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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (21624)	11/10/2004 3:48:24 PM
From: russwinter	Read Replies (2) \| Respond to of 110194

2.05 is considered OK at treasury auctions? News to me. No help for the USD from this rate increase. Rising US interest rates no boon for ailing dollar Wed Nov 10, 2004 02:29 PM ET By Jamie McGeever NEW YORK, Nov 10 (Reuters) - Such is the depth of negative sentiment surrounding the U.S. dollar that rising interest rates and widening spreads in its favor are failing to give the currency cyclical support it might have been expected to enjoy, analysts said. The Fed on Wednesday raised its federal funds rate by a quarter-percentage point to 2 percent -- its fourth such move this year. This brings benchmark U.S. interest rates in line with euro-zone benchmark rates, which have been on hold since June last year, and up from near 50-year lows of 1 percent. Rising interest rates often attract investment flows and therefore help strengthen a currency, but the market's reaction to the Federal Reserve's latest hike underscores the dollar's disconnect from the debt market. Despite the rise of nominal interest rates and widening bond yield spreads to their widest levels in months, the dollar has struggled as it hit new lows earlier Wednesday against the euro (EUR=: Quote, Profile, Research) . Alex Beuzelin, currency analyst at Ruesch International in Washington, D.C., says the size of the U.S. external deficit is such that rates will have to rise much more steeply to make investors sit up and take notice. "The spreads are not sufficiently strong enough in favor of the dollar," Beuzelin added. On a 10-year basis, spreads are at their widest level in favor of the dollar in almost six months. The difference between benchmark 10-year U.S. Treasury notes (US10YT=RR: Quote, Profile, Research) and comparable German bunds (EU10YT=RR: Quote, Profile, Research) is floating between 35 and 40 basis points in favor of Treasuries, its highest since the end of June. Yet that yield advantage is not enough to outweigh the combined losses from the fall in bond prices and the dollar. "Now, a 40-basis-points premium gets eaten up very quickly by the currency depreciation," said Alan Ruskin, senior currency strategist at 4Cast, a consultancy in New York. Ruskin believes the dollar's slide is in part a delayed response to the fall in 10-year yield to 3.93 percent at the end of last month from 4.88 percent in June. DOLLAR STILL EYES CYCLICAL REBOUND Meanwhile, the yield spread of 2-year Treasuries (US2YT=RR: Quote, Profile, Research) over comparable German paper (EU2YT=RR: Quote, Profile, Research) , bonds that are more sensitive to interest rate moves by the Fed of European Central Bank, is also hovering just below 40 basis points, the highest in almost four years. "The cyclical story should give the dollar a bounce, but the market's focused too much on other factors," said Sophia Drossos, a global currency strategist at Morgan Stanley in New York. They include the U.S. budget and current account deficits, a growing feeling U.S. policymakers are content to see the dollar depreciate and speculation China might loosen its yuan currency (CNY=: Quote, Profile, Research) , which is tightly pegged to the dollar. Drossos said the cyclical turn of rising interest rates on the back of strong U.S. economic growth -- currently outstripping that of Japan and the euro zone -- should ultimately attract investment and lift the dollar, which is what happened when the euro neared $1.30 earlier this year. "But now, it's almost as if it doesn't matter how strong the economy is," she added. In order for the dollar to start on a path toward sustainable recovery, the Fed would likely have to stick to a policy of steady rate hikes, perhaps up to 4 percent, against a backdrop of stellar growth. "But there's not that degree of comfort about the economy," Ruskin said.