Higher Interest Rates On Horizon?

An accelerating economic recovery in the United States should soon lead to higher interest rates, U.S. Treasury Secretary John Snow said in an interview published Monday by The Times newspaper.

The report triggered a moderate rally by the U.S. dollar on foreign exchanges, as well as a drop in U.S. bond prices on the Tokyo markets.

"As profits increase, there is going to be a need for a capital-rationing process," Snow was quoted as saying.

"I'd be frustrated and concerned if there were not some upward movement" in rates, he was quoted as saying.

Growth in the United States in the year ahead would be about 4 percent, creating "roughly 2 million new jobs from the third quarter of this year to the third quarter of 2004," The Times quoted Snow as saying.

"I would stake my reputation on employment growth happening before Christmas. I'd bet dollars to doughnuts that we're going to see a pickup in jobs in the next few months," Snow was quoted as saying.

Higher interest rates tend to boost a currency, because of the prospects of better returns on investment. The dollar, which had fallen under 108.80 yen over the weekend, bounced up to 109.96 yen Monday, half a yen higher than its closing rate in New York on Friday.

The euro eased to $1.1656 from $1.1669. The pound sterling held firm, despite British Prime Minister Tony Blair's treatment for a heart irregularity on Sunday.

In Tokyo, the comments sparked a drop in U.S. bond prices as investors began factoring in the prospect that interest rates would be higher by the time bonds reached maturity, driving up yields.

The price of the benchmark 10-year U.S. Treasury note dropped 12/32 point, or $3.75 per $1,000 in face value. Its yield, which moves in the opposite direction, rose to 4.44 percent. The 30-year Treasury bond fell 14/32 point to 101 11/32, yielding 5.28 percent.

In the Times interview, Snow rejected the idea that the Federal Reserve Board would not raise interest rates before a presidential election.

"It is amazing how you get this sort of mythology without any factual backing," Snow was quoted as saying.