Ahead of the Fed, dollar jumps, but bonds dip

NEW YORK - The dollar hit two-month highs, while US Treasury debt prices and stocks dipped on Friday, in anticipation of a Federal Reserve interest-rate increase next week and possibly another in August.

By (Reuters)

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Published: Sat 24 Jun 2006, 6:18 PM

Last updated: Sat 4 Apr 2015, 1:12 PM

US and European stocks slipped on the increasing likelihood of higher borrowing costs, offsetting investor enthusiasm over about $22 billion of potential US merger and acquisitions activity in the energy sector.

Speculation crept into markets that the Fed may have to get more aggressive to stamp out inflation.

“People are starting to realize there is indeed a certain probability the Fed may need to raise more than 25 basis points,” said Frank Hsu, managing director of global fixed income at Fimat USA in New York.

“People are more and more convinced the Fed has further to go,” Hsu said.

The Dow Jones industrial average slipped 30.02 points, or 0.27 percent, to end at 10,989.09. The Standard & Poor’s 500 Index inched down 1.10 points, or 0.09 percent, to finish at 1,244.50. The Nasdaq Composite Index fell 1.51 points, or 0.07 percent, to close at 2,121.47.

In New York, oil and gold futures rose.

The Fed will hold a policy meeting next week on Wednesday and Thursday, when it is widely expected to raise the benchmark fed funds rate for the 17th consecutive time by a quarter-percentage point to 5.25 percent.

The interest-rate futures market has nearly fully priced in another rate increase from the Fed in August.

Dollar and US bond yields climb

The dollar and US Treasury bond yields, which move inversely to prices, have been driven higher this week by some speculation that the Fed may even raise rates by half a percentage point next week. But analysts pointed out that this is still a remote possibility.

“The market has got a whiff of the possibility of a 50- basis-point hike by the Fed next week, and that’s likely to keep supporting the dollar heading towards the meeting,” said Richard Franulovich, currency strategist at Westpac in New York.

Against the dollar, the euro was down 0.55 percent on the day at $1.2508, near a two-month low plumbed earlier in the day around $1.2480. The dollar was up 0.37 percent at 116.56 yen, its highest since April.

Meanwhile, the prospect of yet more Fed rate increases drove the yield on the two-year Treasury note -- the most sensitive to changes in the outlook for US monetary policy -- to a 5-1/2-year high.

The two-year note slipped 2/32 to a price of 99-9/32 for a yield of 5.27 percent -- the highest yield since December 2000.

The benchmark 10-year Treasury note fell 5/32 to a price of 99-6/32 while its yield rose to 5.23 percent from 5.21 percent late on Thursday.

Earlier in the session, the 10-year note’s yield rose to 5.24 percent, the highest since the spring of 2002, according to Reuters data.

On Wall Street, stocks on a seesaw

US stocks had a seesaw day, opening lower after weaker-than-expected durable goods orders, and then turning higher for most of the afternoon as investors warmed up to the takeover deals pending in the energy sector.

Anadarko Petroleum Corp. said it agreed to acquire Kerr-McGee Corp. and Western Gas Resources Inc. in separate cash deals totaling $21.1 billion. In another smaller acquisition, valued at about $1.4 billion, Energy Partners Ltd. said it will buy Stone Energy Corp.

But by late in the session, the prospects of another rate increase next week gave investors a reason to sell some stocks before going home for the weekend.

In addition to finishing Friday’s session lower, the three major US stock indexes also ended the week on a downbeat note: The Dow fell 0.23 percent, the S&P 500 slid 0.56 percent and the Nasdaq shed 0.40 percent.

“A good part of the sell-off has been this concern, that Ben Bernanke and the other Fed governors have introduced effectively this issue of inflation fears,” said Milton Ezrati, senior economic strategist at Lord Abbett & Co. in Jersey City, New Jersey.

Overseas, stocks end mixed

After a month of increased volatility due to tightening credit conditions, global stock markets continue to struggle.

In Europe, the FTSEurofirst 300 Index of 300 leading shares ended little changed -- rising just 1.69 points, or 0.13 percent, to close at 1,283.08.

In Japan, the Nikkei average inched down just 0.08 percent. The Nikkei fell 11.65 points to close at 15,124.04 as concerns about a slowdown in the US economy prompted investors to sell shares of exporters such as Honda Motor Co. 7267.T, while expectations for higher rates in Japan also hurt investor sentiment.

Oil and gold futures rise

In New York, COMEX gold for August delivery rose $2.60 to settle at $588 an ounce, buoyed by short covering that was triggered by higher oil prices, traders said.

US crude oil futures for August delivery rose 3 cents to settle at $70.87 a barrel on the New York Mercantile Exchange. Earlier on Friday, NYMEX August crude hit a session high at $71.30, lifted as gasoline futures rallied after an oil spill closed a Louisiana shipping channel on Thursday and a BP Plc gasoline unit was briefly shut for maintenance.

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