Even Forex Fireworks Can't Distract Treasury Traders

Who are awaiting Thursday's word from the Fed chairman before doing anything rash.
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The Treasury market finished the day very little changed in spite of some noontime fireworks in the currency market, which can often spill over into the credit markets. Analysts attributed the bond market's paralysis to its single-minded focus on what

Fed

Chairman

Alan Greenspan

will say when he addresses

Congress

on the economy and monetary policy on Thursday.

Undistracted by the economic calendar, which was bare, the benchmark 30-year Treasury bond ended the day down 6/32 at 90 31/32, lifting its yield 2 basis points to 5.90%. But shorter-maturity Treasury notes, whose yields correspond more closely to the short-term interest rates set by the Fed, closed slightly higher on the day, dropping the two-year note's yield, for example, to its lowest level since May 28. The two-year note gained 1/32, dropping its yield from 5.47% to 5.46%.

In the foreign exchange market, the dollar tumbled against the euro in what traders attributed to a short squeeze, starting at around 12:30 p.m. EDT. Basically, the euro, which has been moving toward parity with the dollar since its introduction at the beginning of the year, traded as low as $1.0121 overnight. But as it bounced off that level and continued moving higher, traders who were short the currency reached their pain threshold at around $1.0198. As the currency rocketed from there to $1.0329, some suspected an intervention by the

European Central Bank

. Trouble is, no one saw any intervention. Today's action returns the euro to a level, around $1.029, not seen since the end of June.

The weakness in dollar-euro also affected dollar-yen, which tumbled from around 118.93 yen to the dollar to as low as 117.72, before recovering to around 118.30, its worst close since June 11.

Weakness in the dollar normally causes weakness in Treasuries, since they become less appealing to foreign investors. At the same time, a weakening dollar can be inflationary in the U.S.

The price action in Treasuries was notable today because it was so subdued relative to what went on in forex. And that,

Merrill Lynch

Treasury market strategist Jerry Lucas said, "indicates that the market is looking beyond all this to

Humphrey-Hawkins

, which is going to set the tone for the rest of the summer."

Greenspan's Humphrey-Hawkins testimony on the economy and monetary policy, slated for 11 a.m. EDT Thursday before the

House Banking Committee

, will be closely attended for any hint about the likelihood of additional interest-rate hikes this year, including at the Fed's next meeting on Aug. 24.

Before the Fed raised rates on June 30, many bond market mavens expected at least two rate hikes. But the

Federal Open Market Committee's

reversion to a neutral policy bias from a tightening bias and last week's benign inflation reports have made the consensus more bullish.

"The market's looking right through this," Lucas said of today's currency market action, "because what Greenspan says is going to have more important long-term ramifications" for the dollar.

There's unlikely to be any positive movement in the Treasury market in advance of Humphrey-Hawkins either,

Fuji Securities

president Bernie Jensen said, even though he doesn't see much risk in it.

"I think his negative comments are pretty well known," Jensen said. "He's been on the hawkish side and most people believe he will still be that way. But there's some little hope he'll talk about why he took the neutral stance, and the moderation in the economy. I think the market can handle more hawkishness, as long as it's not one-sided."