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Dollar soars, bonds recover
Speculation over faster rate hikes boosts greenback to 1-month highs, 10-year yield dips from peak.
March 23, 2005: 4:57 PM EST

NEW YORK (CNN/Money) - The dollar soared Wednesday as investors mulled the likelihood of faster interest rate hikes to control inflation, while bonds bounced back from the previous day's sell-off.

In currency trading, the euro bought $1.2994 late in New York, down from $1.3087 Tuesday, while the dollar jumped to 105.95 from 105.61 late Tuesday.

The dollar hit one-month highs against the euro and the yen right after a government report showed that consumer prices rose at the fastest clip in four months in February. The currency later gave back some of those gains.

The Fed raised its target for the fed funds rates a percentage point to 2.75 percent Tuesday and noted that "pressures on inflation have picked up in recent months." As talk revved up that the statement meant a faster pace of monetary tightening, the dollar gained steam.

Rising interest rates, which are meant to slow inflation, often boost the dollar by making dollar-denominated U.S. assets more attractive to foreign investors.

But higher inflation could ultimately be detrimental to economic growth and weigh on the currency, and analysts noted that investors were not necessarily opening new positions betting on dollar strength.

"This has been a major unwinding of shorts on the dollar rather than placing new bets in favor of the dollar," John Rothfield, currency strategist with Bank of America, told Reuters.

Meanwhile, the Labor Department reported that its Consumer Price Index rose 0.4 percent in February, the biggest gain since October, versus a 0.1 percent gain in January. Economists surveyed by had forecast CPI would be up 0.3 percent in February.

"It adds a little more power to yesterday's wording change in the Fed statement," Brian Fabbri, managing director at BNP Paribas in New York, told Reuters. "Fifty (basis point interest rate hike) is coming, maybe not in May, but June is really starting to stand out now."

While signs of higher inflation and faster rate hikes boost the greenback, bond traders fear inflation as it erodes the value of their fixed income investment.

Bond prices tumbled after the Fed's decision Tuesday, but the market staged a comeback Wednesday, particularly longer-dated maturities, as traders seemed to decide that the sell-off had gone too far too fast.

The 10-year note gained 10/32 of a point, to 95-10/32, to yield 4.59 percent, down from 4.63 percent late Tuesday. The yield hit a high of 4.66 percent Wednesday. The last time the 10-year yield was above 4.60 percent was July 2004.

The 30-year bond added 17/32 of a point, to 107-20/32 to yield 4.85 percent, down from 4.88 percent late Monday. Bond prices and yields move in opposite directions.

The five-year note rose 3/32 of to yield 4.28 percent, while the two-year was little changed at 99-5/32 to yield 3.82 percent.

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