NEW YORK (CNNfn) - Currency players bought dollars Monday on the growing possibility that armed conflict in Kosovo will be neither brief nor uncomplicated, but Treasury bonds turned away from a more tenuous flight-to-safety boost.
Dollar bulls put the euro deep on the defensive in early trading, forcing the still-young European currency to a fresh lifetime low of $1.068 before sporadic profit-taking set in. By 9:00 a.m. ET, the euro was trading at $1.0697, far off Friday's record low close of $1.0753.
The yen, meanwhile, got some lift from the annual repatriation of Japanese funds, firming slightly in the face of the dollar's resurgent safe-haven power. Dollar/yen slipped to 120.10 yen by mid-morning from its previous close of 120.36.
Market insiders blamed the euro's descent on NATO's continuing attacks against Yugoslavia over the breakaway province of Kosovo.
In particular, they noted that the euro had begun flirting with the previously untested $1.07 barrier over the weekend as relations decayed between NATO and long-time Yugoslav ally Russia.
Financial markets previously shrugged off the conflict as investors already had steeled themselves to expect Western forces to intervene in the Balkans. Many investors hoped the intervention would be brief and relatively antiseptic, keeping an anticipated flight-to-safety bid into dollars and Treasury bonds largely under wraps.
However, five days after the air strikes on Yugoslav positions began, a speedy end to the crisis now seems less likely. This in turn has fed the trickle of funds pouring out of the euro, which investors feel is most at risk if the conflict spreads or is prolonged, into the dollar.
Fundamentals at hand
Traders also noted that the Kosovo crisis is only adding to the selling pressure already strangling the European currency. Investors have speculated widely that the European economy is poised on the edge of recession and may require one or more interest rate cuts in order to restart growth.
On the other hand, the U.S. economy remains robust to the point that the Federal Open Market Committee (FOMC), the chief arbiter of U.S. monetary policy, may adopt an interest rate-tightening bias when it meets Tuesday.
Although economists do not foresee the FOMC actually moving to raise rates, investors will watch carefully to see whether the monetary board formally changes its bias to encourage higher interest rates in the future.
Higher interest rates broadly indicate increased demand for the local currency, driving exchange rates higher, while lower rates artificially depress demand.
With other factors, the threat of lower European rates amid sluggish European growth has kept the euro on a mostly downward course throughout most of its three-month history.
Bonds turn away
U.S. Treasury bonds got little comfort from the renewed safety bid, instead tumbling as investors paid increasing attention to the oil industry and the threat of higher inflation that rising oil prices could bring.
By 9:00 a.m. ET the benchmark 30-year Treasury bond had fallen 16/32 of a point in price to 94-16/32, pushing the yield up to 5.63 percent.
Traders noted that a weekend trickle of investors fleeing the uncertainties of Balkan war had given Treasury prices a tenuous lift, but the flight to quality now seemed to be ebbing.
However, activity was subdued ahead of Tuesday's FOMC meeting, with many domestic bond players unwilling to take any firm positions in the event of unwelcome surprises. In such an arid trading climate, the effect of the morning's otherwise uninspiring selling was dramatically magnified.
-- by staff writer Robert Scott Martin