Dollar under pressure as Fed fails to raise rates: US bond yields hit 18-month high as central bank disappoints markets

YIELDS of US bonds hit an 18-month high and the dollar came under renewed pressure yesterday after the Federal Reserve disappointed market expectations and failed to raise short-term interest rates.

The yield on the benchmark 61 4 per cent 30-year bond rose above 7.60 per cent for the first time since November 1992 after falling some two-thirds of a point as markets waited in vain for the Fed to act.

Financial markets are expecting a rise of up to half a point in the benchmark Federal Funds rate, now 3.75 per cent, to ease fears of mounting US inflation pressures.

That would see shares rising strongly, analysts said. A quarter-point or no change would disappoint.

The Fed's policymaking Federal Open Market Committee meets on 17 May but the central bank could raise rates before then.

Dealers said that no one was prepared to buy bonds until after the Fed had acted. This could mean a poor start to today's auction of dollars 17bn (pounds 12bn) of three-year bonds.

The US Treasury is selling a further dollars 12bn of 12-year bonds on Wednesday.

The dollar slipped to the day's lows after it became clear the Fed had failed to act. In London it finished almost a pfennig lower at DM1.6579 and at Y102.91 against the yen, little changed on Friday's finish but still a hair's breadth away from record postwar lows.

Wall Street stocks also suffered as dealers continued to fear a rise in rates. The Dow Jones Industrial Average closed down 40.46 points at 3,629.04.

In Britain consumer borrowing maintained its momentum ahead of last month's tax increases, with lending by finance houses, building societies and from banks on Visa and Mastercard credit cards reaching a record net level in March.

Economists said the figures were a further sign that an early cut in interest rates was unlikely, but the figures gave no indication how borrowing had responded after the tax rises had taken effect.

Consumers borrowed pounds 516m more than they repaid in March, just surpassing the previous record increase in early 1990, according to the Central Statistical Office. This was well above the pounds 350m rise expected in the City and the pounds 336m in the previous month, which was higher than first estimated. Some pounds 5.2bn in new consumer credit was advanced during the month.

The rise in net lending in March was driven largely by pounds 431m in net lending by finance houses, dominated by purchases of cars. This was also the highest monthly figure on record. Consumers also borrowed pounds 76m more on Visa and Mastercard bank credit cards in March than they paid back, the biggest figure for six months.

Jonathan Loynes, economist at Midland Global Markets, said the rises in finance house and credit card lending were consistent with increases of 1.2 per cent in household goods and clothing sales respectively during the month.

But on a broader definition of consumer credit - also including lending by banks on personal accounts, by insurance companies and retailers and on all bank credit cards and charge cards - the growth in borrowing appeared to have flattened out. Net lending on this definition fell to pounds 709m in the first quarter of the year, from pounds 722m in the fourth quarter last year and pounds 799m in the third.

'The broader measure of credit demand - released only quarterly - does not point to accelerating growth,' said Simon Briscoe, of Warburg Securities.

Trading was light on the London stock market as it waited for the Fed to raise US interest rates.

The FT-SE index of 100 leading shares ended the day 8.2 points lower at 3,097.8 after dealers squared their positions. At one stage the index was 25 points down on Friay's close.

European currency trading was also frozen in the headlights of the impending US interest rate decision. The pound closed a tenth of a point lower against a basket of currencies at 79.4 per cent of its 1985 value. It fell by half a cent to dollars 1.4912 and by half a pfennig to DM2.4781.

The pound faces a nervous four weeks before the European elections which could decide John Major's fate as Prime Minister.

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