NEW YORK ( TheStreet) -- The dollar was mostly weaker vs. the majors Friday, as what started as a classic risk-off day in Asia and Europe turned into a risk-on day as North America opened.

With the eurozone being the source of all the market mayhem, and with restructuring risks still present, we do not think that the euro outlook has shifted. Monday's trading will be key: Do markets sell into euro strength or do they bet on a bigger euro bounce? Intervention fears are overblown, in our view, and so once this period of correction/consolidation has run its course, the euro will likely be very vulnerable once again.

The pace of weakness may ease a bit, but we cannot make a case for a bullish euro trend anytime soon. Key levels up ahead for the euro/dollar (EUR/USD) are 1.2619 and 1.2731 (50% and 62% retracement levels, respectively, of the big May 10-19 drop).

The yen (JPY) was weaker across the board Friday and underperformed the buck. Thus, dollar/yen rose to test 90. Emerging-market foreign exchange was mostly firmer, with the dollar/Brazilian real (USD/BRL) falling after being unable to pierce 1.90.

The biggest gainers on the day vs. the dollar were the zloty (PLN), the New Zealand dollar (NZD), the Australian dollar (AUD), the koruna (CZK) and the krona (SEK), while the biggest losers vs. the dollar were the won (KRW), the ringgit (MYR), the Philippine peso (PHP), the baht (THB) and the yen. There were no U.S. data Friday, but it probably wouldn't have mattered much as most economic data have been sidelined by what's going on in Europe. Mexico's central bank kept rates steady at 4.5%, as expected, and voiced concern about the impact of European crisis.

U.S. equity markets were higher, recovering from early selling and surging in the last half-hour of trading. The Dow Jones Industrial Average, S&P 500 and Nasdaq ended up 1.25%, 1.5% and 1.1%, respectively. European markets were up, too, with the Euro Stoxx 50 rising 0.2%. Asian equities are likely to open up Monday as Asian ADRs were higher during North American trading Friday. Nikkei futures point to an up open for Japan, and the soft yen should help Japan exporters.

The U.S. bond market was lower as the safe-haven bid eased. Two- and 10-year yields were up 6 basis points and 3 basis points, respectively. European bond markets were mostly higher, as 10-year yields in the U.K., France and Germany were down 1 basis point, 1 basis point and 2 basis points, respectively. Greek 10-year yields rose 3 basis points, Portugal rose 2 basis points, Ireland rose 3 basis points, Italy fell 2 basis points and Spain fell 2 basis points.

The EU finance ministers' meeting yielded mechanisms to punish profligate members, but it did not produce anything designed to ensure some sort of orderly debt restructuring process. This is disappointing, as media reports had German Finance Minister Wolfgang Schaeuble pushing for some sort of path by which an insolvent eurozone member could restructure within the umbrella of the eurozone. EU President Herman Van Rompuy said there was little support for this proposal.

Although we have never subscribed to the notion that a Greek debt restructuring would a) lead to ejection from the euro zone or b) even worse, "the end" of the eurozone experiment, we have always said that the impact of such an event would depend on how it's done (orderly vs. disorderly).

As such, we are very disappointed that the EU finance ministers are basically hiding their heads in the sand. Our regular readers know that we believe fiscal austerity plans proposed by Greece, Portugal and Spain are likely to fail in the current recessionary/deflationary environment, and so we continue to believe that some sort of debt restructuring is inevitable.

On the other hand, there was apparently no support for the Slovak financial minister's call for a "death penalty" (expulsion) for countries that would seek to "abuse" the system. This is not too surprising, of course. Why would any member support such an option when it would most likely be at risk?

U.S. and Chinese officials will begin the Strategic Economic Dialogue in Beijing in the coming week. We do not expect any big policy announcements. We continue to believe that the current crisis in Europe has validated China's cautious approach to monetary and foreign exchange policy this year, and so China will continue to resist any pressure from the U.S. (or from anyone else for that matter) to move the exchange rate for the near future. Some sort of nonbinding promises to eventually loosen the yuan may have been made earlier this year (when the Treasury delayed its foreign exchange manipulation report), but we would be surprised if China gave any sort of timetable. Other central banks have expressed concern about the potential impact of the European crisis, which we believe raises the risks that central banks all over the world tilt towards dovishness as a result of what's going on in Europe.

Canada reported stronger-than-expected April inflation and March retail sales. The foreign exchange market remains gripped by the sovereign debt crisis in Europe and the threats to world growth, but the economic data underscore the bullish case for the Canadian dollar. When the crisis passes, we expect the Canadian dollar to be one of the strongest currencies.

The Bloomberg consensus had been for a 0.1% increase in March retail sales, and Canada reported a dramatic 2.1% increase and revised the February gain up to 0.8% from 0.5%. Auto and related sales were strong, but gains were broadly based. Excluding the automotive sector (autos, parts and gasoline), retail sales were up a still-impressive 1.6%.

Canada's CPI also defied expectations, but not by nearly as much. The consensus had expected a 0.2% increase on the headline and core rate, but the government actually reported a 0.3% increase. This was enough, however, to bring the year-over-year core rate to 1.9%, just below the 2.0% threshold.

Under normal circumstances, the recent decline in the Canadian dollar and this string of data would increase the probability of a Bank of Canada rate hike in June rather than July. However, the new threat to the world recovery, as partly reflected in the drop in commodity prices, should encourage the BOC to take a wait-and-see attitude. The rate decision is not until June 1. If some sense of stability returns to the global capital markets along with greater visibility into what the second half of the year may hold, a BOC rate hike is still possible. For medium-term investors, however, the key point is that the BOC is still on track to be the first G7 country to hike rates. Canada's economic fundamentals seem solid, and the recent selloff has created new opportunities to add to Canadian dollar exposure.

Commodity Futures Trading Commission data show that for the week ended May 18, speculative accounts mostly increased their strong dollar bets. Net short euro positions fell to -107,143 from the record -113,890 previously. Swiss franc net shorts decreased to -14,558 from -17,527, while pound net shorts rose to a new record -76,745 from -72,188 previously. The dollar bloc saw its net long positions drop, while the Mexican peso (MXN) saw net longs decrease again to 35,702 from 41,958 previously. Speculators cut net short yen positions negligibly to -34,289 from -34,669 previously. Given the stronger yen last week, net yen shorts should decrease much more in the next weekly report.

Upcoming Releases

Asia: Australia new-vehicle sales; Thai GDP; Bank of Japan monthly report; Singapore CPI; Taiwan unemployment, IP, sales.

Europe, the Middle East and Africa: Turkey capacity utilization; Israel central bank meeting; Hungarian and Czech confidence.

Americas: U.S. Chicago Fed national activity index, existing-home sales; Mexico mid-May CPI, trade. No U.S. speakers.

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