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Dollar drags bonds down
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June 8, 1999: 3:29 p.m. ET
Euro regains the offensive, leaving bond yields drifting closer to 6%
By Staff Writer Robert Scott Martin
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NEW YORK (CNNfn) - Surging German economic data and official support gave the euro back the upper hand Tuesday, forcing the dollar sharply lower and encouraging an otherwise jittery bond market to join the retreat.
Shortly before 3 p.m. ET, the euro gained more than 1-1/2 cents on the dollar to $1.0452. Cross-trading from investors caught short in euros also pushed the yen to its highest level against the dollar in nearly six weeks, sending the Japanese unit up nearly 2 full yen to 118.84 on the greenback.
The bond market, devoid of other impetus in the absence of breaking economic news, followed the dollar's slide, with the bellwether 30-year Treasury bond giving up 9/32 of a point in price to 89-3/4. The yield edged ominously up to 5.99 percent, its highest level in nearly 13 months.
Traders said the euro's dramatic recovery was due to support from both German monetary authorities and German economic statistics that together boosted the sagging currency off the lifetime lows hit only a day before.
Ernst Welteke, the designated successor to Bundesbank President Hans Tietmeyer, encouraged euro-buying sentiments by saying that incorrect chart indications had artificially inflated investors' expectations for the euro to an unrealistic level.
"The starting euro exchange rate, which had been driven by a certain level of initial enthusiasm, is not the right reference level," Welteke said. "Much more appropriate would be exchange rate conditions of the early months of 1998, when one ECU (European Currency Unit, the forerunner of the euro) cost around $1.08."
He also called on the United States to lend the euro a hand, noting that the large U.S. trade deficit with united Europe should encourage U.S. authorities to take an interest in the euro. A stronger European currency would inspire Europeans to buy more U.S. products, reducing the trade gap.
Meanwhile, an unexpected spike in Germany's gross domestic product (GDP) sounded the call for euro bulls. The first-quarter number leapt 0.4 percent from the previous quarter's 0.8 percent decline, indicating that Germany, Europe's economic linchpin, has evaded falling into recession and is now growing at an appreciable rate.
Bonds flirts with 6 percent
In the bond market, volume remained light, extending the previous day's wary trend and exaggerating the impact of otherwise thin selling from overseas traders looking to cash in on the dollar's decline.
The long bond last touched the key 6 percent yield rate over a year ago, on May 14, 1998. Economists and traders alike have expected the yield to climb past this level some time this week, although few have indicated that breaking the ceiling will have much more than a psychological effect on financial markets.
Many investors have stayed aloof from the bond market until Friday's release of May producer price index (PPI) data and next Monday's follow-up release of the consumer price index (CPI).
Either report could indicate whether last month's unexpectedly robust CPI reading was an isolated spike or the beginning of an inflationary trend. Signs of rising inflation, in turn, would be likely to force the Federal Reserve's hand, encouraging its rate-setting Open Market Committee to raise interest rates sooner rather than later.
St. Louis Fed President William Poole poured fire on investors' rate fears by telling reporters Tuesday that "the odds have changed" and that it is now "more likely to have an inflation problem than people would have guessed six months ago."
Poole, who is not a voting member of the Open Market Committee, also said "the ideal [monetary] situation is when changes in policy do not take the market by surprise."
Anthony Crescenzi, bond market strategist at Miller Tabak & Hirsch, said these comments amounted to Poole telling investors that "it is good the markets are looking for a rate increase," hinting at a rate hike as early as the Fed's next policy meeting June 29-30. 
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