Dollar rises on Greenspan prediction

EUROPEAN government bond yields surged and the dollar rose to an 11-week high against the euro after Federal Reserve chairman Alan Greenspan said US economic growth is poised to accelerate.

Greenspan said low overnight interest rates would be enough to revive the economy and that it was unlikely the Fed would take "unconventional' steps such as buying Treasuries to cut borrowing costs. The speech surprised some investors, because it came three weeks after the Fed cut its benchmark interest rate to 1%, the lowest since 1958, citing a risk of deflation. "Bond investors around the world will feel betrayed by Greenspan," said Michael Derks, London-based chief global strategist at Commonwealth Bank of Australia. "He seems to have done a Damascene conversion to the growth story he has completely changed course in a short space of time." The German 3/4% bund due July 2013 had its biggest two-day rise in yield since June 1995 before paring losses. The price slid 0.28, or 2.8 per 1,000 ($1,130) face amount, to 97.54 at 11.07am in London. Earlier, its yield rose as much as 10 basis points after gaining 13 basis points yesterday.

The dollar advanced to $1.1138 against the euro, its highest footing since April 30. It also strengthened versus the yen.

Rising stock prices and low interest rates have reduced financing costs for consumers and businesses, Greenspan said in his biannual monetary report to Congress. Combined with tax cuts, the improving financial conditions "should bolster economic activity over coming quarters", he said.

"Bonds have been significantly knocked by the Greenspan speech," said Ciaran Barr, chief British economist at Deutsche Bank. "Either the market got itself very confused over the deflation issue or he has confused the market.' Japanese Bonds Fall Japanese bonds also fell, pushing the yield on the No 251 bond maturing in 2013 to as high as 1.15%, compared with 1.03% previously. The Bank of Japan said the outlook for exports is improving and rising stock prices are boosting business confidence, raising its assessment for the first time since July 2002.

The Fed expects the US economy to grow at a 2.5% to 2.75% inflation-adjusted rate this year and 3.75% to 4.75% next year, according to the economic forecast Greenspan presented. The Standard & Poor's 500 index of stocks has risen almost 14% this year.

Greenspan is likely today to be questioned by senators critical of his views on prospects for inflation, analysts said.