Dollar Falls vs Yen on Latin America Concern; U.S. Bonds Lead Global Rally
Thursday's Global Markets: Dollar Falls, Bonds Rise (Update1) (Updates to remove stock market information from 4th and 5th paragraphs.)
NEW YORK, Sept. 17 (Bloomberg) -- The dollar fell against the yen amid concern that economic weakness in Latin America could hurt the U.S., and as international investors moved money from U.S. to the safety of domestic bond markets.
The dollar fell for the first time in four days, dropping to 132.10 yen from 134.12 late yesterday in New York. It gained against the deutsche mark, reversing earlier declines, climbing to 1.6955 marks from 1.6914 marks. ''If the Latin American economy goes, the U.S. will feel the pinch first,'' said Michael Scarlatos, a currency strategist at Bankers Trust New York Corp. ''It doesn't look as if the G-7 is as close to a solution on the turmoil affecting markets as people thought.''
Upheaval in global markets has made some investors reduce their international exposure and bring assets home, analysts and traders say. Bond yields in the U.K., Germany and Japan all reached record lows today as investors sought safety in debt markets. ''When you get into a time like this when things are so much up in the air, people want liquidity at any cost,'' said Kathy Jones, a currency analyst at Prudential Securities Inc. ''They're doing the safest thing -- find the safest, most liquid bond market, and that would be the domestic bond market.''
Interest Rates
U.S. Treasury Secretary Robert Rubin yesterday said it was ''too early'' to discuss plans to help Brazil fend off a currency devaluation there. And Federal Reserve Chairman Alan Greenspan told a Congressional committee that ''at the moment'' there is no move by industrialized nations to cut interest rates. ''We've tempered our expectations about a massive package coming out of the IMF for Latin America,'' said Hillel Waxman, head of foreign exchange at Bank Leumi U.S.A. ''That's moved the problems down there back to the front burner.''
Still, some traders are betting the U.S. will lower interest rates if problems in Latin America worsen. Greenspan left open the possibility of a rate cut in the U.S., saying he sees ''the first signs of erosion around the edges'' of the U.S. economy.
Bonds
Today's decline in major stock indexes from Tokyo to London to New York ''is definitely a plus for the bond market,'' said Susan Huang, who oversees $30 billion at Chase Asset Management. She favors longer-term U.S. Treasuries -- which reap the fattest returns when yields fall -- and said 30-year yields may fall to 5 percent by year-end.
Stocks in the U.S. tumbled, with the Dow Jones Industrial Average dropping 216.01 points to 7873.77, and the Standard & Poor's 500 Index falling 26.62 to 1018.86. Major stock markets around the world fell more than 2 percent
Thirty-year U.S. bonds have been a good bet so far this year, handing investors returns of more than 15 percent when price gains and interest are taken into account. If yields fell to 5 percent by year-end, that would result in 1998 returns of almost 20 percent, eclipsing last year's 16.7 percent gains.
Among the most actively traded Treasuries today, two-year notes climbed 2/32, or 63 cents per $1,000 note, to 100 25/32, driving its yield down 5 basis points to 4.68 percent. The 30- year bond rose 18/32, cutting the yield 4 basis points to 5.18 percent -- not far from the record low of 5.13 percent reached last week.
Treasury bond yields fell more than 1/2 percentage point in the past three months as global stocks tumbled, Russia devalued it currency and defaulted on some debt, and concern increased that Brazil might be forced to devalue as well. These developments fanned expectations for slower worldwide growth and possible interest rate cuts.
In the U.S., 10-year note yields fell to levels not seen since 1967, while benchmark yields on 10-year German, U.K. and Japanese notes all touched record lows. ''What we've been seeing is an inverse reaction'' between stocks and bonds, said Frank Rachwalski, who oversees about $17.5 billion of money market investments at Scudder Kemper Investments in Chicago.
Consumer Prices
Also helping bonds were reports on consumer prices, trade and manufacturing, which suggested inflation is tame, and economic growth is slowing.
The U.S. government said consumer prices rose 0.2 percent overall, and when food and energy prices are excluded, in line with expectations. For the first eight months of the year, consumer prices rose 1.6 percent, the same as in the first eight months of 1997 and a sign inflation isn't quickening.
A separate report showed the U.S. trade deficit widened to $13.923 billion in July from $13.639 billion, as U.S. exports fell at a faster rate than imports. Meantime, a report by the Federal Reserve Bank of Philadelphia said its index of general economic conditions in the region unexpectedly slumped in September to its lowest level in more than three years.
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