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Euro slides to record low
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January 27, 2000: 4:03 p.m. ET
Single currency slips below 99-cent mark; U.S. bonds take opposite path
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NEW YORK (CNNfn) - The euro fell to a record low against the dollar Thursday, slipping below the 99-cent mark for the first time, on expectations that the buoyant U.S. economy will spur higher interest rates and lure investors away from the single currency to dollar-denominated securities.
Similar concerns about strong growth, accelerating inflation and higher rates had significantly less of an impact on U.S. Treasurys, with the benchmark 30-year bond posting strong gains for a fifth consecutive trading day.
"There's a general consensus out there that rates are headed higher in the U.S. and Europe, but there's apprehension about it anyway," said Michael Gregory, an international economist with Lehman Brothers in New York. "That affecting the euro and that's affecting the bond market."
On Thursday, the euro fell below the one-to-one level against the dollar for the second time this week, falling as low as 98.77 cents in early trading before rebounding to 98.90 cents. The currency is now down more than 15 percent from where it debuted against the dollar a year ago.
99 cents euro sale
The benchmark Treasury bond, meantime, gained 21/32 of a point in price, sending the yield to 6.52 percent from 6.57 percent late Tuesday. And in an unusual twist, the yield on the 10-year and five-year benchmark bonds both rose above the 30-year security's yield. Usually shorter-term bonds have a lower yield than longer-term ones because they carry less risk for less time.
The euro's drop accelerated after the U.S. government reported that orders for durable goods jumped 4.1 percent in December, well above analysts' forecasts. The number reinforced expectations that Fed policy makers will raise rates at their policy meeting next Tuesday and Wednesday.
The Fed funds rate - the minimum rate banks can charge each other for overnight loans -- currently rests at 5.5 percent. By contrast, the European Central Bank's benchmark refinancing rate currently rests at 3 percent, suggesting that an investor would earn a smaller rate of return on a euro-denominated asset than on an American one.
A lack of discussion among leading European policy makers about the euro's weakness contributed to the euros decline. European Central Bank Chief Economist Otmar Issing said Wednesday that the euro's exchange rate against the dollar was not itself the target of the central bank's policy.
And a lack of comment from officials attending this week's World Economic Forum meetings in Davos, Switzerland, also may have contributed to the euro's descent, Gregory said.
Technical factors
That aside, the euro's decline to record lows was also the product of technical factors; investors holding onto the euro, and securities denominated in it, tired of waiting for it to appreciate after resting near parity with the U.S. dollar for so long.
"Much of the decline is disappointment among investors who were burnt quite badly in 1999 where they thought things had bottomed," Gregory said. "You'll have to see some tougher talk from the ECB, more robust economic data from Europe and eventually a rate hike."
A turnaround in stock prices later in the day helped bolster bond prices. Stocks reversed Thursday morning's strong gains, as investors looked beyond the quarter's strong earnings reports and at the prospect for rising interest rates.
ECI report awaited
For Friday, both bond and currency investors will be focused on U.S. economic data rather than European as the Labor Department releases its fourth-quarter tally on employment labor costs, or how much companies spend on employee salaries, benefits and other compensation costs.
Analysts polled by Briefing.com expect employment costs rose 0.8 percent in the fourth quarter, the same pace that was registered in the third quarter.
Also Friday, the Labor Department will release its final tally on fourth quarter gross domestic product. Analysts polled by Briefing.com expect the GDP grew at 5.5 percent pace in the final three months of the year, compared to the revised 5.7 percent pace recorded a month before.
The report, along with other recent economic data including Thursday's durable goods report will likely give investors a more clear indication of what the Federal Open Market Committee under the guidance of Alan Greenspan will do at its policy meeting slated to begin next Tuesday.
"If there's continued strength in employment costs, I believe the Fed will raise rates 50 basis points to slow economic growth by a couple of notches," said Richard Babson, president of Babson-United Investment Advisors in Boston.
Babson predicts the Fed funds rate will reach 6.25 percent by the Labor Day holiday weekend, or even sooner. 
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