Bonds Plunge as Drop in Dollar Renews Fear of Reduction in Foreign Buying
NEW YORK -- A sharp drop in the dollar yesterday created fresh turmoil in the bond markets.</br></br>The dollar's slump aroused renewed concern that foreign investors may cut back on their purchases of dollar-denominated investments at a time when the U.S. is addicted to massive infusions of foreign funds. In addition, traders fear the falling dollar, which makes imported goods more expensive, will intensify pressures for higher inflation and increased interest rates.</br></br>If the dollar continues to fall sharply, the Federal Reserve might react by tightening credit slightly, raising short-term interest rates, analysts say. But most agree that a credit-tightening move isn't likely anytime soon because that could damage the economy and place additional strains on the banking system. The Fed's policy committee meets today in Washington to review strategy.</br></br>In the largest one-day slump since March 4, prices of actively traded Treasury bonds fell about 1 3/4 points, or $17.50 for each $1,000 face amount. Corporate and municipal bond prices also fell, although not as sharply as Treasury bonds.</br></br>The yield on the most actively traded 30-year Treasury bonds rose to 8.84% from 8.67% last Friday. Late last month, the yield on these bonds stood at about 8 3/8%.