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Weak dollar digs into bond
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June 1, 1999: 9:18 a.m. ET
Traders look warily toward NAPM report as dollar sinks, taking bonds with it
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NEW YORK (CNNfn) - The dollar was back on the run as U.S. and British traders returned to financial markets Tuesday, demoralizing the bond market ahead of a release of key manufacturing data due later in the morning.
Shortly before 9 a.m. ET, the U.S. currency weakened nearly a full yen to 120.84 yen, while easing faintly from the euro to value the European unit at $1.0445.
The benchmark 30-year Treasury bond, bereft of support from the dollar, lost 12/32 of a point in price to 91-14/32, causing the yield to edge up to 5.86 percent.
Japanese bonds boost yen
Currency traders said weakness in the Japanese bond market had spurred yen inflows as local long-term interest rates, reflected in bond yields, surged.
The yield on the benchmark 10-year Japanese government bond climbed 11.5 basis points to 1.56 percent after reports that Prime Minister Keizo Obuchi soon may suspend Japan's sales tax to encourage his nation's weary economy.
Although government officials denied the reports, bond traders remained unconvinced, worrying that such a tax break would force Japan to issue additional debt to cover the budget deficit created. This in turn would flood the bond market with indigestible supply.
As Japanese bond yields climbed, the value of the yen climbed also, rising as investors speculated on interest rate volatility ahead.
Euro hangs on
The euro likewise edged up on the dollar, as investors bought into rumors of a concerted European Central Bank euro-buying effort on the horizon.
Euro bulls had hoped that the closure of British and U.S. financial markets Monday would be the ideal time for monetary authorities to rescue the European currency, which has drifted on a mostly downward course since its launch five months ago.
Despite the lack of official response to the speculation, hope of a currency intervention was enough to keep the euro shakily above its record low of $1.039 hit Friday.
However, the European unit still faces a harsh comparison with the dollar's robust economic fundamentals, a contrast most evident in the European and U.S. purchasing managers indexes. While the European index slipped to 50.4 in May from 50.7, indicating that economic expansion is slowing to a near stop on the Continent, the U.S. index is expected to rise to 53.4 from 52.8 when it is released at 10 a.m. ET.
Bonds slide ahead of data
The looming release of the U.S. statistic kept the bond market subdued, as traders remained reluctant to buy deeper into Treasury debt amid growing fear of higher U.S. interest rates ahead.
The index, released monthly by the National Association of Purchasing Management, is a key indicator of the health of the manufacturing sector. Manufacturing has lagged the rest of the U.S. economy in recent years, acting as a brake on the otherwise nearly universal growth trend and helping keep inflationary pressures muted.
Should the index rise unexpectedly, it will only be more evidence to gloomy bond traders that the Federal Reserve will vote to raise interest rates as early as its next Open Market Committee meeting in late June. An unexpectedly flat statistic, conversely, could spur some relief buying.
Traders said the market would be likely to ignore the morning's other economic releases, including leading indicators and construction spending statistics. 
-- by staff writer Robert Scott Martin
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