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Dollar surges, bonds stable
Greenback rallies to new 7-month high against euro on upward revision to first-quarter GDP growth.
May 26, 2005: 4:24 PM EDT

NEW YORK (CNN/Money) - The dollar climbed to a seven-month high against the euro Thursday on government news that the economy had grown faster than early estimates had predicted but still fell short of Wall Street expectations.

Treasury prices remained relatively unchanged following the report.

The euro bought $1.2510, down from $1.2602 late Wednesday, while the dollar bought 107.96, up from 107.72 in the previous session.

The dollar soared Thursday after the government revised first-quarter real GDP growth to an annual rate of 3.5 percent, versus the initial reading of 3.1 percent. The new figure was slightly below the consensus analyst estimate of 3.6 percent.

"This is a solid (GDP) release and should support the dollar's gains from earlier this morning," Lara Rhame, currency strategist at CSFB, told Reuters.

Faster GDP growth is an indication of an expanding economy, which could lead the Federal Reserve to raise interest rates. Rising interest rates generally help the dollar as they make dollar-denominated securities more attractive to foreign investors.

Furthermore, the dollar has benefited as investors seek to capitalize on rising rates in the United States and sluggish growth in Europe.

"Near-term pressure on the euro is to be expected....We've seen earlier on this morning the euro coming under renewed pressure on fears with regard to the referendum this weekend in France," Ian Stannard, senior foreign exchange strategist at BNP Paribas in London, told Reuters, referring to concerns that France will reject the new European Union constitution in a referendum scheduled for Sunday.

Debt prices held steady after Thursday's first quarter GDP numbers which hinted that inflation continues to rise as expected. Bond traders hate inflation because it erodes the value of the fixed-income investment.

"Inflation gains remain modest but they are gains," John Silvia, chief economist at Wachovia Securities, told Reuters."This suggests that interest rates will continue to rise as the Fed raises rates at the short end and bond traders discount trend growth and higher inflation at the long end."

The benchmark 10-year Treasury note was up one tick from Wednesday at 100-10/32, yielding 4.08 percent. The 30-year bond remained unchanged from the previous session at 114-11/32, to yield 4.43 percent. Bond prices and yields move in opposite directions.

Prices for the five-year note held steady at 100-7/32, yielding 3.82 percent, and the two-year note inched one tick lower at 99-23/32, yielding 3.64 percent.

The stability of treasuries also suggests the upward revision to economic growth had already been priced into the market.

An upward revision had been expected since the government reported a better-than-expected trade gap in March. Purchases of imported goods and services reduce GDP, while exports increase the measure of a nation's economic activity.

Having little effect on Thursday's bond prices was the Labor Department Department's jobless claim figures, which rose slightly by 1,000 claims to 323,000 in the week ended May 21 from an upwardly revised 322,000 for the previous week.

Slated for release on Friday is April's personal consumption and income figures.

-- from staff and wire reports

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