TOKYO, Nov 15 - The dollar edged higher while interest rate futures fell sharply on Thursday as rumours swept financial markets that Osama bin Laden had been captured.
"Basically, it's a rumour about Osama bin Laden being captured. But it's purely word of mouth, not on the screens, not on TV, and we don't know where this rumour is coming from," said a Singapore-based trader.
"But everyone is trading on it right now -- foreign and local guys. I think the market has overreacted hugely, and it should start coming up again," he added.
Dealers were very cautious since similar rumours have repeatedly proved misplaced in the past, but they said there was no doubt the talk was hitting the eurodollar futures market.
The SGX eurodollar contract for delivery in March fell a hefty 12 basis points to 97.865 while the June contract dropped 20 basis points to 97.465, an unusually sharp move for this time zone.
Some dealers said the bin Laden rumour originated directly from Singapore's SGX market, making them suspicious that an opportunistic investor had started it to make money.
Eurodollar contracts are essentially bets on where the market believes official U.S. interest rates will stand in a certain period of time.
Thus, the June contract of 97.465 implies a Federal Reserve funds rate of around 2.50 percent by June compared to the present 2.00 percent level.
Dealers said the market's reasoning was that if bin Laden was captured it would be a powerful boost to consumer confidence in the United States, which would make it less necessary for the Fed to cut interest rates again.
Eurodollars had been under downward pressure in any case following the stunningly strong 7.1 percent rise in U.S. retail sales in October reported on Wednesday.
The dollar nudged up to 1.6651 Swiss francs from 1.6610 as the rumours gathered pace. The franc is considered a safe haven so any hint that the war is moving to a conclusion tends to depress the currency.