Euro plunges Common currency losing friends; Treasurys slip as Mideast talks begin October 16, 2000: 4:09 p.m. ET

NEW YORK (CNNfn) - The euro fell to near all-time lows against the U.S. dollar Monday after the president of the European Central Bank seemed to dismiss the possibility that other nations would intervene again to help the struggling currency.

Meanwhile, U.S. Treasurys closed slightly down as U.S. equities markets recovered from last week's losses and peace talks began in the Middle East.

Does the euro have any friends?

European Central Bank President Wim Duisenberg was reported in the London Times as saying it would be inappropriate for the Group of Seven (G-7) industrial nations to step into markets when external events led to extreme exchange rate volatility.

Asked whether it would make sense for central banks to get into the market if a sharp change in currencies were caused by war in the Middle East, Duisenberg replied, "I wouldn't think so." An ECB spokesman confirmed that the quote was correct.

Later Monday, ECB executive board member Sirkka Hamalainen made an apparently contradictory statement, saying the euro's ongoing weakness poses a potential risk to the world economy.

"The concerted measures undertaken by the ECB jointly with other major central banks in the foreign exchange market a few weeks ago (to bail out the euro) have made it clear to market participants and to the public at large that all the policy makers involved are concerned about the potential implications of a misalignment of the euro for the world economy," Hamalainen said.

Dealers said Duisenberg's comment contributed to a fall in the euro's exchange rate to within just a third of a cent of its lifetime low of 84.40 U.S. cents, which it reached last month. By 3:00 p.m. ET, the euro had recovered slightly to 84.96 cents against the dollar, still below Friday's close of 85.6 cents.

In addition to rising against the struggling euro, the dollar also rose slightly to 108.06 yen from Friday's close of 107.78 yen.

Treasurys slip lower

U.S. Treasuries edged narrowly lower as rickety U.S. stocks stabilized and as Israeli and Palestinian officials met in Egypt in an attempt to instill calm in the Middle East after weeks of violence.

President Clinton attended the summit in Sharm El-Sheikhh, Egypt, appealing to both Israel and the Palestinians in an attempt to quell fighting that has killed around 100 people in less than three weeks.

The unrest caused oil prices to resume an upward climb last week after easing off 10-year peaks hit in September. It also rattled U.S. stock markets already unbalanced by weak profit forecasts, sending many investors fleeing for the safe haven of government-guaranteed securities.

A measure of calm returned to the markets, traders said, which kept the market trapped in a tight downward sloping range.

"We're staring at very small ranges, waiting for other markets to react" to developments in the Middle East, said Thomas Estes, head of fixed-income sales and trading at Daiwa Securities America.

At the 3 p.m. ET New York settlement, 10-year Treasury notes were off 3/32 at 100 even, as their yield, which moves inversely to the price, stood at 5.75 percent. Thirty-year bonds fell 4/32 to 106-2/32, yielding 5.82 percent.

Two-year notes were off 1/32 at 100-6/32, yielding 5.90 percent, only seven basis points off an 11-month low of 5.83 percent hit last week when stocks were on the slide. Five-year notes slipped 4/32 to 103-31/32, yielding 5.75 percent.

Market psychology changes

U.S. stocks were mixed with the tech-heavy Nasdaq, which rebounded strongly on Friday after previous heavy selling, was down 0.4 percent to 3,304. The Dow Jones industrial average was up 0.5 percent to 10,246.

"From a psychological perspective the market is in a very tough spot. We've seen a substantial re-pricing in the equity markets to lower levels that still weighs very, very heavily on the back of our minds," said Jim Caron, fixed-income strategist at Merrill Lynch.

The tech-weighted Nasdaq has shed 19 percent of its value since the end of August on earnings worries, and is off by nearly the same amount on the year. The Dow Jones industrial average of blue-chip stocks is off 9 percent since the end of August and around 10 percent on the year.

"A lot of money was driving the Treasury market last week on fear, flight to quality buying," said Josh Stiles, senior bond strategist at IDEAglobal.com. "That was partially unwound on Friday and probably has about another 10 basis points to go if we continue to see stability in the stock market and more calm in the Middle East."

Traders said an easing in oil prices was helping 30-year debt, which has suffered in recent weeks as investors sold their longer-dated debt for shorter paper on fears higher energy costs would eat into their returns.

November NYMEX light sweet crude futures were $2.14 lower at $32.85 a barrel.

What will the Fed do?

Earlier, in a speech to the Federal Reserve Bank of Atlanta, Fed Chairman Alan Greenspan made no reference to the U.S. economy or interest rate outlook following stock market volatility and two recent reports showing a pickup in inflation and consumer demand.

On Friday the government reported prices at the producer level stripped of food and energy components rose a higher-than-expected 0.3 percent in September, which traders said would have hurt the market a lot more had it not been for uneasiness about the prospects for Middle East peace.

The government also said retail sales in September jumped 0.9 percent -- far higher than expected -- showing no let-up in the American consumer's thirst to spend.

Those reports reignited some concerns that the Fed, widely expected to leave rates unchanged for the rest of the year, may still have more credit tightening up its sleeve following six rate hikes between June 1999 and May.

Traders said an expected reopening of $4 billion-to-$5 billion of five-year reference notes from mortgage lender Freddie Mac sometime this week was weighing on the five-year sector.

Earlier, the government said August business inventories rose by 0.7 percent, higher than the 0.4 percent rise economists in a recent Reuters survey forecast, and following an upwardly revised 0.4 percent rise in July.

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-- Martin Thompson (mthom1927@aol.com), October 16, 2000