NEW YORK (CNN/Money) -
The U.S. dollar rebounded sharply Thursday, coming back from heavy losses incurred during the past few weeks, helped by comments from the Federal Reserve and signs from Europe that the United States might not fight a potential war with Iraq alone.
Around 4:00 p.m. ET, the euro traded at $1.08, down slightly from $1.082 late Monday. The dollar bought ¥119.04, up from ¥118.48 late Wednesday.
Analysts cautioned, however, that despite the Federal Reserve's decisions Wednesday to maintain its balanced risks assessment and to keep official interest rates unchanged, the dollar's rebound was unlikely to last long.
Fed policy makers ended a two-day meeting Wednesday, leaving interest rates unchanged from their 40-year low. Some economists had expected the board to indicate a bias change and signal a possible rate cut later this year, but it clung to its view that the risks to the U.S. economy were balanced between weakness and inflation. This lack of a shift in bias helped boost the dollar.
Also, newspaper reports indicating support from eight European nations for the U.S. position on Iraq gave a lift to the dollar, beyond what traders said was buying on the recent weakness in the currency.
The U.S. currency has seen a significant decline in recent weeks, hitting three-year lows against the euro and also retreating heavily against the yen, on the back of concerns that the United States might enter a war in the Middle East without the backing of the United Nations -- and on a series of mixed economic reports and corporate earning results.
The greenback has fallen almost every day since late November against the euro, slipping almost 8 percent.
Meanwhile, Treasurys staged a cautious comeback after three straight days of losses, as a stock market slump and news that the U.S. economy barely grew in the fourth quarter nudged prices higher.
Around 4:00 p.m. ET, the benchmark 10-year note was up 1/32 of a point at 100-6/32, yielding 3.97 percent, while the 30-year bond jumped 23/32 of a point to 107-24/32, yielding 4.87 percent.
The five-year note rose 7/32 of a point to 100-9/32, yielding 2.93 percent, while the two-year gained 4/32 of a point to 99-27/32, yielding 1.70 percent.
Government bonds gave ground early in the session but a stock market slide after media powerhouse AOL Time Warner (AOL: down $1.96 to $12.00, Research, Estimates) reported a $98.7 billion loss for 2002 helped reverse the decline. CNN/Money is a subsidiary of AOL Time Warner.
War fears also kept investors from making any big bets in or out of safe-haven government bonds, analysts said.
Along with sinking stock prices, Iraq-related uncertainty has given rise to what Tony Crescenzi, chief bond market strategist at Miller Tabak & Co., called the "Friday effect," where bonds rally ahead of the weekend because of the heightened geopolitical tension.
A Commerce Department report on U.S. economic growth showed activity all but stagnated in the fourth quarter of 2002, limping ahead at a modest 0.7 percent clip after a healthier 4 percent experienced between July and September.
Although the number matched Wall Street expectations, some traders who had bet on the possibility of a small fourth-quarter contraction took the chance to shed some of their holdings early in the day.
-- from staff and wire reports
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