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James Turk: Another ''waterfall'' decline in U.S. dollar may be imminent

Section: Daily Dispatches

By John Beresford-Peirse
and Mark Tannenbaum
Bloomberg News Service
Saturday, March 11, 2005

http://quote.bloomberg.com/apps/news?
pid=10000006&sid=aFP1.B7ct874&refer=home

U.S. 10-year Treasury notes fell, the biggest fluctuation of any
government debt market in the world today, after the trade deficit
widened more than forecast on consumer demand for imported goods.

The declines pushed the notes to their biggest weekly drop since
May. The Commerce Department report caps a week where oil and
gasoline prices near a record high fanned concern faster inflation
will erode the value of fixed-income payments, and a falling dollar
led to speculation international investors may shun U.S. financial
assets.

A major concern for Treasuries is "the weaker dollar and the
inflation piece of that story," said Ralph Axel, a U.S. government
debt strategist in New York at HSBC Securities USA Inc. "Inflation
is the main issue of uncertainty in the U.S."

The benchmark 4 percent note due February 2015 fell about 3/8, or
$3.75 per $1,000 face amount, to 95 29/32 at 10:30 a.m. in New York,
according to bond broker Cantor Fitzgerald LP. The yield rose 5
basis points to 4.51 percent. A basis point is 0.01 percentage
point.

For the week, the yield is up 21 basis points, the most since the
period ended May 7. The yield yesterday reached 4.56 percent, the
highest since July. Ten-year note yields may reach as high as 4.75
percent in the next couple of months, said Axel, whose firm is one
of the 22 primary U.S. government securities dealers, which trade
with the Federal Reserve's New York branch.

The world's biggest movers are based on changes in price or yield
and are screened for the size of the market and amount of daily
trading.

"The low-inflation environment might be behind us," said Alex Li, an
interest-rate strategist in New York at Credit Suisse First Boston,
also a primary dealer. Ten-year yields may rise to 5 percent by year-
end, he said.

The trade deficit was $58.3 billion, more than the median estimate
of $56.8 billion in a Bloomberg survey of economists, and the second-
largest ever. Demand for consumer goods, automobiles and business
equipment pushed imports to a record.

The trade report "just contributes to the current reassessment in
the market that the Fed has a long inflation battle on its hands and
it does not appear that the fight is anywhere near over," said
Sadakichi Robbins, head of proprietary fixed-income trading at Bank
Julius Baer & Co. in New York.

A wider U.S. trade gap means more dollars need to be converted to
other currencies to pay for imports. Against the euro the dollar
slid to $1.3453 at 10:30 a.m. in New York, from $1.3418 yesterday,
according to electronic currency-dealing system EBS, and is down 1.6
percent this week.

Fed Chairman Alan Greenspan yesterday said a weakening dollar may
prompt foreign exporters to raise prices in the U.S., spurring
inflation concerns. A lower dollar may make imported goods more
expensive in the U.S., Greenspan told the Council on Foreign
Relations Annual Corporate Conference in New York.

"We may be approaching a point, if we aren't already there, at which
exporters to the United States, should the dollar decline further,
would no longer choose to absorb a further reduction in profit
margins," Greenspan said.

A Labor Department report on March 4 showed companies added 262,000
workers to payrolls last month, the most since October.

Signs of labor market strength may add to expectations inflation is
quickening. A Fed survey on March 9 showed companies "indicated
greater ease in passing along price increases."

In the past month, government reports have shown the producer price
index excluding food an energy rose the most since 1998 in January,
the core consumer price index increased that month from a year
earlier by the most since 2002 and commodity prices as measured by
the Reuters-CRB index hit a 24-year high.

Traders and investors are raising expectations for how much the
central bank will increase its target for the overnight lending rate
this year.

The Fed, which has raised borrowing costs six times since June, will
lift the rate to 3.75 percent by Dec. 31, according to the median
forecast of 66 economists polled by Bloomberg from March 1 to March
8. The rate is now 2.50 percent.

Declines in Treasuries may be limited as some investors find value
in 10-year yields at their highest since July.

Bill Gross, chief investment officer at Pacific Investment
Management Co. and manager of the world's biggest bond fund, said
yesterday his firm bought "a billion or two" dollars worth of five-
and 10-year notes in recent days.

The yield's 14-day relative-strength index, a gauge of momentum for
gains or declines, rose to 73 on March 9, according to data compiled
by Bloomberg. A reading of 70 or above suggests a turn in direction
may be imminent. The index is 67 today.

"Given that the market looks oversold, we are positioning ourselves
for some form of a near-term recovery in Treasuries," said Nick
Tribe, at Portfolio Partners Ltd. in Melbourne, which manages the
equivalent of $2.7 billion in bonds and cash. "We are moving to be
long in U.S. Treasury markets."

Treasuries fell in Asian trading yesterday after Japanese Prime
Minister Junichiro Koizumi said his country, which holds the world's
largest currency reserves, should consider diversifying how it
invests its foreign reserves.

Japanese Finance Minister Sadakazu Tanigaki later said the remarks
don't mean the government plans to change its asset mix. Japan is
the largest overseas holder of U.S. Treasuries, owning a total of
$711.8 billion as of December.

China's central bank cut the share of its currency reserves held in
dollars and raised its holdings of euros, according to a report by
Lehman Brothers Holdings Inc. China is the second- largest foreign
holder of Treasuries. It slowed its purchases of the securities in
the last three months of 2004.

Seventy-six percent of China's reserves, the world's second-
largest, were in dollars last year, down from 82 percent in 2003,
Lehman said in an analysis yesterday of figures published by the
People's Bank of China. The rest are in euros, said Lehman, the
fifth-largest U.S. securities firm.

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