally, it appears that most participants expect the MPC to hold off this week and instead cut rates next month. This realization may be one of the factors weighing on British equity prices today. The MPC cut rates 125 basis points in the last quarter of 1998, but this will unlikely be sufficient to head off recessionary forces, which continue to gather.

Second, the

U.S. Senate

will reportedly begin the trial of

President Clinton

later in the week. There does appear to be a greater element of bipartisanship at work, and a survey of the weekend talk shows continues to give hope of something short of a full-blown trial and Clinton's removal from office.

Third, at the week's end, the U.S. will report December jobs data. The early call is for something like a 200,000 rise in nonfarm payrolls and a tick higher on the unemployment rate. Economists who are fine-tuning expectations for Friday's jobs report will use today's

National Association of Purchasing Management

survey. The consensus calls for a small rise in the diffusion index, which will still have a reading below 50, meaning that the manufacturing sector is still contracting.

In many ways the new year of trading is beginning like the year just finished: Bond yields are generally slipping, and equity markets are generally advancing. Japan remains a stubborn exception. The


finished down 3%, and while the yield on the benchmark Japanese government bond did ease, at 1.99% it is still nearly three times as high as it was just 10 weeks ago.


S&P 500

futures are trading up around 3.00 points at 6:15 am EST. The dollar is likely to spend the New York session largely confined to the ranges already seen against the euro. It can recover a bit more against the yen, but is unlikely to rise much above the 114.50 to 114.70 area today. The


is off nearly 10% in the past six weeks, and although the return of winter weather conditions may put a floor under some commodity prices, including oil, commodity-based currencies, like the Canadian and Australian dollars, may not derive much support.

In emerging markets, South Korea continues to stand out. The South Korean won strengthened for the third consecutive session. Increasing optimism that the Korean economy has turned the corner has bolstered equity prices and the won. Earlier today, the government announced it will pay back the


$1 billion loan due Jan. 8. Its foreign currency reserves have been fully rebuilt over the past year and now stand at a record just below $49 billion. At the end of last year,


indicated that it will consider upgrading Korea's debt rating due to the replenishment of foreign-exchange reserves and the stabilization of local financial markets.

Marc Chandler is an independent currency strategist whose column appears Mondays and Thursdays. At the time of publication, he held no positions in the currencies discussed in this column.