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Dollar Slumps Against Yen and Mark as Bond Market Tumbles

June 13, 1996

NEW YORK (AP) _ A late afternoon slump in the U.S. Treasury market nudged the dollar lower against the German mark and Japanese yen Wednesday as both markets worried increasingly about inflation.

One day before a monthly retail sales report, the markets continued to grapple with whether the U.S. Federal Reserve will hike interest rates to strangle inflation.

On Tuesday and Wednesday the government reported tame inflation at the wholesale and retail levels, but signs of a robust economy have fueled speculation that the central bank would rather act too soon than too late.

The latest signal came in a news report Wednesday afternoon that Fed officials were divided over inflation risks, suggesting some are ready to raise rates to keep price gains in check.

That hurt bonds and mildly weakened stocks, spilling over to the dollar.

``The dollar was not that happy with the bond market’s slump,″ said Lisa Finstrom, a senior currency analyst at Smith Barney Inc.

In late New York trading, the dollar was quoted at 109.05 Japanese yen, down from 109.43 late Tuesday. The dollar also was changing hands in New York at 1.5325 German marks, down from 1.5347. But the dollar ended mixed overall.

A report by Market News Service, quoting unidentified sources, said that Fed officials were torn over how to regard inflation risks. They pointed to unemployment below 6 percent as being inflationary and signs that other inflationary pressures were not abating.

The article left the impression that it is increasingly likely the Fed will raise rates to cool the economy, Finstrom said.

The problem, she said, is that the Fed was perceived to have been too slow to raise rates in 1994.

Thus, Finstrom said, while dollar traders like higher rates because it keeps investors coming to U.S. assets, higher rates are are not considered positive until inflation is under control.

``It’s only good if you feel the Fed is going to keep inflation from accelerating. Rising inflation is negative,″ Finstrom said.

The bond market also was disappointed that consumer prices rose 0.3 percent in May. While the rise had been expected, Finstrom said, traders had grown hopeful Wednesday’s report would mirror the drop in Tuesday’s report on wholesale prices.

Other late dollar rates in New York, compared with late Tuesday: 1.2631 Swiss francs, down from 1.2645; 5.1990 French francs, up from 5.1980; 1,552 Italian lire, up from 1,549.60; and 1.3669 Canadian dollars, up from 1.3655.

The British pound was quoted at $1.5355, up from $1.5350.

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