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Dollar Rallies on Mild Inflation Data and Financial Market Gains

May 10, 1996

NEW YORK (AP) _ The dollar surged Friday after the Labor Department reported a surprisingly benign April inflation rate, triggering exuberant rallies in the stock and bond markets and strong demand for the currency.

``Today was all a dollar story,″ said Peter Wadkins, vice president at the New York branch of Standard Chartered Bank. ``People want the dollar.″

By 4 p.m. in New York, the dollar traded at 1.5280 marks, up from 1.5200 Thursday. The dollar traded at 105.45 yen, up from 104.72 Thursday.

Many traders had been reluctant to buy or sell the dollar early Friday pending the release of the April wholesale price data, regarded as an important sign of inflationary pressures.

Recent surges in American grain and fuel costs had raised fears that the U.S. economy was vulnerable to an inflationary spiral, which would make dollar-denominated investments less attractive.

But the Labor Department data released Friday morning showed only a 0.4 percent increase, smaller than the 0.5 percent increase in March. The underlying inflation rate, which excludes food and energy trends, rose only 0.1 percent.

The bond market rallied sharply on that news as inflation anxieties dissipated, pushing the yield on the 30-year Treasury bond back below 7 percent. The strength in bonds spilled over into stocks, creating a strong global demand for dollars needed to purchase U.S. financial assets.

``If equities are going down and the bond market is going down, foreign investors pull out. Today we saw a reversal of that,″ Wadkins said.

Others attributed the dollar’s strength partly to renewed speculation that interest rates in Germany will have to fall in order for the German economy to grow. Lower rates in Germany lessen demand for marks.

Comments by senior members of Germany’s central bank earlier in the week had raised fears that the mark’s gradual weakness had run its course, which caused a brief rally in the German currency and pushed the dollar down.

``Now the dollar has taken a bullish tone of its own,″ said Liz Goldberg, assistant vice president at the New York branch of Hypo Bank. ``Its move down was on the mark’s strength, and now the dollar has gotten back on track.″

Other late dollar rates in New York, compared with Thursday: 1.2479 Swiss francs, up from 1.2386; 5.1794 French francs, up from 5.1515; 1,559.00 Italian lire, down from 1,560.60; 1.3670 Canadian dollars, down from 1.3673.

The British pound traded at $1.5205, down from $1.5231.

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