NEW YORK (CNN/Money) -
The dollar staged a modest rebound against the euro Wednesday after the U.S. trade gap narrowed unexpectedly and wholesale prices showed inflation remains at bay in the world's largest economy.
Longer-term Treasury prices also rallied on the signs inflation will stay low, pushing the yield on the 10-year note below the key 4 percent level for the first time since October.
The 10-year bond rose 6/32 to 102-3/32, pushing its yield down to 3.98 percent from 4.01 percent late Tuesday. Bond prices and yields move in opposite directions.
In currency markets, the euro bought $1.2653 in afternoon U.S. trading, down from $1.2690 late Tuesday. The dollar fell slightly against the Japanese yen, buying ¥106.19, down from ¥106.25 late Tuesday.
Producer prices rose 0.3 in December, a shade above the 0.2 percent gain expected. But excluding food and energy, prices fell 0.1 percent against forecasts of a 0.1 percent rise. That left the core measure up just 1.0 percent for the year and suggested little inflationary pressures in the production pipeline.
Separately, the trade deficit narrowed to $38 billion in November when analysts had looked for a rise to $42.0 billion. That suggested trade would subtract less from GDP growth in the quarter than first thought.
The dollar's rebound may be slight, but it temporarily eases calls for intervention by the European Central Bank to stabilize the euro's surge.
"We don't think they will intervene -- there are various policy responses possible and there could be interest rate cuts. All our short-term indicators show that euro/dollar is overbought," Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein, told Reuters.
Treasury prices headed higher as early profit-taking ran its course and the benign inflation numbers reinforced perceptions that the Federal Reserve would be in no hurry to raise interest rates.
The 30-year bond added 1/2 of a point to 107-7/32 to yield 4.89 percent versus 4.93 percent late Tuesday.
But shorter-term debt edged lower, with the two-year note slipping 1/16 of a point to 100-15/32 to yield 1.62 percent, and the five-year note dropping 1/32 to 101-11/32 yielding 2.95 percent.
"The dip by the core PPI brings attention to how inflation is not an issue in the credit market and it's the least of the Federal Reserve's worries," John Lonski, chief economist at Moody's Investors Service, told Reuters.
Traders noted Fed Governor Ben Bernanke was speaking later Wednesday and the market tended to pay attention to him since he had been more open than many board members in airing the intricacies of the central bank's policies.
The Federal Reserve said the U.S. economy kept on the recovery track in recent months, with some areas of the nation seeing faster growth than others in its Beige Book, an assessment of the economy compiled by the regional Fed banks.
While most areas reported "quite favorable" conditions, the Fed noted some regions saw "only slow or modest growth" and one, the St. Louis area, called conditions "mixed."
The report is for use at the Fed's first monetary policy meeting of 2004, a two-day affair set for Jan. 27-28.
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