The U.S. dollar continues to suffer from what some analysts call the Rodney Dangerfield effect: It can't seem to get any respect.
Borrowing a phrase from Dangerfield's well-known stand-up comedy act, foreign exchange traders have dubbed the greenback a second rate currency and a target of selling in global markets, a development that has not gone unnoticed by bond investors.
The latest wave of market jitters in the Treasury market reflects investors' fears that the sliding dollar will force the Federal Reserve to raise interest rates sooner than expected. The notion has been supported by news reports that Fed officials have privately signaled their willingness to do just that.
Compounding those fears was the failure by central banks, through several rounds of concerted intervention last week, to shore up the flagging dollar. With intervention looking less and less like a viable method of supporting the dollar, bond market observers are now more inclined to believe the Fed might boost rates.
"Intervention isn't working, and it is becoming more likely that the Fed will raise rates to support the dollar," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. Wesbury said the central bank could boost short4erm rates as early as next week when the Federal Open Markets Committee meets to discuss U.S. monetary policy.
The dollar fell to 1.5805 German marks Friday, a 13-month low. Despite repeated intervention Friday by the Federal Reserve and other Group of Seven nation central banks, the dollar hit its lowest level against the mark since May 10, 1993.
Dollar weakness is a negative for fixed-income investors because of the inflationary implications inherent in a declining currency's value. Lower currency rates are inflationary because they generally make imports more expensive, provide an umbrella for retailers and producers to raise prices, and shift demand toward U.S.-made products at a time when factories are running near full capacity.
Reasons for the dollar's weakness run the gamut, though the most cited culprits are lack of faith in Clinton Administration. the U.S. budget deficit, economic growth and inflation, and uncertainty over the future path of U.S. and German interest rates.
The problem for the bond market in such a rising-inflation scenario is one of sponsorship and the all too apparent lack of foreign demand for U.S. government and corporate securities. Without the help of funds flowing out of other markets into U.S. investments, fixed-income observers continue to argue that the bond market will have a difficult time recovering recent losses.
"The world's awash in dollars, and few people want to hold them because of inflationary fears," Wesbury said.
Charles Leiberman, director of financial markets research at Chemical Securities Inc., said the dollar's slide has exacerbated fears that U.S. inflation is beginning to heat up. While the weak greenback has contributed to bond investors' concerns over mounting price pressures, Leiberman stressed that it is not the primary force behind the market's declines.
Market observers were mixed on whether the central bank would boost credit in coming weeks to bolster the sagging dollar. Much of the debate centers on whether the Fed would be willing to support the dollar at the expense of maintaining economic expansion.
Fred Leiner, bond market analyst at Continental Bank, is among the market observers who believe the Fed will boost rates in coming weeks to restore stability to global foreign exchange markets.
On the other side, Donald Fine, chief market analyst at Chase Securities Inc., thinks the Fed will rely on bouts of concerted central bank intervention, not higher rates, to prop up the dollar.
To support his case, Fine said investors need only to recall England's attempts to support the pound artificially through higher interest rates in 1991. Raising rates failed to boost the value of the currency over time and resulted in a substantial increase in unemployment.
"Monetary policy should never be used to stabilize the dollar," Fine said.
The tug of war between the bulls and bears intensifies in coming sessions as the bond market came up against a barrage of reports on the economy.
At issue is whether growth has moderated from the brisk pace seen earlier in the year. At risk is the health of a market already weakened by signs of mounting wage pressures and lingering fears of higher interest rates.
Fixed-income analysts remain decidedly mixed about overall economic fundamentals, with some forecasting softer growth in the third and fourth quarters of 1994, and others expecting the economy to expand further through the end of the year.
The notion that the pace of economic growth may moderate in the months ahead has gained credence in recent weeks as reports of slower activity came in, analysts said.
But bond investors are not getting ahead of themselves. At best, they remain cautiously optimistic that the bearish cloud that hovered over the Treasury market in recent months will gradually dissipate.
Treasury Market Friday
The Treasury market fell sharply Friday as several rounds of concerted central bank intervention failed to prop up the U.S. dollar.
The 30-year bond ended down more than 1 1/4 points Friday, to yield 7.51%.
Central banks, led by the Federal Reserve and the Bundesbank, intervened several times in support of the dollar. The bouts of buying succeeded in pushing the dollar higher briefly, but the U.S. unit reversed directions to test the downside once again.
"Bond traders were disappointed that the intervention wasn't more effective, and some wonder if rates will have to go higher to support the dollar," a trader said.
In futures, the September bond contract ended down more than a point at 102.14.
In the cash markets, the 6% two-year note was quoted late Friday down 6/32 at 99.27-99.28 to yield 6.06%. The 6 3/4% five-year note ended down 19/32 at 99.19-99.21 to yield 6.83%.
Corporate Securities
Fitch Investors Service Inc. rated Telex-Chile's implied external debt obligations BBB.
In a press release, Fitch said the rating reflects the telecommunications firm's sound financial position, solid operating record, and demonstrated ability to operate effectively in a competitive environment. The credit trend is stable.
Telex-Chile provides international public long distance service, private networks for corporate customers, and various retail communications services to the general public.Treasury Market Yields Prev. Prev. Friday Week Month 3-Month Bill 4.25 4.20 4.26 6-Month Bill 4.75 4.62 4.78 1-Year Bill 5.36 5.14 5.30 2-Year Note 6.06 5.83 5.95 3-Year Note 6.36 6.18 6.29 5-Year Note 6.83 6.68 6.71 7-Year Note 6.86 6.74 6.75 10-Year Note 7.20 7.11 7.10 30-Year Bond 7.51 7.44 7.38
Source: Cantor, Fitzgerald/Telerate
