Bonds surged by 1 1/2 points and helped to support the dollar, which enjoyed a recovery for the second day running. In London the dollar ended about one pfennig higher at DM1.5478 and gained almost half a yen to stand at a closing Y98.40.
On Wednesday, speculation was rife that a big rise in short-term US rates of as much as one full point was imminent.
Analysts predicted yesterday that an increase in the key Fed Funds rate - currently 4.25 per cent - would come soon but was unlikely to exceed a quarter point.
Hans Tietmeyer, the Bundesbank president, also gave tough verbal support for the dollar, describing the downward pressure in the markets as exaggerated and unnecessarily damaging. He also went as far as publicly permissible in nudging the American authorities towards raising interest rates to halt the dollar's slide.
Adopting the most forthright tone to date, Mr Tietmeyer blamed market over-reaction for the exchange rate turbulence.
'The partly exaggerated fears of new inflation in the US have also played a part in this,' he told an audience at the American Chamber of Commerce in Frankfurt.
The 0.6 per cent increase in US June retail sales was too low to stir inflation fears or make a case for a rise in rates. Excluding new cars, sales increased by 0.4 per cent.
Meanwhile, the White House raised its estimate for 1994 growth to 3.6 per cent from 3.1 per cent. It said the expansion would ease to 2.8 per cent in 1995.Reuse content