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Dollar climbs, sucre plunges
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February 15, 1999: 9:46 a.m. ET
Yen slips overseas on brief-lived rate cheer; Ecuador devalues its currency
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NEW YORK (CNNfn) - Global money markets were quiet but cautious in the absence of U.S. traders Monday, but edgy Japanese bond yields and nerves over a fresh Latin devaluation promised volatility ahead.
While U.S. financial markets were closed in observance of Presidents Day, the dollar climbed in Europe against the yen, surging a full yen to 115.04 from its previous close of 114.04.
Traders said the dollar's strength comes amid renewed wariness over Japanese bond yields, which crept up again overnight amid fears that an interest rate cut may not be enough to rally the local bond market.
Euro trading was subdued, with the pan-European currency sliding to $1.1239 from its previous close of $1.1298.
Traders said comments from Germany's finance minister published in Italian newspaper La Repubblica had rekindled investor hopes for European interest rate cuts in the near future, depressing speculative demand for euros.
BOJ: Not far enough?
After a brief rate-inspired respite Friday, the benchmark 10-year Japanese government bond (JGB) drifted lower Monday, driving the yield back up to 2.14 percent from its previous close of 2.08 percent.
The yield has hit a 19-month peak of 2.44 percent in recent weeks, a stark climb from last year, when it wallowed at all-time lows near 0.7 percent. This, in turn, has shaken world currency and debt markets, driving the yen higher against the dollar and depressing Treasury prices.
Global traders had hoped the BOJ's decision Friday to reduce the Japanese overnight call rate to 0.15 percent from 0.25 percent would give the JGB market more concrete support.
However, the continued high yield only underlines fears that the BOJ has not gone far enough.
Many traders have expressed hopes that the BOJ would step up its bond-buying policies to spur local demand, lifting prices and forcing yields back down to manageable levels.
Other players have insisted that the BOJ must directly underwrite an upcoming record 30 trillion-yen ($263 billion) bond offering in order to buoy the market's confidence, a demand the bank has ignored as being constitutionally prohibited.
As for complaints that the bank didn't go too far in reducing short-term interest rates, some traders noted that the BOJ is nearly up against the rate wall as it is, with the key discount rate at a record low of 0.50 percent.
Another devaluation for Ecuador
When U.S. money markets reopen Tuesday, investors may find themselves facing a new round of Latin American currency volatility.
On Friday, Ecuador devalued its sucre currency for the third time since 1997, allowing the sucre to slide nearly 3 percent to 7,515 to the dollar from its previous close of 7,301.
Ecuadorean officials last adjusted the trading band on the sucre in September, triggering a sympathetic devaluation in neighboring Colombia and raising the specter of region-wide currency collapse.
Unlike previous Ecuadorean moves, which only expanded the sucre's trading range, Friday's devaluation followed a recent Brazilian tactic by eliminating all trading bands, allowing the currency to float free.
Since Brazil's latest round of monetary manipulations began Jan. 13, its currency, the real, has lost 58 percent of its value.
This, in turn, sparked widespread panic in world financial markets, spurring a flight to Treasury bonds and worries that monetary deflation could spread throughout the Western Hemisphere.
In the near term, global currency traders said the Ecuadorean move is most likely to encourage key trading partner Venezuela to abandon its trading bands, although that scenario depends on the still-cryptic fiscal policies of new President Hector Chavez.
Colombian authorities, for their part, said the sucre's plunge had no "big implications" for their own monetary policies.
Ecuador retains currency reserves of $1.4 billion to defend the sucre, down significantly from $1.697 billion at the end of 1998. 
-- from staff and wire reports
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