Dollar Seen Falling as U.S. Bonds Slump on Inflation
Concerns, Euro Gains
By Perri Colley McKinney and Malcolm Foster
Dollar Seen Falling as U.S. Bonds Slump, Euro Gains (Repeat)
(Repeats story from May 7, adds EU finance ministers
meeting in final paragraph.)
New York, May 8 (Bloomberg) -- The dollar could extend this
week's 1.7 percent decline against the euro if reports next week
re-ignite U.S. inflation concern and push stocks and bonds
lower.
Progress toward a plan to end the NATO bombing of
Yugoslavia could also boost Europe's single currency, which was
at $1.0757 late Friday from $1.0792 Thursday in New York.
Traders said the euro won the confidence of many traders and
investors this week when it broke through $1.07 and topped
$1.0817.
''This is a turnaround for the euro,'' which pared its loss
for the year to 7.8 percent this week from as much as 9.5
percent, said Paul Spirgel, a senior trader at Royal Bank of
Scotland. ''There seems to be a movement to pull money out of
the U.S. We're running out of steam here.''
U.S. bonds turned in the worst week in two months, falling
to an 11-month low. As for stocks, analysts said U.S. shares are
becoming expensive enough to send investors overseas amid signs
of recovery in some areas of Asia and Latin America.
Japan, though, isn't rebounding like many of its Asian
neighbors, and this has damped demand for the yen. It traded at
120.75 per dollar from 120.57 Thursday and down 1.1 percent this
week as the world's second-largest economy remains mired in its
worst recession since World War II.
Dollar's Reprieve
The dollar got a temporary reprieve from its three-day
decline against the euro after a U.S. jobs report calmed concern
that growth is accelerating fast enough to stoke inflation. The
prospect of higher interest rates has hurt U.S. stocks and bonds
and, with them, the currency as international investors sold
their dollar proceeds.
The U.S. economy added 234,000 jobs last month, and the
unemployment rate rose to 4.3 percent, the Labor Department
said. Economists polled by Bloomberg News had expected a gain of
242,000 non-farm related jobs and the jobless rate to remain at
4.2 percent, the lowest since 1970.
''The report removed the possibility of another day of
losses for the dollar'' by keeping bonds little changed at an 11-
month low, said Mike Faust, who manages $400 million in bonds at
Bailard, Biehl & Kaiser in San Mateo, California. He's increased
his holdings of euros in recent weeks, and now is looking to
bolster his dollar holdings on any dips between $1.08 and $1.09
per euro.
Still, the jobs report was ''neither strong enough nor weak
enough to change many peoples' view'' on whether the Fed will
need to raise rates, he said.
And it doesn't negate comments Thursday by Fed Chairman
Alan Greenspan that sent stocks and bonds sliding. He said
rising wages may herald faster inflation.
Opinions Split
The split in opinions means next week's inflation reports
will command more attention than usual, said Bob Lynch, a
currency strategist at Paribas Corp.
Producer prices, to be released on Thursday, are expected
to rise 0.5 percent in April, according to a Bloomberg News
poll. That's up from 0.2 percent in March. The following day,
the government is expected to say consumer prices rose 0.4
percent, compared with 0.2 percent in May.
Also next week, retail sales are expected to rise 0.3
percent in April from 0.2 percent in May.
''The uncertainty over Fed policy and the potential for
lower bond prices might hamper the dollar and negate its benefit
from higher interest rates,'' which boost the return on dollar-
denominated deposits, Lynch said. ''I think the euro will remain
supported next week.''
The yield on the benchmark U.S. 30-year bond rose 2 basis
point to 5.81 percent. And after a temporary setback from
Greenspan's warning, the Dow Jones Industrial Average rose 85
points Friday to a record 11031.
Eventually, higher U.S. rates could be good for the dollar.
If the Fed raises its target rate from 4.75 percent, it would
bolster the money-market return on dollar-denominated deposits
and widen the gap with the European Central Bank's 2.5-percent
key rate. The Fed next meets May 18.
Rates in Japan, meantime, are at historic lows as policy-
makers try to lift the economy from a 15-month recession.
Reports Thursday showed falling household spending and vehicle
sales.
''People should buy the dollar whenever it dips,'' said
Masao Yoshikawa, head of the customer desk at Industrial Bank of
Japan Ltd. in Tokyo.
Euro's 3-Week High
The euro held near its three-week high after the Group of
Seven nations and Russia agreed Thursday on a framework for
peace in Kosovo. Russian support for the plan, including a
United Nations-sanctioned troop force, improves the chances of
securing peace in Yugoslavia, said U.S. President Bill Clinton.
The plan will be the basis of negotiations with Yugoslav
President Slobodan Milosevic. Concern about the cost of the war
has sapped investor demand for European assets.
''With an end to the Yugoslavian conflict looking to be on
the cards, further short-term gains could well be seen'' by the
European currency, said James McKay, global markets strategist
at Commonwealth Bank of Australia in London. An agreement could
send the euro to $1.10, he said.
The European Union's currency tacked on 2.4 percent in its
three-day advance, climbing to its strongest since April 13 at
$1.0817, as foreign ministers from the U.S., U.K., Germany,
France, Italy, Canada, Japan and Russia agreed to deploy United
Nations-sanctioned troops as part of their plan for Kosovo.
Euro Underestimated
The euro also garnered support from ECB policy-makers, who
after months of downplaying the euro's decline, have warned they
may buy the single currency if it declines more.
Earlier Friday, Tommaso Padoa-Schioppa, executive board
member of the European Central Bank, said it ''might well be
that markets are underestimating the intrinsic value of the
euro.''
''We take the view that the euro will gain ground in the
international financial markets on the basis of its own
intrinsic merits: a high degree of anti-inflationary
credibility, the effective persistence of its internal
stability, the setting-up of broad and financial markets, the
strength of its economy and the position of Europe as the
world's leading trade partner,'' he said.
European Union finance ministers meet Monday in the first
attempt at an EU-wide economic policy since the arrival of the
euro as a common currency for 11 countries with 290 million
consumers on Jan. 1.
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