Some days provide a simple textbook case of how the markets work together. Take yesterday's domino effect.

The US$ weakened suddenly against the yen and the mark, hitting the U.S. treasuries market, which in turn knocked back stocks. And all this was good for gold.

At the G7 finance ministers' meeting in Berlin almost two weeks ago, the consensus was that a strong -- but not necessarily stronger -- greenback was desirable: the struggling economies of Europe and Japan would benefit from the competitive edge against the U.S. while the U.S. would benefit from continued capital inflows and the anti-inflationary power of cheaper imports.

The currency markets took notice -- for about 10 seconds. Wall Street simply could not be swayed from its view that the US$ was headed 5% to 10% higher against the yen and the mark.

By Wednesday of this week the mark had sunk to 1.70 against the US$ and Merrill Lynch & Co. was forecasting 1.80. The yen, meanwhile, looked headed as low as 130 to the buck from the 125 level.

But a spate of US$-selling by Japanese trading houses yesterday cut the greenback down by a couple of yen toward 122 and that selling stretched into Europe, where the buck also lost a couple pfennigs.

The US$ -- a tonic for the treasuries market over the past few weeks -- weighed on bond prices yesterday, ratcheting up yields for the third straight day.

Those rising short-term interest rates gave stock traders second thoughts. Higher bond yields provide greater competition for equities, while the fear grows that higher rates could choke the economic growth that fuels earnings and rising stock prices.

The Dow Jones industrial average fell 92.75 points to 6927.38, making for a two-day loss of 140 points and significant break below the 7000 level hurdled last week.

The Toronto Stock Exchange 300 composite index escaped with a loss of 43.79 to 6205.07, the difference being gold. The spot price of gold hit US$355 yesterday before falling back toward US$352. That lifted the TSE gold subindex 354 points, making a difference of 20 points in the 300, which just about erased the damage inflicted by bank stocks.

Gold's recent decline has been almost a mirror move of the US$'s rise. A flight to ``the ultimate store of value'' is a logical extension of the sudden weakening of the greenback.

But why has the US$ gone from a sure thing to a good short-sale prospect in just a couple of days?

The easiest answer is that currency traders fear a concerted central bank selling strike against the speculators bidding the US$ up against the wishes of the G7.

But such intervention is most unlikely in light of U.S. statistics published on Wednesday. They showed the merchandise trade deficit ballooning in December and adding up to a shortfall of US$114 billion for the year.

That means, as Carl Weinberg of High Frequency Economics points out, the rest of the world had to finance the U.S. trade gap to the tune of US$114 billion.

``Yet we note that U.S. interest rates are not too appealing, bonds are not performing well and equities are at perilous heights, from which future humongous capital gains are no longer assured.''

Weinberg concludes that the only difference between now and two years ago when the US$ was plunging is that the Japanese have been willing to step up and buy US$s to devalue the yen.

But perhaps for not much longer. He expects Japanese authorities to guide investors back into domestic debt markets this spring to help fund the fiscal deficit for next year.

The Tokyo stock market raced ahead yesterday in anticipation that the government will step in to shore up the system and crank up the economy. If Tokyo becomes strong again overnight and gold regains momentum, it could be a worrying day in North American bond and stock markets.

As an added knee-knocker, Federal Reserve chairman Alan Greenspan just happens to be giving one of his rare speeches today in Florida. Another reference to ``irrational exuberance'' could cast a pall over the markets.

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