Central Bank Watch

Ben Bernanke, Chairman, Federal Reserve

2007-09-13T09:39:00.000-07:00

How Far, How Fast, Will the Dollar Fall?

2007-09-13T09:22:00.000-07:00

FOR several years, the darkest scenarios for the world economy have involved a dollar crash. The script was simple. America’s dependence on foreign capital was a dangerous vulnerability. At some point foreign investors would refuse to pile up ever more dollar assets. If investors were spooked, say by a crisis in American financial markets, they might ditch dollars fast. The greenback would plunge. A tumbling currency would prevent the Fed from cutting interest rates, deepening and spreading the economic pain.

Well, the financial shock has hit but where is the stampede out of dollars? The greenback has fallen, to be sure, particularly since it has become clear that the Federal Reserve is likely to cut interest rates on September 18th, and particularly against the yen and the euro—the dollar hit an all-time low of $1.39 per euro on Wednesday September 12th and its decline continued on Thursday.

But the decline, so far, has hardly been a panicked rout. Although the dollar has plumbed historical depths against an index of important currencies, it has fallen by less than 1.5% since the financial turmoil hit in early August. Measured against a broader group of currencies that includes all America’s main trading partners, the dollar is little changed from where it was before August’s tumult began.

As the first signs of trouble emerged, the dollar even rose. To some analysts this confirmed the dollar’s status as a haven in troubled times. More likely, it was the consequence of unwinding leveraged bets elsewhere. Whatever the reason, the dollar’s initial buoyancy did not last. In recent weeks the greenback has slowly fallen and the likely path of interest rates suggests there is more weakness to come.

Recent gloomy job statistics suggested that the economy was weakening well before the credit turmoil hit, and all but sealed the case for a cut in short-term interest rates on September 18th, certainly of a quarter point, perhaps by as much as half a percentage point. With the European Central Bank hinting strongly that euro-zone interest rates might rise again this year, it is no surprise that the dollar has hit new lows against the euro.

Its path against the yen is harder to foresee. Japan’s economy, too, seems to be in a spot of bother making it much less likely that the Bank of Japan will raise interest rates in a hurry. That suggests the carry-trade (selling borrowed yen to invest elsewhere) will remain attractive, limiting the yen’s rise.

For true dollar pessimists, these cyclical considerations are only part of the story. Far more important, they argue, is the risk that the private investors and central banks that have been funding America’s gaping current-account deficit become permanently less keen on dollar assets. Ken Rogoff, an economist at Harvard University, and a dollar bear, argues that America’s image as a great financial centre has been tarnished by the subprime mess. The “mystique” that has allowed America to borrow lavishly and cheaply has suffered a blow. The result, he argues, must be a lower dollar and higher interest rates in America relative to the rest of the world.

Indeed, the complex structured-debt products that investors now shun have been an important source of financing for America’s current-account deficit. In 2006 foreign investors, on net, bought some $400 billion of corporate-issued debt (including mortgage-backed securities not guaranteed by the government-sponsored housing giants Fannie Mae and Freddie Mac). That is the equivalent of around half the current-account deficit.

It is hard to know what share of this debt was asset-backed, let alone mortgage-backed but the numbers are big enough that foreign flight from the mortgage-backed market, if not countered by eager buying of other types of American assets, could cause trouble for the dollar.

The lesson of the past few weeks, however, is that this is unlikely to happen all of a sudden. And if private investors fret, central banks may well pick up the slack. China, in particular, has little to gain from a dollar crash. With domestic inflation now at a ten-year high, China’s politicians may be willing to let the yuan rise somewhat faster against the dollar. But they are unlikely to add to a rout, not least because that would make their exports much less competitive in America.

Another argument against a sudden crash is that the dollar is already quite cheap. In real effective terms, it has slowly fallen by some 20% since its recent peak in 2002. That decline is already helping to shrink America’s external deficit. Add in the probability of sharply slower domestic demand in America, and the current-account deficit could shrink a fair bit over the coming months. A smaller need for foreign funds would itself put a floor under the dollar. All told, the doom-mongers’ script may play out in reverse. Instead of a financial crisis prompting a dollar crash, it may accelerate the unwinding of the imbalances that had the worrywarts so unnerved in the first place.

The Central Bank fighting the Bull Market

2007-08-11T07:06:00.000-07:00

Volatility Forces Central Bank's Hand

2007-08-11T06:51:00.000-07:00

The currency market experienced large swings in the morning amid sharp volatility prompted by heightened risk aversion to fears of a widespread credit crunch. The yen continued to benefit from such wariness, rallying across the board to 117.24 against the dollar and 160 versus the euro. Those gains were short-lived as the Fed announced that it would intervene by injecting funds “to facilitate the orderly function of financial markets”. The Fed’s decision follows similar liquidity injections from the ECB, initiated yesterday and several Asian central banks including the Bank of Japan.The Fed intervened three times today, amounting to nearly $38 billion in fund injections -- its largest since September 14, 2001, and said it would provide reserves as necessary. The Fed’s move momentarily quelled fears of a credit crunch as markets stemmed earlier losses and the yen reversed its gains against the majors. Currency traders will continue to focus on developments with the subprime debacle and exhibit greater wariness to carry trade volatility. The dollar rallied against the euro, sterling and Aussie in the Friday session, with carry trade unwinding benefiting the greenback. Although the outlook for the dollar remains bearish in light of US fundamentals, the market continues to be dictated by credit concerns and will likely trade under choppy volatile conditions over the coming weeks. Data released from China revealed a trade surplus of $24.4 billion, its second highest recorded surplus and defying expectations of a slow down given massive recent recalls in Chinese exports. The July trade surplus was up 34% y/y, versus a 27% rise in June. The strong figures will likely prompt renewed jawboning from US government officials for China to hasten moves toward a more flexible currency regime.Next week will see several key G7 economic releases, including Japan Q2 GDP, June trade balance, inflation data from the US, UK and Eurozone, as well as the minutes of the August MPC meeting.

Greenspan Says U.S. Recession 'Possible, Not Probable'

2007-02-28T20:32:00.000-08:00

(Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said a recession in the U.S. is possible, though not probable this year as excess housing inventory is being reduced quickly.
Greenspan spoke in a satellite video link to the CLSA Japan Forum in Tokyo today. His comments came from notes taken by Bernard Key, a former economics professor at Tama University in Tokyo, who attended the event. The comments were confirmed by four other people leaving the event who declined to be identified. The media were barred from the meeting and CLSA would not confirm Greenspan's comments.
``By the end of the year, there is the possibility, but not the probability of the U.S. moving into recession,'' Greenspan said, according to Key's notes. There are specific housing and general inventory excesses that are being addressed quickly, but need to be carefully monitored, he said. Current yield premiums are not sustainable, profit margins are peaking and the U.S. growth cycle is in a mature phase, Greenspan said.
The former Fed chairman said previous experience suggests a flattening of profit margins should produce a recession. He added that globalization of the economy may mean that pattern may not repeat this time, according to a fund manager who attended the speech. Greenspan said three days ago that a U.S. recession was possible this year in part because slowing growth in profit margins suggests the expansion might be winding down, according to the Associated Press.
He acknowledged at the time that most economists aren't predicting a recession. Greenspan's successor, Ben S. Bernanke, told Congress yesterday that the Fed still expects the economy to pick up later this year.
Weakness
Greenspan's remarks earlier this week emerged at a time of weakness in some areas of the economy, including the housing and auto industries, in an expansion that started in 2001.
On Feb. 27, U.S. stocks had their biggest tumble since 2002 after a plunge in Chinese shares sparked a global sell off and raised concern that investors will dump equities after a four- year bull market.
Greenspan today said the relative mildness of this week's fall in equity markets is evidence that financial systems have become better at accommodating shocks, according to one fund manager who attended the talk.
Asked about investment opportunities, Greenspan said that at some stage we'll see a recovery to a more ``normal'' risk spread, according to a trader at today's event.
The trader said he'd heard Greenspan speak three times in the last 12 months and this was the most cautious he'd heard him. The same trader said Greenspan used the words ``mature phase'' three times to describe the U.S. economy and that the repetition of the phrasing was conspicuous.
Bernanke
Yesterday, Bernanke said in congressional testimony that ``there's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year.'' The central bank's outlook is unshaken by a U.S. government report showing the fourth-quarter expansion was slower than previously estimated, Bernanke added.
Bernanke and his colleagues have been mostly upbeat about economic prospects this year, while noting risks from industries such as housing.
The Fed has said over the past month that the housing market may be bottoming, and San Francisco Fed President Janet Yellen said repeatedly in January that the job market was going ``gangbusters.''
Most forecasters consider that a recession is possible, though chances are ``pretty low,'' Wachovia Corp. chief economist John Silvia, who helps run a quarterly survey of business economists, said in an interview on Feb. 27.
Since retiring in January 2006, Greenspan, 80, has been working on a book, ``The Age of Turbulence,'' and speaking to companies and business groups. The New York Times reported last March that Penguin Press, part of Pearson Plc, paid Greenspan at least $8.5 million for the rights to the book, which is scheduled for a Sept. 17 release.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net ; Kiyori Ueno in Tokyo at kueno2@bloomberg.net

Fed Leaves Rate at 5.25%, Says Inflation Slowing

2007-01-31T20:19:00.000-08:00

(Bloomberg) -- The Federal Reserve kept the benchmark U.S. interest rate at 5.25 percent, declaring that inflation is slowing ``modestly'' even as the economy picks up speed.
The Fed's statement, which dropped language that described inflation as elevated, triggered a rally in stocks and bonds as investors concluded the central bank will keep rates unchanged for at least six months. The new wording overshadowed the Fed's retention of its bias toward tightening credit.
``Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market,'' the Federal Open Market Committee said today in a statement in Washington. ``Overall, the economy seems likely to expand at a moderate pace over coming quarters.''
The reputation of Ben S. Bernanke, who became chairman a year ago tomorrow, was burnished by government figures today that showed economic growth rebounded last quarter and a measure of inflation eased. The reception contrasts with the skepticism that greeted last month's Fed statement, when some economists predicted a slump in housing and manufacturing would require imminent rate cuts.
``Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time,'' the Fed said. ``However, the high level of resource utilization has the potential to sustain inflation pressures.''
The Dow Jones Industrial Average advanced 98.3 points, or 0.8 percent, to 12,621.69. The yield on the benchmark 10-year Treasury note declined 6 basis points to 4.81 percent.
`Changed Their Footing'
``It's nice that they have changed their footing a little bit,'' said Paul R.T. Johnson, chief executive officer of Boston Cabot in Chicago. ``Maybe we can have good economic growth with low inflation.''
Today's unanimous vote extends the Fed's period of inactivity to seven months, the longest stretch without a change since June 2004, when the Fed ended a yearlong freeze at 1 percent. Policy makers, who next meet March 20-21, are counting on the economy slowing enough to reduce inflation.
``Some inflation risks remain,'' the Fed said. ``The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.''
The Fed's preferred inflation gauge, which excludes food and energy costs, rose at a 2.1 percent annual pace in the fourth quarter, the Commerce Department said today.
It's the fifth straight period the measure has exceeded 2 percent, the upper end of the comfort range articulated by Bernanke, who testifies before Congress Feb. 14-15 on monetary policy and the economy. The gauge rose at a 2.2 percent pace in the third quarter.
Comparison
The retention of the Fed's tightening bias contrasts with some forecasts made a month ago, when indications of a potentially deeper slowdown raised the possibility that the Fed could alter its stance. At the last gathering, several FOMC members saw increased risks of slower economic growth, according to meeting minutes.
Since then, economic reports showing job gains, consumer spending, signs of stabilization in the housing market and a narrower trade deficit have all but erased that possibility.
Investors are increasingly coming around to that view. Traders see little chance of a rate cut by the end of August. At the start of December, futures contracts reflected an almost- certain cut by the end of March.
``As long as the economic data remains as constructive as it has been lately, the Fed will be happy to keep policy as it stands,'' said David Resler, chief economist at Nomura Securities International Inc. in New York.
Fed members, as part of an ongoing discussion on how much information to disclose publicly, were scheduled this week to ``consider the role that economic projections and forecasts can play in communicating information,'' the Dec. 12 minutes said.
Brighter Picture
The Commerce Department confirmed the economic trend today, giving its initial estimate that fourth-quarter gross domestic product expanded at a 3.5 percent annual pace, compared with 2 percent in the third quarter and 2.6 percent in the April-to-June period.
Policy makers who spoke this month gave little indication they were ready to adjust borrowing costs. San Francisco Fed President Janet Yellen said Jan. 17 that the existing stance was ``well-positioned'' to bring down inflation without hurting growth; Poole used the same phrase in a press conference that day.
``It will still take some additional time for inflation to unwind due to lags between policy actions and their impacts on economic activity and inflation,'' Yellen said in a speech in Scottsdale, Arizona, which she repeated five days later in Nevada.
Fed Vice Chairman Donald Kohn said in a Jan. 8 speech that ``despite the recent favorable price data, I believe it is still too early to relax our concerns about whether the run-up in price pressures in the spring and summer of last year is truly unwinding and whether it is unwinding rapidly enough to forestall a pickup in inflation expectations.''
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .

The Fed Can't Get No Respect From Supply-Siders

2006-08-14T04:32:00.000-07:00

(Bloomberg) -- Have you ever noticed how upbeat the supply-siders are, unfazed by the twists and turns in Federal Reserve policy? As long as there's been a tax cut --specifically, a cut in marginal tax rates or on capital gains -- in the last three to five years, nothing can go wrong with the economy.
Supply-side economics is based on the idea of using tax cuts as incentives to increase, as the name suggests, the supply side of the economy, or its productive capacity.
Cut the tax on capital, for example, and you get more capital investment, a larger capital stock, and higher potential gross domestic product, which means the economy can accommodate a faster pace of growth without generating inflationary pressures.
The same holds true for reductions in marginal income-tax rates. Allow workers to keep more of their take-home pay, and it will encourage them to work harder -- and nudge some deadbeats to enter the labor force. Because an economy's potential is circumscribed by the growth in the labor force and the growth in productivity, more workers equal higher potential GDP.
That said, tax cuts aren't the only force holding sway over the economy. The Fed is entrusted with the conduct of monetary policy, whose most obvious manifestation is the setting of the benchmark overnight rate.
If fiscal policy is all that matters for economic growth, why do folks in the financial markets spend so much time and energy obsessing over the appropriate level for the federal funds rate? Based on some of the breathless commentary following last week's Fed meeting, the decision to leave the funds rate at 5.25 percent is something that Chairman Ben Bernanke will take with him to his grave!
A Laffer Moment
The issue of why supply-siders deny the growth-retardant effects of higher interest rates had been knocking around in the back of my mind for a while and was catapulted to consciousness following a conversation I had last month with Art Laffer, the father of supply-side economics.
I had called Laffer, chairman of Laffer Associates in San Diego, to talk about the government's mid-year budget review, which projected a 30 percent decline in the 2006 deficit from an inflated February estimate. Almost all the improvement was due to a surge in tax receipts from individuals and corporations.
Laffer is smart, warm, charming and a great talker on a wide range of issues. So the conversation quickly moved from the question of tax cuts paying for themselves (supply-side dogma) to other subjects. My ears perked up when he said that monetary policy could not affect production, employment or output; that all it could do was create ``asset price disturbances.''
Aha!
Fiscal policy, on the other hand -- tax and spending initiatives -- does have an effect on production, employment and output, Laffer said.
That's it! No wonder the supply-siders give short shrift to monetary policy. If it has no role in determining economic growth, who cares? All monetary policy can do is affect prices.
In the long run, that's correct. Changes in monetary policy can have ``real'' effects (on employment and output) in the short run. In the long run, the central bank can only affect the price level, or inflation.
Short and long are relative terms. Following the Great Depression, there was lots of room for above-trend growth before the economy bumped up against capacity constraints.
No one (well, maybe someone) will challenge the idea that tax cuts increase the incentive to work, invest and save, thereby raising the economy's potential. When it comes to the supply side of the economy, fiscal policy reigns supreme.
Incentives to Demand
Central banks work by altering incentives, too. By raising and lowering interest rates, the monetary authority changes the incentive to spend and to save.
For example, when interest rates were at miniscule levels in 2003 and 2004, consumers weren't being compensated for saving. So they borrowed to finance spending.
The Fed, in other words, affects aggregate demand, or the economy-wide demand for goods and services. In so doing, it can affect employment, encouraging companies to hire more workers to meet that demand.
Eventually, however, the economy will bump up against its potential. At that point, lowering interest rates, or increasing the money supply, won't generate more ``stuff,'' only higher prices.
Given their exclusive focus on the effect of monetary policy on inflation in the long run, supply-siders tend to underestimate the central bank's ability to affect growth in the short run. In 1993, they predicted death to the economy when President Bill Clinton raised marginal income tax rates.
The Long Run
Instead, the 1990s turned out to be a decade of strong growth (yes, there was a capital gains tax cut in 1997), the response to a sustained period of very low interest rates. The Fed held the funds rate at 3 percent for 17 months -- a rate unimaginable for bond traders who'd come of age in the 1970s.
Fast forward to the present and the supply-siders' assumption that the higher interest rates they claim are necessary to quell inflation won't have an effect on growth seems equally misplaced.
When the economy does downshift to below-trend growth, they can always throw up those Clinton tax increases as the reason.

To contact the columnist on this story:
Caroline Baum in New York at cabaum@bloomberg.net.

Supply Side Excuse for Weak Job Growth Is Lame

2006-07-11T00:23:00.000-07:00

(Bloomberg) -- The postmortems on the employment report for June, the third consecutive month of soft payroll growth, break down along ideological lines.
For one group, the average monthly gain of 86,000 in private payrolls from April through June, the smallest quarterly increase since the third quarter of 2003, was a sign of weak labor demand.
Construction employment has shown virtually no growth in the last four months, further corroboration of cooling in the residential real estate market. The number of retail jobs has fallen for the last three months, which could be a response to the downshift in consumer spending in the second quarter. Temporary help services jobs, which employers use to address fluctuations in demand and which don't carry the same financial burden as a permanent hire, have been in decline all year.
In fact, government was the largest source of job creation last month, which is hardly an indication of a robust labor market.
The other group of analysts viewed the modest employment growth of the last three months as a sign of tight labor supply.
Like clockwork, the no-one-left-to-hire argument surfaces at this point in every business cycle. And some industries are having trouble finding skilled workers.
But to claim that weak job growth in aggregate is a result of no labor supply is inaccurate at best and disingenuous at worst.
Follow the Money
Why? Because we have an easy way to tell whether it's lack of demand or lack of supply that's behind the slowdown in hiring to an average of 108,000 a month (total employment, including government) in the second quarter from 170,000 in the previous nine months.
``The proof of the pudding is in the pay,'' says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. ``If labor is in short supply, labor pay rates should be rising.'' As it turns out, ``unit labor costs are rising less than inflation,'' he says.
Much was made of the 3.9 percent increase in average hourly earnings in June compared with a year ago, the biggest in five years. This narrow measure of wages of non-supervisory workers (in services industries) and production workers (in goods- producing industries) doesn't account for productivity, or worker output per hour.
``In a steady state, workers' pay should match inflation plus productivity,'' says Glassman. ``The share of income that goes to business and labor should stabilize.''
Shrinking Labor Share
That's not happening. Business continues to command an increasingly large share of the income pie. Pretax profits adjusted for the value of inventories and depreciation rose to a record 12.7 percent of gross domestic production in the first quarter. After-tax profits also stood at a record -- 9.3 percent of income -- in more than a half-century of data collection.
Unit labor costs, a broad measure of compensation that incorporates productivity growth, rose 0.3 percent in the first quarter from a year earlier. Labor is not sharing the wealth in this expansion, probably because the labor pool is no longer circumscribed by the labor force in the U.S. Companies outsource jobs to the cheapest producer, keeping costs down and profits high.
So, yes, the unemployment rate is historically low at 4.6 percent. But the broadest measure of labor pay suggests that workers' income is not keeping pace with productivity growth (2.5 percent in the year ended in the first quarter of 2006) or inflation (pick any measure you like, even with all the usual suspects excluded).
Need Lacking
It's true that the workweek rose to 33.9 hours in June, only the second time in almost four years that the usually forward- looking workweek was that high. It would be unusual, to say the least, for the forward-looking workweek (employers work their current stable of workers harder before they commit to new hiring early in the expansion) to lag. Besides, the workweek has been in decline for the 40 years for which the Bureau of Labor Statistics has records.
There are other reasons the labor supply argument doesn't hold water.
``Remember, payroll is a measure of jobs, not people,'' says Joe Carson, director of global economic research at Alliance Bernstein. ``It tells you how many jobs are being offered by corporations.''
It's no secret that this expansion has seen the weakest labor need -- the number of workers and the number of hours they put in -- of any postwar business cycle.
Data Whisperer
``Companies are speaking to you through the data,'' Carson says. ``They have said they don't need the jobs and they don't need the hours. They don't see a lack of supply. They don't have the demand.''
Whether it's the changes wrought by the Internet -- more people shopping on line means less need for in-store sales associates -- or outsourcing or something else, labor demand isn't what it used to be. Unlike previous business cycles, where good job opportunities and good pay induced workers into the labor force, there has been little ``supply-side'' response this time around.
Is there any other reason to be suspicious of the supply- side argument as the cause of weak hiring? Yes. The Federal Reserve has been raising short-term rates for two years for a total of 425 basis points. The myopic focus on what the Fed says and does seems to evaporate when it comes to doling out credit for economic outcomes.
Which brings us to another standard feature of business- cycle analysis that crops up right about now: claims that interest-rate increases aren't working. These assertions follow close on the heels of ``no one left to hire'' and turn out to be equally misplaced.

To contact the columnist on this story: Caroline Baum at Bloomberg

Dollar Falls This Week as Fed Rate Increase Expectations Ease

2006-06-03T13:19:00.000-07:00

(Bloomberg) -- The dollar fell against the euro and yen, snapping a two-week rally, as signs of slowing growth reduced expectations the Federal Reserve will lift interest rates later this month.
Traders pared bets the central bank will increase borrowing costs by a quarter-percentage point for a 17th straight time after reports showed the economy added the fewest jobs since October and manufacturing slowed.
``There's the sense that maybe the Fed is not going to be going as much as people had been expecting,'' said Jeffrey Young, head of currency research in New York at Citigroup Inc. ``This will be marginally negative for the dollar.''
The U.S. currency weakened 1.4 percent this week to $1.2918 per euro at 5:25 p.m. in New York yesterday. It fell 0.8 percent on the week to 111.71 yen.
U.S. employers added 75,000 jobs last month, fewer than any economist forecast, a Labor Department report showed yesterday. The median forecast of 80 economists surveyed by Bloomberg was for the economy to generate 170,000 jobs. The unemployment rate fell to 4.6 percent from 4.7 percent.
``We're questioning how much growth we will have going forward,'' said David Durrant, an investment strategist in New York at Julius Baer Investment Management, which oversees about $40 billion. ``We're dollar bears.''
Lower Odds
Interest-rate futures showed traders see a 48 percent chance the Fed will lift its benchmark a quarter-point to 5.25 percent on June 29, the lowest since May 16 and down from 68 percent odds before the release of the labor report.
``This places significant downward pressure on the dollar going forward,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``There were few redeeming factors'' in the jobs report, he said.
Ruskin is considering lifting his year-end forecast for $1.30 per euro.
The dollar reached a one-month high against the yen this week after the Fed's May 10 minutes suggested the central bank may still raise rates this month.
``Recent developments suggested that upside risks to inflation had risen somewhat since the time of the March meeting,'' the Federal Open Market Committee said in records of the May 10 session, released on May 31.
`Excuse to Pause'
``The Fed takes away from this that they have an excuse to pause if they want to,'' Lara Rhame, a currency strategist at Credit Suisse Group in New York, said of the labor report. ``The knee-jerk reaction: it's a dollar negative.''
She forecasts a dollar decline to 110 yen in three months.
U.S. factory orders fell 1.8 percent in April, a government report showed this week. Manufacturing growth slowed last month, a private industry report showed June 1. The same report showed manufacturers paid more for their purchases for a third straight month in May, adding to the case for further rate increases to stem inflation.
``The crucial expectation is that growth is to slow in the second half of the year,'' said Kamal Sharma, a currency strategist at Bank of America Corp. in London. ``It weighed on the dollar across the board.''
The dollar may fall to $1.33 per euro and 105 yen within six months, he said.
Paulson Nomination
The dollar dropped 0.9 percent against the euro on May 30, the most in six weeks, on speculation Treasury secretary nominee Henry Paulson won't try to stop a slide in the currency.
The U.S. currency has fallen about 4.5 percent against the euro and yen since April 21, when the Group of Seven industrialized nations urged China and other developing Asian nations to let their currencies strengthen. The yuan is little changed since then as China limited its currency's advance.
The dollar has lost about a quarter of its value against the euro since Bush took office in January 2001, even as the administration has said it supports a ``strong dollar.''
Paulson, Goldman Sachs Group Inc.'s chief executive officer, will replace John Snow, who took the post in February 2003. The appointment is subject to Senate confirmation.
``I don't think the nomination of Paulson has changed anything,'' said Meg Browne, a currency strategist in New York at Brown Brothers Harriman & Co. ``It's not as though he has a differing view from the current administration's policy.''

To contact the reporter on this story:
Deborah Finestone in New York at
dfinestone@bloomberg.net;
Michael McDonald in New York at mmcdonald10@bloomberg.net

10-Year Note Yields Hold at Their Highest Levels Since December

2006-02-02T10:02:00.000-08:00

(Bloomberg) -- U.S. Treasury 10-year note yields held near the highest in almost two months after government reports showed a drop in new unemployment claims and faster growth in labor costs.
The Labor Department data may bolster speculation that the Federal Reserve will raise interest rates at least once more. The 10-year note's yield, which moves inversely to its price, has surged in recent weeks amid signs the economy is recovering from a fourth-quarter slowdown.
``These are ugly numbers for bonds,'' said David Ader, an interest-rate strategist at Greenwich, Connecticut-based RBS Greenwich Capital, one of the 22 primary U.S. government securities dealers that trade with the Fed. ``I have been calling for 10-year yields to move back above 4.6 percent.''
The yield on the benchmark 10-year note was little changed at 4.56 percent at 12:10 p.m. in New York, according to Cantor Fitzgerald LP. The yield climbed about 20 basis points, or 0.20 percentage point, in the past two weeks and is the highest since Dec. 5. The price of the 4 1/2 percent note due in November was 99 91/6. The two-year note yields 4.57 percent, the highest in almost five years.
Treasuries briefly rose as benchmark stock indexes fell and on speculation the U.S. would raise the terror alert level. The U.S. has no plans to increase the alert, Homeland Security Department spokesman Russ Knocke said.
Yield Gap
Expectations that faster growth and inflation will cause the Fed to further increase its target for the overnight lending rate between banks has led traders to push yields on two-year notes above those of 10-year notes. Shorter-maturity debt is more sensitive than longer-maturity debt to changes in monetary policy.
The 10-year yield exceeded the two-year yield by 188 basis points when the Fed started lifting rates in June 2004. The central bank two days ago raised its benchmark rate to 4.5 percent, the highest since April 2001.
``We already had a pretty sizable selloff over the last week or so,'' said Alex Li, an interest-rate strategist at primary dealer Credit Suisse Securities USA LLC in New York. ``The market has more important data to worry about tomorrow, and also the auctions next week.''
Next week brings the government's quarterly auctions of three- and 10-year notes and 30-year bonds. The Treasury will sell $21 billion of three-year notes, $13 billion of 10-year notes and $14 billion of 30-year bonds in the first sale of 30- year debt since August 2001. The new 30-year bonds yielded 4.57 percent in pre-auction trading.
Claims, Productivity
First-time claims for unemployment insurance benefits unexpectedly fell last week and the number of Americans on unemployment benefit rolls dropped to the lowest level in almost five years, suggesting they are having greater success finding jobs.
Initial jobless claims dropped by 11,000 to 273,000, numbering fewer than 300,000 for a third straight week. Last year, claims numbered less than 300,000 just three times.
A separate Labor Department report showed productivity, a measure of how much an employee produces for each hour of work, fell at a 0.6 percent annual rate in the fourth quarter while the cost of labor per unit production increased 3.5 percent, adding to concern that rising wages and benefits may fuel inflation.
Economists at Bear Stearns & Co. said in a research report that the drop in productivity was connected to a slowdown in the economy last quarter. Growth in the last three months of year was 1.1 percent at an annual rate, the slowest since 2002.
Key Level
A drop in 10-year notes stalled when the yield reached 4.578 percent, the level at which the notes were first sold to investors in an auction in November.
``You're not going to find fresh sellers at lower prices with the risk of the number coming out tomorrow,'' said Thomas Tucci, head of U.S. Treasury trading at RBC Capital Markets Inc. in New York, the investment-banking arm of Canada's biggest lender.
Tomorrow's employment report is forecast to show U.S. employers added 250,000 workers to payrolls last month, compared with 108,000 jobs created in December and the most since January 2000, according to the median estimate of economists surveyed by Bloomberg News.
Traders are pricing in an 88 percent chance the Fed will raise its benchmark rate to 4.75 percent at its next meeting on March 28, up from 46 percent on Jan. 5, according to interest- rate futures. Traders raised bets on the odds of an increase at the following meeting on May 10 to 28 percent, from no chance at the end of last week.
Yield Curve
Bill Gross, who manages the world's biggest bond fund, said the difference between short- and long-maturity debt yields may steepen as overseas central banks trim purchases of notes maturing in 10 years or more.
Foreign central banks, which have kept long-term yields from rising even as the Fed raised rates, may have little reason to keep tying up assets for a longer period, Gross said.
Investors abroad owned about half the $4.18 trillion in tradable Treasuries as of December, according to Treasury data.
``The exploitation of higher yields on the longer end of the curve is basically over,'' Gross, chief investment officer of Pacific Investment Management Co., said in his February Investment Outlook, released yesterday. Foreign central banks ``have no incentive to disproportionately favor any maturity on the curve'' now that two- and 10-year yields are about even, he said.

To contact the reporter on this story:
Elizabeth Stanton in New York at estanton@bloomberg.net;
Joshua Krongold in New York at at jkrongold2@bloomberg.net.

A Question, Mr. Trichet. Why Is Dad Out Of Work?

2005-12-19T13:07:00.000-08:00

(Bloomberg) -- Packing little Jean-Marie, Hans or Mario off to school sometime soon? You might want to start wondering what they will be learning.
Jean-Claude Trichet, the president of the European Central Bank, is spending a chunk of money on an education kit for schools, giving teachers the chance to introduce the work of the central bank to their pupils.
Under the title ``Price Stability: Why Is It Important for You?'' the bank has included an information pack, plus a short animated film. In total, about 50,000 secondary schools in the European Union will receive the kit. Anyone with too much time on their hands can take a look at the ECB's Web site (www.ecb.int).
The bank needn't have bothered.
``It is really just propaganda and a waste of ECB money,'' said Stuart Thomson, a fixed-income analyst at Charles Stanley Sutherlands in Edinburgh, in a telephone interview. ``If market professionals can't figure out what they are doing, how can a class of schoolchildren?''
The film is reminiscent of the cheaper programs on Nickelodeon TV. A couple of teenagers look suitably bored as they are lectured on the mechanics of monetary policy, when all they want to do is get back to playing with their mobile phones and iPods. Then they perk up as they are given a tour of different trades, in which helpful business people explain how hard it is to run a company when prices are changing all the time.
Questions for Teacher
As any teacher will say, lecturing children isn't enough. To stimulate their fresh, innocent minds you need a debate. Fortunately, my school days are long gone. Still, if I was confronted with the ECB video, here are the questions I'd ask:
How come Dad doesn't have a job?
Unemployment in the euro area was 8.3 percent in October, according to Eurostat, the EU statistics agency in Luxembourg. That's more than 12 million people out of work. It has barely shifted since the euro was introduced. The ECB still insists on maintaining price stability, yet refuses to actively promote employment.
What will I do when I finally get out of this boring school?
The unemployment rate among people younger than 25 in the euro area was about 17 percent in October, according to Eurostat. It shows little sign of falling, even with the supposed pick-up in the economy. In Greece, youth unemployment was about 26 percent in June. So, somewhere between a fifth and a quarter of the people in this classroom won't find a job. The ECB hasn't been able to promote growth in the region to create jobs.
Higher Interest Rates
Why have interest rates just been raised while economic growth is dismal?
This month, the ECB increased the benchmark lending rate to 2.25 percent, again in line with its mission to maintain price stability. And yet growth in the region is still weak: just 1.6 percent for the euro countries in the third quarter, compared with 4.3 percent in the U.S. In Italy, the economy will expand just 0.2 percent this year, according to the employers lobby group Confindustria. That is just a whisker away from another recession -- and hardly justifies a rate increase.
How can you run a single currency without a single government?
Surely the euro was meant to be a stepping stone toward a single European government, not a full stop. Yet the rejection of the European Constitution in France and the Netherlands means that process has come to a halt. The competing needs of the different countries will never be absorbed when there are no agreed rules on fiscal and tax policy -- and no progress toward them.
Opt-Out Countries
If the euro is so great, why have the U.K., Sweden and Denmark been doing better than most of the euro countries?
One or two years of better growth by the nations that opted to stay out of the euro might be explained away. Yet the countries that hung on to their own currencies appear to have performed better.
``The kids should remind the ECB governors of the old proverb: Do unto others as you would have others do unto you,'' said Dirk Chlench, an economist at Hypothekenbank in Essen AG, in an e-mailed response to questions. ``On the one hand, the ECB is permanently bashing democratically elected governments in the euro area for their allegedly loose fiscal policy, but on the other hand the ECB pays no attention to the widely shared fears of politicians that the premature ECB interest rate hike might derail the incipient recovery.''
Trichet and the ECB have a lot of explaining to do. The video, probably inadvertently, illustrates much of the problem with the central bank, and why the euro has been so disappointing even to its proponents.
Wider Mandate
The ECB defines its job just in terms of price stability. So far it has shown no interest in widening its mandate or in reassessing the responsibilities that come with being a single central bank for a whole continent.
Yet, it is simply not good enough to repeat the mantra of price stability. A new currency needs to offer people a bit more than just the grind of an endless war on inflation. It needs to take an active role in promoting employment.
The ECB doesn't even try to do that. Perhaps it's time the central bank did a little less teaching and a bit more observing. It might even learn something.

To contact the writer of this column:
Matthew Lynn in London at matthewlynn@bloomberg.net.

Copper Rises to Record on Speculation China May Default on Wrong-Way Bets

2005-11-18T11:45:00.000-08:00

(Bloomberg) -- Copper rose to records in London and New York on speculation the Chinese government doesn't have enough metal to make good on wrong-way bets made by one of its traders.
As much as 200,000 metric tons of copper must be delivered to international warehouses because of positions amassed by Liu Qibing, a trader for an affiliate of the National Development and Reform Commission, the state-run China Daily said yesterday, citing an unidentified official. There are about 140,000 tons of copper in publicly reported stockpiles worldwide.
``The funds piled in and pushed prices higher,'' said Angus Macmillan, an analyst in London at Prudential Bache, a member of the London Metal Exchange. ``It's physically impossible to deliver that metal anywhere. The government has basically increased nervousness in a market that was already nervous.''
Copper futures for December delivery rose 3.2 cents, or 1.6 percent, to $1.978 a pound on the Comex division of the New York Mercantile Exchange, the seventh straight record. Prices climbed 3.8 percent this week, the fifth straight advance.
Copper for delivery in three months on the LME rose $55, or 1.3 percent, to $4,200 a ton ($1.9048 a pound) after reaching a record $4,243. Prices on the Shanghai Futures Exchange fell 0.5 percent.
Unprecedented statements by China on sales of copper from its inventories this week have failed to convince investors the nation can honor Liu's bets. The country, the biggest consumer of the metal, may have losses of as much as $300 million, according to Wang Zheng, a trader at Shanghai Dalu Futures Co.
`Infinitely Higher'
China may default on the trades, Mark Topfer, the former No. 2 lawyer at the LME, said in an interview yesterday. The country's delivery obligations are ``infinitely higher than the stock that exists'' in exchange-approved warehouses, he said.
Topfer, who works in Norton Rose's financial markets division in London, was the LME's deputy general counsel until last year and advises brokers and customers.
The Beijing-based State Reserve Bureau, to which Liu was affiliated, may be the second Chinese state-controlled organization to get into trouble in a year. In November last year, China Aviation Oil (Singapore) Corp. sought protection from creditors after it ran up $555 million of debt from trading oil derivatives. The company bet prices would fall. They have risen to a record.
Copper's 36 percent rally in the past 12 months also has echoes of the Sumitomo Corp. scandal, when trader Yasuo Hamanaka hoarded metal, sending copper up 69 percent in a year. Hamanaka admitted in 1996 to unauthorized copper trades that lost the Japanese company $2.6 billion. He was jailed.
Copper inventory of 141,852 tons, equal to about three days of global usage, is stored in warehouses monitored by the LME and commodity exchanges in New York and Shanghai, according to data compiled by Bloomberg.
`Personal Actions'
Liu built up so-called short positions, betting copper prices would fall, China Daily reported, citing an unnamed official at government stockpile agency the State Reserve Bureau.
``As far as I know, the loss was a result of his personal actions, instead of the government,'' China Daily cited the official as saying.
The National Control Center for Supplies Reserve, under the State Reserve Bureau, declined to comment today when contacted by Bloomberg. No one answered calls made to Liu's mobile phone.
``The blame is going to be tossed back and forth until it lands on someone's lap,'' said Michael Guido, marketing manager for hedge funds at Societe Generale in New York. ``When it comes down to the deadline, somebody has to pay.''
Liu hasn't been at work since last month, two people at companies that traded with him told Bloomberg Nov. 15, declining to be identified. He hasn't answered e-mails or calls to his cell and landline phones.
`Eight Brokers'
The LME, the world's biggest metals exchange, may employ its special committee to settle a dispute between China and as many as eight brokers who have done business with Liu if the State Reserve Bureau, or SRB, reneges on the positions, Topfer said.
Adam Robinson, an LME spokesman based in London, declined to comment yesterday. Calls to the SRB spokesman in Beijing weren't answered today.
By building a short position, a speculator enters a contract pledging to deliver a commodity by a specific date at a preset price. The bet is that prices will fall so that delivery can be made with supplies that are cheaper than when the contract was sold.
Liu isn't registered with the U.K.'s Financial Services Authority in London, which regulates the LME, FSA spokesman David Cliffe said yesterday. The FSA is ``monitoring'' the copper market, Cliffe said today.
Production Shortfall
Copper has more than doubled since 2003 as production failed to meet demand. The shortfall in output this year will be 343,000 tons, Standard Bank in London forecast in a Nov. 1 report.
China has been announcing sales of copper to ease prices. The SRB plans to sell 20,000 tons on Nov. 23, the National Development and Reform Commission said Nov. 16. It sold the same amount on the day of the announcement.
The SRB may be selling copper to roll over some of its contracts that are scheduled for delivery in December, Wang said. A rollover is when a position is closed and replaced with a similar one for a date further ahead.
Speculation that the SRB may get government approval to export 200,000 tons of copper to meet the obligations has circulated in the Shanghai market, the China Daily said today. The SRB has declined to comment.
Prices for copper may rise another 9 percent this year, before falling in 2006, as China is forced to make good on the bets, said David Threlkeld, the first man to publicly allege in 1991 that Hamanaka was cornering the copper market. Threlkeld is president of Resolved Inc. in Scottsdale, Arizona.
Liu's current whereabouts are unknown.

To contact the reporters on this story:
Matthew Craze in London at mcraze@bloomberg.net;
Simon Casey in London at scasey4@bloomberg.net

Trichet Says ECB Ready to Raise Interest Rates to Stem European Inflation

2005-11-18T09:21:00.000-08:00

(Bloomberg) -- European Central Bank President Jean- Claude Trichet said the bank is poised to raise interest rates for the first time in five years to stem inflation in the 12 euro nations. Bonds fell across the region.
The bank's governing council is ready ``to moderately augment the present level of interest rates in order to take into account the level of risks to price stability,'' Trichet said in a speech to a banking conference in Frankfurt today. ``We will withdraw some of the accommodation which is in the present monetary policy stance.''
Trichet's comments are the clearest sign yet the ECB will increase its benchmark interest rate from a six-decade low of 2 percent at its next policy meeting on Dec. 1. Inflation, at 2.5 percent in October, has been above the ECB's 2 percent target for nine months and economic growth picked up in the third quarter.
``He's pre-announced a rate hike,'' said Holger Schmieding, co- head of European Economics at Bank of America in London ``The choice of words points to a 25 basis point rise rather than 50.''
The euro jumped to $1.1750 from $1.1670 after Trichet's comments. The yield on the benchmark German two-year bond soared 11 basis points, or 0.11 percentage point, to 2.80 percent at 2:34 p.m. in London. The increase was the biggest since Sept. 3 last year. Bond yields move inversely to prices.
All 19 economists surveyed by Bloomberg after Trichet's remarks expect the bank to raise the benchmark refinancing rate by at least a quarter point on Dec. 1. In an Oct. 28 survey, only one out of 26 economists predicted an increase.
`Big Mistake'
European politicians and executives want the ECB to wait for more signs economic growth is accelerating before raising rates.
``It's too soon to have an increase in interest rates in Europe,'' Italian Deputy Finance Minister Mario Baldassarri said in an interview in Frankfurt. German Finance Minister-designate Peer Steinbrueck said in an interview Nov. 16 the ECB should keep rates on hold ``for as long as possible.'' His Austrian counterpart Karl- Heinz Grasser said Nov. 8 the bank should keep a ``steady hand'' to support growth.
``It's a big mistake to raise interest rates now,'' said Henri Lachmann, chief executive of Schneider Electric SA, the world's biggest maker of circuit breakers. ``The enemy isn't inflation, but growth and unemployment.'' The euro region jobless rate was 8.4 percent in September.
Trichet said today interest rates will ``remain accommodative'' even after an increase. It is important ``to continue solidly anchoring inflation expectations'' and preserving confidence in monetary stability will ``contribute to sustained growth and job creation in the euro area,'' he said.
`Unsettled'
Commerzbank AG Chief Executive Klaus-Peter Mueller said the fear of higher rates is overblown. ``Whether rates are lowered or raised by a quarter of a percentage point won't stop anyone making a sensible investment,'' he said in an interview. ``I see the expected rise as a signal the central bank is ready to fight inflation.''
Inflation will average 2.3 percent this year, up from 1.9 percent forecast in April, the European Commission, the executive arm of the 25-nation European Union, said yesterday. It raised the 2006 forecast to 2.2 percent from 1.5 percent, the sixth year the ECB would fail to keep inflation below its 2 percent limit.
``Of course that unsettles us as a central bank,'' ECB council member Axel Weber said in an interview today in Frankfurt, when asked about upward revision in the commission's inflation forecasts. He also said he expects growth in the economy of the dozen euro nations to accelerate next year.
Second Increase?
``The debate focuses on what will happen in 2006, whether next year's growth will accelerate in Europe,'' said Lionel Oster, who helps manage more than $120 billion as head of European government bonds at F&C Management Ltd. in London. ``That's the bet the ECB is making.''
Euro region growth will reach 1.3 percent this year, picking up to 1.9 percent in 2006 and 2.1 percent in 2007, the commission said yesterday. The forecast was cut from 1.6 percent for 2005 and 2.1 percent for 2006 due to sluggish growth in the first half of this year.
Euro-region growth accelerated to 0.6 percent in the third quarter from 0.3 percent in the three months through June, Luxembourg-based Eurostat said Nov. 15. Germany's economy, Europe's largest, also expanded 0.6 percent from the second quarter.
The commission predicted U.S. growth of 3.2 percent next year, which would mean Europe is set to lag behind the world's largest economy for the 14th time in 15 years in 2006.
``The next question is when the next hike will come,'' Bank of America's Schmieding said. ``We think it will probably be in March. More than 20 basis points is already priced in.''
Yields on European interest-rate futures jumped as much as 11 basis points after Trichet's comments, indicating traders increased bets the ECB will raise rates as high as 2.75 percent by the end of 2006.
The September Euribor futures contract, which settles to a three-month interest rate that has averaged about 14 basis points more than the ECB's key rate since the currency's introduction in 1999, yielded 2.965 percent.

To contact the reporter on this story:
Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net.

Bernanke's Success as Fed Chairman May Depend on Honing Political Skills

2005-10-25T05:16:00.000-07:00

(Bloomberg) -- Ben Bernanke accepted the biggest economics job in the world yesterday and went right to work on his greatest perceived weakness: his political skills.
From his office across the street from the White House's West Wing, President George W. Bush's choice to be the next Federal Reserve chairman telephoned members of the Senate Banking Committee privately to introduce himself and seek their support.
Bernanke, 51, a former Princeton University professor who served as a Fed governor and is now Bush's top economic adviser, is widely considered one of the country's top monetary scholars. His success atop the central bank may depend more on his response to political challenges, including relations with Congress, his leadership of the Fed's policy-making Open Market Committee and his stance on such issues as the budget, trade and international relations.
``He's politically untested,'' said Tom Schlesinger, executive director of the Financial Markets Center, a Howardsville, Virginia-based group that monitors the Fed.
Bernanke's confirmation hearing before the Senate Banking Committee is likely to occur before Congress breaks for the Thanksgiving holiday at the end of November, Alabama Republican Senator Richard Shelby said yesterday in an interview.
``This will not be a committee hearing that would rubber- stamp anybody,'' said Shelby, who added that Bernanke ``makes an excellent impression'' and predicted he would be approved.
Greenspan's non-renewable term as a Fed governor expires Jan. 31, which occurs on a scheduled meeting of the Fed's Open Market Committee. The 79-year-old Fed chairman is expected to attend and cast his last policy vote.
Only Part of the Job
Senator Charles Schumer, a New York Democrat, said in a statement that Bernanke appears to be a good choice and that fighting inflation will only be part of his job.
``In the next few years, the Federal Reserve chairman's voice for fiscal restraint and moderation will be much-needed,'' Schumer said. ``I await eagerly how he sees his role in this regard at the upcoming Banking Committee hearings.''
The U.S. budget deficit fell to $319 billion in the fiscal year that ended Sept. 30 from last year's record $413 billion.
At a hearing before the Joint Economic Committee on Oct. 20, Bernanke said deficit spending when the country is at war and recovering from natural disasters is ``not an unreasonable approach'' and suggested the economy might suffer if Congress doesn't make permanent the tax cuts passed in Bush's first term.
``It is very important for him to be seen as independent, and not as part and parcel of any administration,'' said Senator Paul Sarbanes, the ranking Democrat on the Senate Banking Committee. Sarbanes said he wanted to explore Bernanke's preference for a numerical inflation goal, which Greenspan opposes.
The Pace of Growth
Lawmakers are also concerned about the pace of economic growth. Retail gasoline prices have risen 51 percent since the start of the year, sapping consumer spending power. Economists expect the Fed to keep leaning against inflation by pushing the benchmark lending higher, though Hurricanes Katrina and Rita may slow fourth quarter growth to 3.1 percent, according to a Bloomberg News survey.
Some members of Congress say the Fed should stop raising rates. ``They should have stopped maybe two increases ago,'' Kentucky Republican Senator Jim Bunning said in an interview. Bunning said he will vote against Bernanke because as a Fed governor, he never proved his independence from Greenspan.
Bernanke must manage politics inside the Fed as well. Some influential governors, such as Donald Kohn and Roger Ferguson Jr., are opposed to a numerically defined inflation goal. Still, Bernanke will probably foster more open debate as he works toward a consensus on such issues.
Not So `Heavy-Handed'
``He may not be as heavy-handed with policy decisions,'' former Fed governor Laurence Meyer said in commentary sent by e- mail. ``The outcomes of the meetings may be more democratic, at least for a time.''
In a recent interview, Bernanke, who has a doctorate from the Massachusetts Institute of Technology, called Greenspan an ``icon'' whose record on inflation fighting continued the difficult work started in the 1980s by former Fed Chairman Paul Volcker. During the past 25 years, the Fed's determination to keep prices stable has become ingrained at the central bank, and earned praised from markets.
``The credibility has begun to inure in the institution,'' Bernanke said in the Oct. 7 interview. ``Keeping inflation low and stable is an important precondition for a healthy and sustained economic growth.''
In past public statements, Bernanke has explained how his service on a local school board in New Jersey was good political training. ``I remember thinking, man, if you think that's problematic, wait until you stick around Washington a little bit longer,'' Schlesinger said.
Managing Relations
Greenspan was involved in politics long before he became Fed chairman. As head of the central bank, he managed his congressional relations carefully, answering lawmakers' remaining questions from hearings in private letters.
Bernanke ``doesn't have the political dexterity of Greenspan, but in comparison to Greenspan, anybody might look underwhelming,'' said Nouriel Roubini, an economist at New York University.

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net

Fed May Sacrifice Growth to Prevent Inflation, Economists Say

2005-09-21T01:32:00.000-07:00

(Bloomberg) -- Federal Reserve policy makers may be willing to sacrifice economic growth if that helps them keep inflation under control as energy prices soar, economists said after reading the central bank's latest statement.
``This is not a policy of indifference,'' said David Resler, chief economist at Nomura Securities International in New York. ``This is a policy of additional restraint. Contrary to what they say, they think the inflation threat is graver than the threat to growth.''
The Fed raised its benchmark U.S. interest rate a quarter- point to 3.75 percent yesterday, the 11th straight increase since June 2004. The U.S. faces only a near-term setback from Hurricane Katrina instead of a ``persistent threat,'' the central bankers said after meeting in Washington. The rate increase and the statement's tone show the Fed's foremost concern is preventing faster inflation, economists said.
``When push comes to shove, the Fed will opt in an unmistakable fashion to preserve the inflation achievements they have,'' said Anthony Karydakis, chief U.S. economist at J.P. Morgan Asset Management. ``They will be very willing to sacrifice some growth for a while to keep inflation under control.''
That's a break from the way the Chairman Alan Greenspan and other Federal Open Market Committee members handled rising energy prices in the past, former Vice Chairman Alan Blinder said.
The Fed previously tried to ``cushion the blow to the real economy by being easier with monetary policy, not tighter,'' when there were temporary oil price increases, said Blinder, now an economics professor at Princeton University. ``In this case, he was not easier with monetary policy. It looks like a small, sliding away from that previous tradition.''
Keeping Pace
Oil prices jumped 31 percent from January through March, and the 12-month rate on the so-called core consumer price index rose to 2.4 percent in February, the highest reading this year. To help keep the economy growing at a robust 3.8 percent annual rate that quarter, the Fed didn't change its ``measured'' pace of tightening to a more aggressive strategy, even though its policy rate declined in inflation-adjusted terms in March.
``The Greenspan standard,'' Blinder wrote in a paper with Princeton economist Ricardo Reis earlier this year, is to avoid the ``error of piling tight money on top of an adverse oil shock - - which is a pretty sure recipe for recession.''
Now, economists noted, the Fed's own forecast is calling for a temporary slowdown in production, hiring, and spending and interest rates are moving higher. In effect, the central bank is raising rates into a downturn, hoping to re-establish a trend of low inflation.
Risks to Strategy
The Fed's decision has already boosted traders' expectations of more restrictive rates going forward. Futures prices now show traders see a chance the central bank will raise the benchmark overnight lending rate at both the November and December meetings. Prior to yesterday's increase, they predicted the Fed would raise rates only one more time this year.
Economist Resler says the Fed's strategy may be risky.
``They are paid to worry about inflation, that is their job,'' Resler said. ``They are also paid not to ignore threats to the downside, or to understate them, which is what I think they are doing.''
The FOMC has been raising the rate target in the context of robust growth in output, a falling unemployment rate, and low inflation as measured by so-called core price indexes that exclude food and energy costs. The rate is now the highest since August 2001, a month before the terror attacks on Washington and New York.
Growth Forecasts
Following Hurricane Katrina, which slammed into New Orleans and Gulf coast cities Aug. 29, economists slashed their estimates for growth and raised their estimates for inflation.
Prior to the hurricane, economists expected the economy to grow 4.1 percent in the third quarter, according to the median estimate in a Bloomberg News survey. They now expect growth of 3.6 percent.
The Fed's statement suggested the downturn in growth and employment wouldn't ``persist.'' The language used to describe energy prices avoided descriptions that might have suggested the threats to inflation were temporary.
``Higher energy and other costs have the potential to add to inflation pressures,'' the Fed said.
Inflation Expectations
``There is something else going on that points to them being much more concerned about the inflationary impact'' of rising energy prices, said Michael Woodford, a co-director of the Program for Economic Research at Columbia University in New York who has advised the Fed Board.
That ``something else'' could be the possibility that what economists call inflation expectations, or consumer and business instincts about where prices are headed, could become unleashed in the wake of the large billboard effects of rising fuel prices.
The average retail price of gasoline is up 55 percent year-to- date. One year inflation expectations, measured by a University of Michigan survey, a set of data the Fed has watched in the past, rose to 4.6 percent in preliminary September report from 3.1 percent a month earlier.
``Hardly a day goes by without seeing fairly credible anecdotal reports about price increases in various industries,'' said Karydakis. ``This is the first time in a very large number of years they are confronted with mounting inflation pressures.''
Greenspan ``doesn't want to leave behind a legacy of an upward creep in inflation.''

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net

U.S. 2-Year Notes Fall As Fed Raises Rates; Yield Curve Narrows

2005-09-21T01:27:00.000-07:00

(Bloomberg) -- U.S. Treasuries maturing in five years or less fell after the Federal Reserve increased its interest-rate target and reiterated that rates probably will continue to rise at a ``measured'' pace to keep inflation tame.
Yields on interest-rate futures contracts surged in a sign that traders have greater conviction about more rate increases. The Fed said the economy faces only ``near term'' setbacks in employment, spending and production after Hurricane Katrina, disappointing some traders who anticipated policy makers to signal they were close to done lifting borrowing costs.
``There's no reason to expect they're going to stop tightening at the next meeting,'' said Eric Hiller, head of interest-rate strategy at Bank of America Corp. in Chicago. ``We're pricing in some risk of getting north of 4 percent by year-end'' from 3.75 percent, he said. The company is the second- largest U.S. bank.
The benchmark two-year note's yield rose 8 basis points, or 0.08 percentage point, to 4 percent at 4 p.m. in New York, according to bond broker Cantor Fitzgerald LP, the highest since Aug. 30. Yields move inversely to bond prices. The 4 percent note due in August 2007 fell about 1/8, or $1.25 per $1,000 face amount, to 100.
Ten-year Treasuries were little changed on speculation the Fed's increases in its target for the overnight lending rate between banks will keep inflation in check by curbing economic activity. The benchmark 10-year note's yield rose less than 1 basis point to 4.25 percent. The price of the 4 1/4 percent security due in August 2015 was little changed at 100. The 5 3/8 percent bond due in February 2031 rose about 3/8 to 112 3/4
Inflation erodes the value of bond's fixed interest payments, with the biggest impact on the longest-maturity securities. Shorter-maturity yields are more sensitive to expectations for monetary policy.
Yield Outlook
``The key to the 10-year rate is expectations for inflation pressures in the long term, which are not going to be increasing,'' said Colin Robertson, managing director of fixed income at Chicago-based Northern Trust Bank, which manages $250 billion of fixed-income assets. ``If that's the case, 10-year yields between 4 and 4.5 percent are to be expected.''
The 10-year note's yield was 4.69 percent on June 29, 2004, the day before the Fed began increasing rates. The note rallied after the last rate increase on Aug. 9, with the yield falling 3 basis points to 4.39 percent.
Fed policy makers lifted their target for the overnight lending rate between banks from 3.50 percent, the 11th straight increase. The Fed next meets to decide interest rates Nov. 1.
The yield on the December federal funds futures contract at the Chicago Board of Trade rose 6.5 basis points to 4.02 percent, indicating traders are certain the Fed will lift the rate to 4 percent by year-end and see a 13 percent chance of a 4.25 percent rate. Yesterday they saw no chance of a 4.25 percent year-end rate.
Expectations
Economists at 18 of the 22 primary dealers of U.S. government securities that trade with the Fed's New York branch predicted an increase in the target rate, according to a Bloomberg survey.
Economists at 16 dealers said the central bank, whose statements announcing its rate increases since May 2004 have said policy makers believe rates can rise ``at a pace that is likely to be measured,'' would repeat the phrase today. Three firms said it would be dropped and three didn't give a prediction.
Hurricane Katrina raised doubt among some investors and economists that the Fed would raise borrowing costs. The costliest natural disaster in U.S. history sent fuel prices to record highs and will shave half a percentage point or more off U.S. economic growth in the second half of the year and cost 400,000 jobs the Congressional Budget Office told lawmakers.
Fed Statement
``While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat,'' the Fed's statement said. ``Higher energy and other costs have the potential to add to inflation pressures,'' the statement also said.
High fuel costs eroded consumer sentiment, surveys this month showed, raising concern fuel prices will dent spending and corporate profits.
The University of Michigan on Sept. 16 said its preliminary September index of consumer confidence had the biggest drop since December 1980, falling to a 13-year low.
Yield Curve
The gap between two- and 10-year yields, known as the yield curve, shrank by the most since May 6 as investors pared expectations for inflation.
The difference narrowed 7 basis points to 26 basis points. The gap was 191 basis point in June 2004, when the Fed started raising rates.
On Aug. 29 the curve narrowed to 12 basis points, the smallest since the Fed began a series of interest-rate cuts in January 2001, and then widened to 33 basis points yesterday amid concern surging fuel prices would slow economic growth and the Fed's pace of rate increases.
``When there was confusion on whether the Fed would stay on the measured pace the curve steepened,'' said Richard Volpe, head of government bond trading at Bear Stearns & Co. in New York. ``Now we've got verification that Fed is still in the tightening mode we're seeing people exit out of those of front end securities.''
Inflation
``The economy is resilient and it will bounce back,'' Amitabh Arora, head of U.S. interest-rate strategy at Lehman Brothers Inc. in New York, said before the decision. ``Inflation fear is there and it is getting stronger.''
Speculation the Fed would pause was damped last week after the Fed's New York and Philadelphia branches said last week that factories paid more for materials this month even as business slowed, indicating inflation may be poised to quicken.
The federal funds target is headed ``much higher than 3.75 percent,'' Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank Securities in New York, said before the decision. ``The market is totally mispriced for that situation.''
A weekly investor sentiment survey released today by JPMorgan Chase & Co. shows 39 percent of participants expect Treasuries to fall in price, down from 58 percent last week.
Seven percent bet that Treasuries will gain, compared with 8 percent last week. The percentage of investors who expect Treasury prices to remain unchanged rose to 54 percent, the most since July 2004, from 34 percent.

To contact the reporter on this story:
Elizabeth Stanton in New York at estanton@bloomberg.net

Futures Traders Boost Bets On More Fed Rate Increases

2005-09-21T01:23:00.000-07:00

(Bloomberg) -- Futures traders added to bets that the U.S. Federal Reserve will raise its interest-rate target at least one more time this year after central bank policy makers today increased the rate an 11th straight time, to 3.75 percent.
The yield on the December federal funds futures at the Chicago Board of Trade rose 6.5 basis points to 4.02 percent, indicating traders are certain the Fed will lift the rate to 4 percent by year end and see a 13 percent chance of a 4.25 percent rate. Yesterday they saw no chance of a 4.25 percent year-end rate.
Fed Chairman Alan Greenspan has led central bank policy makers in lifting the target by a quarter-point at each meeting since June 30 last year. After the devastation of Hurricane Katrina, some economists cut their growth estimates for this year and traders erased bets on interest-increases.
``Looks like the Fed will stay in play a little bit longer than traders thought two weeks ago after the hurricane,'' said John Brady, an interest-rate broker for Man Financial Inc. at the Chicago Mercantile Exchange.
Economists at four firms, including UBS Securities LLC, predicted the Fed wouldn't raise the rate today, the first time in at least four months that all 22 so-called primary dealers of U.S. government debt didn't agree on higher rates. Traders are favoring a pause after the Nov. 1 meeting.
Betting on More Increases
``Higher energy and other costs have the potential to add to inflation pressures,'' the Fed said in its statement today. Central bankers' concern about inflation is pushing traders to price in a higher chance of a rate increase at each of the next two Fed meetings, Brady said.
``This does not look to us like a statement from a committee that thinks monetary policy is only 25 basis points away from being neutral,'' John Ryding, chief U.S. economist at Bear, Stearns & Co., wrote in a note to investors. ``We continue to look for the Fed to hike rates'' in November and December.
Futures are agreements to buy or sell assets at a set date and price. Contracts on interest rates are settled in cash. Fed funds futures settle at the federal funds effective rate, which is the average of all overnight rates for the month.
An increase in the Fed's target to 4.25 percent on Dec. 13 would raise the average overnight rate that month to 4.153 percent. The rate on the contract is derived by subtracting the contract's price from 100.

To contact the reporters on this story:
Ann Saphir in Chicago at asaphir@bloomberg.net

Fed Raises Rate, Says Katrina Effect Is "Near-Term"

2005-09-21T01:13:00.000-07:00

(Bloomberg) -- Federal Reserve policy makers raised the benchmark interest rate for the 11th straight time and signaled they may do so again, saying the U.S. economy faces only a ``near-term'' setback after Hurricane Katrina.
The Fed raised the overnight bank lending rate a quarter point to 3.75 percent, the highest in four years, after meeting today in Washington. Fed Governor Mark Olson voted against his nine colleagues in favor of holding the rate steady, his only dissent ever against a rate move and the first since June 2003.
``Widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production and employment will be set back in the near term,'' the Fed's statement said. ``It is the committee's view that they do not pose a more persistent threat.''
The decision shows the Fed, in the waning months of Chairman Alan Greenspan's term, is foremost concerned about potential inflation from energy prices. About 20 percent of the 111 economists in a Bloomberg News survey predicted the Fed might skip an increase today because of risks the economy would slow.
``The bottom line: The strategy of gradually raising interest rates is not over, and unless the economy softens materially, more quarter-point hikes can be expected,'' said Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in New York, after the decision.
U.S. stocks fell after investors said the Fed is less likely to break from raising rates, adding to concern about slowing growth. The Standard & Poor's 500 Stock Index erased a gain and fell 9.7, or 0.8 percent, at 4:17 p.m. in New York.
Measured Pace
The U.S. economy, the world's largest, was ``poised to continue growing at a good pace'' before the storm, said the statement from the Federal Open Market Committee. High productivity and low interest rates will support growth, and the Fed said it still expects to raise interest rates gradually.
``With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' today's statement said. The August statement called inflation expectations ``well contained.''
``Higher energy and other costs have the potential to add to inflation pressures,'' the Fed said today. ``However, core inflation has been relatively low in recent months and longer-term inflation expectations remain contained.''
Katrina is complicating matters for Greenspan, 79, as he puts his final touches on his 18-year career at the Fed before his non- renewable term as a governor ends Jan. 31. Greenspan led the central bank through an era that included the longest economic expansion and two eight-month recessions.
Hurricane Effect
The storm altered the outlook for both the economy and Fed policy after it struck the Gulf Coast on Aug. 29, causing an estimated $100 billion in damage across 90,000 square miles. It killed more than 900 people, displaced hundreds of thousands and shuttered workplaces. The storm closed ports and shut down vital oil and gas refining and production facilities, prompting economists to lower their economic growth forecasts.
In addition to raising fuel prices, the disruption to production and refining operations may make energy prices more volatile, the Fed said.
The situation created one of their most complicated scenarios for forecasting Fed policy since the current cycle of rate increases began in June 2004. The split in the Bloomberg survey about whether the Fed would raise rates or hold steady was the biggest since June 2003, when economists disagreed about how much the Fed would cut rates. Merrill Lynch & Co. was among firms predicting the Fed would hold rates steady.
Olson Dissent
Some members of Congress also had called on the Fed to pause, given concerns about the economy after the storm. ``There is no reason to raise interest rates at this point,'' Senator Orrin Hatch, a Utah Republican, said Sept. 7.
The dissent by Governor Olson, a former congressional staff member, reflects the disparity of opinion.
``Mark, above all, is honest,'' former U.S. Representative Bill Frenzel, a Minnesota Republican who is now a guest scholar at the Brookings Institution in Washington, said in a telephone interview. ``If he felt the committee was going in a direction that was not good for the economy, he would not be afraid to cast a vote in opposition to his colleagues.''
Olson, 62, was appointed to his Fed post in December 2001, for a term that expires in January 2010. He was formerly staff director of the Securities Subcommittee of the Senate Banking, Housing and Urban Affairs Committee, and he served as an aide to Frenzel from 1971 to 1976.
``While the dissent came as a surprise, we certainly wouldn't read it as evidence of any sort of a significant split on the FOMC,'' said David Greenlaw, chief U.S. fixed income economist at Morgan Stanley in New York.
Treasuries
U.S. Treasuries maturing in five years or less fell after the Fed decision while longer-maturity Treasuries were little changed on speculation the Fed will be able to keep inflation in check. Futures traders added to bets that the U.S. Federal Reserve will raise its interest-rate target at least one more time this year.
Fed officials who spoke since the storm had suggested that any slowdown in growth would be temporary, especially with large pledges of government spending in place, and that there are still inflation risks. ``I'm concerned about core inflation running at the upper end of the range that I feel is consistent with price stability,'' Chicago Fed Bank President and FOMC voting member Michael Moskow said in a Sept. 7 speech.
Inflation gauges rose last month. Producer prices rose 5.1 percent in the 12 months ended August, up from 4.6 percent for year ended July. The consumer price index rose 3.6 percent on a year-over-year basis, up from 3.2 percent the prior month. Without food and energy prices the CPI rose 2.1 percent in August, at the top of the comfort range for some Fed officials.
Energy Prices
Average pump prices for regular gasoline are about 50 percent higher than a year ago and touched a record $3.057 a gallon on Sept. 2. The price surge undercut Americans' confidence, which declined in this month's University of Michigan consumer sentiment survey to the lowest since 1992.
Consumers' expectations of inflation over the next year jumped to 4.6 percent from 3.1 percent in August, the survey said. Companies are trying to pass along part of their higher fuel bills, and that may keep fanning inflation expectations.
United Parcel Service Inc., the world's largest package- delivery company, will raise its fuel surcharge for deliveries by about 13 percent next month. Dow Chemical Co., whose products are used in everything from milk jugs to compact discs, said Sept. 15 it will seek to raise prices across its ``entire portfolio'' of chemical and plastic products.
Reconstruction Spending
Any slowdown from Katrina may be eased by increased federal spending, which could push resource use rates even higher and spur faster inflation.
``You have an economy that's running with very little slack,'' Dave MacEwen, chief investment officer for fixed income at American Century Investments, said before the announcement. ``Enormous amounts of fiscal spending'' will result in stimulus ``the economy just doesn't need.''
President George W. Bush, whose approval ratings are at the lowest of his presidency, last week promised to rebuild the Gulf region in ``one of the largest reconstruction projects the world has ever seen.''
The government has already approved $64.6 billion in assistance and Senate Majority Leader Bill Frist, a Tennessee Republican, told Bloomberg News Sept. 7 that the costs of recovery and relief efforts may reach $200 billion.
Dallas Fed bank President Richard Fisher, an FOMC voting member this year, said in a Sept. 12 speech ``it would be ill- advised for the Fed'' to compensate for the increased spending through rate policy.
Growth Outlook
The world's largest economy will grow at a 3.6 percent annual rate from July through September instead of the 4.1 percent forecasters predicted a month ago, according to the most recent Bloomberg monthly survey of 57 economists. The CPI may rise by 0.5 percentage points in the quarter to 3.5 percent, according to the forecast.
With today's action, the U.S. policy rate is 1.75 percentage points above the European Central Bank's refinancing rate, 1 percentage point higher than the Bank of Canada's overnight rate, and three-quarters of a point below the Bank of England's base lending rate.

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net.

Treasuries May Gain This Week On Fed 'Measured' Pace

2005-09-11T20:57:00.000-07:00

(Bloomberg) -- U.S. Treasuries are likely to extend a 14-month rally as the Federal Reserve sticks to its ``measured'' pace of interest-rate increases to keep inflation from accelerating after Hurricane Katrina.
Treasuries maturing in 10 years or more have gained as the central bank raised its interest-rate target 2.5 percentage points since June 2004 to keep inflation under control. The benchmark 10-year note's yield has fallen to 4.12 percent from 4.69 percent the day before the Fed started raising rates, lowering borrowing costs for companies and consumers.
After hurricane Katrina caused record damage along the Gulf of Mexico coast, speculation mounted the Fed would pause after 10 consecutive rate increases to assess the economic effects. Interest-rate futures show traders last week renewed bets the Fed will lift rates at its Sept. 20 meeting. A Bloomberg survey showed economists boosted estimates for inflation even as they lowered forecasts for economic growth.
``The Fed is raising rates not because of an acceleration of growth, but because of concerns they have about inflation,'' said Michael Materasso, who oversees $19 billion as head of fixed income at Fiduciary Trust Co. in New York. Additional increases ``would be good for the long end of the market,'' while a pause may send bonds down, he said.
Weekly Loss
The benchmark 10-year note's yield last week rose 8.2 basis points, or 0.08 percentage point, recouping more than half the decline after Hurricane Katrina hit. Chicago Fed President Michael Moskow and San Francisco Fed President Janet Yellen suggested in speeches they are concerned about faster inflation.
The yield on the 10-year note today rose 1 basis point to 4.12 percent as of 9:57 a.m. in Singapore according to bond broker Cantor Fitzgerald LP. The price of the 4 1/4 percent note maturing August 2015 fell 1/32, or 31 cents per $1,000 face amount, to 101 1/32.
The note last week posted its first weekly loss since the five days ended Aug. 5. The 10-year yield rose less than the yield on the benchmark two-year note, which is more sensitive to changes in monetary policy. Two-year yields surged 12 basis points to 3.87 percent.
A Sept. 9 survey of 38 money managers who oversee a combined $1.27 trillion found that 61 percent said the Fed shouldn't pause. Seventy-nine percent in the poll by Jersey City, New Jersey-based Ried, Thunberg & Co. said the risk of faster inflation, which erodes the purchasing power of fixed income payments, would rise without an increase. The survey showed participants expect 10-year notes to fall by year-end.
`Fighting Inflation'
Long-term yields ``have been falling because as the Fed's been raising rates, the market has taken comfort that it's fighting inflation,'' said James Bianco, president of Chicago- based Bianco Research LLC. ``If the Fed pauses, it could produce higher yields.''
How much yields rise depends on how long the respite lasts, Bianco said. Ten-year yields may return to the year's high of about 4.70 percent should the central bank go months without raising rates, he said. Increases at each of the Fed's three remaining meetings this year will likely keep the note's yield between 4 percent and 4.25 percent, Bianco said.
The October federal funds futures contract shows traders see a 78 percent probability of a rate increase next week, up from about 70 percent on Sept. 2. Before the storm, they expected about a 100 percent chance of an increase.
`Stopping Short'
The consumer price index will rise 3.5 percent this quarter, up from a forecast of 3 percent a month ago, according to the median forecast of 54 economists surveyed by Bloomberg between Aug. 31 and Sept. 8. A Sept. 15 government report may show prices, excluding food and energy, increased 0.2 percent last month, in line with the average since 1999, the median estimate in a separate survey showed.
Treasuries maturing in five years or less ``are better value in this environment, with inflationary threats and with the potential of the Fed stopping short of where they would have based upon a slower economy'' resulting from Katrina, said Bill Gross, chief investment officer at Newport Beach, California- based Pacific Investment Management Co. and manager of the world's biggest bond fund.
The economy will expand at a 3.6 percent annual rate from July through September instead of the 4.1 percent predicted a month ago, according to the median estimate of 57 analysts surveyed by Bloomberg from Aug. 31 to Sept. 8.
`Collateral Damage'
Investors such as Marc Seidner, who oversees $26 billion of bonds at Standish Mellon Asset Management in Boston, said the economy is too fragile to withstand higher rates.
``The more the Fed raises interest rates, the higher the probability that there is collateral damage to the economy,'' he said.
Hurricane Katrina destroyed property worth at least $125 billion, according to storm modeler Risk Management Solutions Inc. It shut 10 percent of U.S. refining capacity, pushing gasoline futures to a record $2.6145 a gallon on Aug. 31. The Congressional Budget Office on Sept. 7 said Katrina may cut U.S. jobs by 400,000 this year.
Some investors and Fed officials are concerned that energy prices won't drop and will feed through to so-called core inflation. The Chicago Fed's Moskow said Sept. 7 that core inflation is ``running at the upper end of the range that I feel is consistent with price stability.''
`Pressing Issue'
Yields on Treasury inflation-protected securities, known as TIPS, show expectations for inflation have risen. The difference in yield between 10-year TIPS and fixed-coupon Treasuries widened to a four-month high of 2.48 percentage points. The so-called break-even rate shows the expected pace of inflation over the life of the securities. TIPS pay interest at lower rates than regular Treasuries on a principal amount that increases in line with the consumer price index.
``Of the two main challenges for the Fed, a slight slip in activity versus a pick-up in inflation, we think insuring long- term price stability is the more pressing issue,'' said Jason Evans, head of U.S. Treasury trading in New York at Deutsche Bank AG. The firm is one of the 22 primary dealers of U.S. government securities that trade with the New York Fed.

To contact the reporter on this story:
Elizabeth Stanton in New York at estanton@bloomberg.net

Yen Drops On Signs Higher Oil Prices Are Eroding Japanese Trade Surplus

2005-09-08T15:11:00.000-07:00

(Bloomberg) -- The yen fell to a one-week low against the dollar and dropped versus the euro on concern high oil prices are eroding Japan's trade surplus.
Crude oil's 50 percent increase over the past year is hurting Japan's trade balance because the country imports almost all its oil. A government report today showed Japan recorded a trade deficit in the first 20 days of August, the first since May. The surplus for the entire month of May was the smallest in more than three years, reducing the amount of dollars and other foreign currency Japan's exporters need to sell for yen.
``The broader picture for the yen's decline is down to the continued deterioration in Japan's trade surplus,'' said Derek Halpenny, a currency strategist at the Bank of Tokyo Mitsubishi Ltd. in London, a unit of Japan's second-largest lender.
The yen weakened to 110.53 per dollar as of 5 p.m. in New York from 110.10 late yesterday, according to electronic currency dealing system EBS. Japan's currency fell to 137.01 per euro from 136.71.
Crude oil rose to a record $70.85 per barrel on Aug. 30. Crude futures for delivery this year were at $64.67 today, tempering yen losses.
``Probably the impact of oil is weighing on the yen more than anything,'' said Jeffrey Young, head of currency research in New York at Citigroup Inc. ``The potential impact of oil has inhibited upside against the dollar and has kept the yen softer against other'' currencies, he said.
A separate report showed Japan's companies cut orders for machinery in July, after the biggest gain in seven months in June. Orders fell 4.3 percent after a jump of 11.1 percent in June, the Cabinet Office said in Tokyo today.
Federal Reserve
The dollar also benefited as speculation ebbs that the Federal Reserve will pause in its interest rate increases after Hurricane Katrina, the costliest natural disaster in U.S. history. The dollar erased losses from earlier today, rising to $1.2399 per euro.
``It's starting to appear that the Fed will continue to tighten and that bodes well for the dollar,'' said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products Corp. in Wilton, Connecticut. ``We've seen the low in the dollar in the last week.''
The Fed's need to keep raising rates is ``not as obvious as it was, though it remains a ``probably scenario,'' San Francisco Fed President Janet Yellen said today in the text of a speech in San Diego. She doesn't vote on policy this year.
Fed Bank of Chicago President Michael Moskow said yesterday that rising inflation pressures need to be countered by ``appropriate'' rate increases.
The U.S. central bank has lifted its target rate for overnight loans between banks 10 times since June last year to 3.5 percent. The dollar fell 2 percent against the euro last week as traders bet the Fed was approaching the end of its rate increases.
`Too Dovish' Market
``The market has got itself into a far-too-dovish spot given the tone of the Fed-speak,'' said Steve Pearson, chief currency strategist at HBOS Plc in London. ``There is potential for rate expectations to rebuild and that should support the dollar.''
The yield on the September federal fund futures contract was 3.585 percent, showing traders see an almost 95 percent chance the Fed will raise its rate to 3.75 percent this month.
Earlier today, the euro rose against the dollar as well as the yen amid signs Germany's economy, Europe's largest, is picking up.
German Reports
German exports, which kept the economy expanding last year, rose for a second month in three, the government said today. An economic indicator published today by the Frankfurter Allgemeine Zeitung newspaper rose the most in almost a decade.
``From a very low base the German data has been performing very strongly, confidence is up and activity is up,'' said Adam Myers, a currency strategist at UBS AG in London. ``The euro will continue to benefit.''
Reports in the past week have shown increases in German industrial production, factory orders and retail sales along with a decline in unemployment, suggesting growth is recovering from a second-quarter slowdown.
The yen's decline may be limited by speculation that Prime Minister Junichiro Koizumi wins re-election on Sept. 11. Koizumi is seeking a mandate to accelerate spending cuts to spur economic growth, which would help the currency.
Yen-Euro Strategy
JPMorgan Chase & Co. said the yen could advance against the euro if Koizumi wins and German Chancellor Gerhard Schroeder holds off a challenge in elections on Sept. 18 from the opposition Christian Democratic Union, which is promising welfare cuts and a loosening of labor laws.
``Euro-yen is likely to be the focus of knee-jerk trading with a modest sell-off likely if Germany rejects reform while Japan embraces Koizumi's reform version a week earlier,'' wrote Paul Meggyesi, a currency strategist at the firm in London in a report on Sept. 6.
Support for Schroeder's Social Democrats rose in a poll, the second poll in two days to show a similar result. Schroeder's party gained 2 percentage points from last week to 34 percent, the Infratest poll of 1,000 voters for ARD television found. Voters were polled on Sept. 6 and 7.
``It's going to weigh on the euro,'' said Ian Stannard, a currency strategist at BNP Paribas SA. ``One of the things that has been helping the euro in the past few weeks has been the prospect of a more pro-reform government in Germany. If it looks like it's going down the wire, the market might start to get a bit nervous.''

To contact the reporter on this story:
Steve Rothwell at srothwell@bloomberg.net

Fed May See Katrina Inflation Risks Outweighing Slowdown Fears

2005-09-05T21:51:00.000-07:00

(Bloomberg) -- The Federal Reserve is likely to conclude that Hurricane Katrina poses more risk of inflation than of an economic slowdown, and probably will raise rates on Sept. 20 while signaling it may pause later if there are lingering effects on growth and hiring.
``If you look at the record at how the U.S. has weathered shocks, we have a very, very resilient economy,'' Harvey Rosenblum, director of research at the Fed Bank of Dallas, said in an interview. Fed policy makers are likely to weigh their response to Katrina against how strong the economy was before the storm. ``Initial conditions matter,'' he said.
Current and former Fed officials also are stressing odds that any slowdown will be temporary, and emphasizing their reputations for keeping inflation at bay. Together, the comments suggest policy makers aren't convinced they need to stop raising rates, even if their Sept. 20 statement is reworded to give them more room to pause later if data warrants.
``From 1994 and on, we have managed to convince markets we are capable and willing to do what it takes to prevent inflation from getting out of control,'' Richmond Fed Bank President Jeffrey Lacker said in an interview. The Fed's credibility helped keep Americans' price concerns anchored even as gasoline costs jumped 38 percent in the year's first half, he said.
Neither Rosenblum nor Lacker, who is a nonvoting member of the Federal Open Market Committee this year, would offer predictions on the path of interest rates. Anthony Santomero, a voting member and Lacker's counterpart at the Fed Bank of Philadelphia, said in a speech after the storm that he expects the Fed to keep raising rates at a so-called measured pace.
More to Say
Fed Bank of Chicago President Michael Moskow of Chicago will comment on the economy in a speech scheduled for tomorrow in Chicago at noon local time. San Francisco Fed President Janet Yellen of San Francisco will speak on the economy the next day.
Investors changed bets about the path of interest rates after Katrina struck, predicting Fed officials will stop raising the nation's benchmark rate after the Sept. 20 meeting, the first of three left this year.
The FOMC raised the overnight bank lending rate 10 times since June 2004, to 3.5 percent, in an effort to head off faster inflation. Before the storm, forecasters in a Bloomberg News survey unanimously predicted another rate increase on Sept. 20; now 12 of 77 expect no change.
The FOMC was already concerned about ``greater near-term momentum'' in the economy, resulting in ``elevated inflation pressures,'' according to minutes of their last meeting, held Aug. 9. Katrina struck 20 days later, and the average U.S. pump price for gasoline rose more than a half-dollar to a record $3.057 a gallon on Sept. 2, the AAA, the nation's largest motoring organization, reported.
Refinery Damage
U.S. consumers are likely to pay $3 a gallon or more for gasoline for at least ``the next six to eight weeks'' because of refinery damage, Ben Bernanke, President George W. Bush's chief economic adviser, said Sept. 1.
The debate around the Fed's boardroom table on Sept. 20 is likely to focus on the duration of disruptions to U.S. ports, logistics and energy supplies, rather than on the possibility of significant impairment to growth.
Louisiana and Mississippi account for around 2 percent of U.S. output. About 30 percent of U.S. oil production comes from off-shore platforms in the Gulf. About 7 percent of the nation's refining capacity is still off line a week after the storm, according to the U.S. Minerals and Mining Service.
Meeting With Greenspan
Bush and Treasury Secretary John Snow both said they met with Fed Chairman Alan Greenspan last week and that he shares a view that economic disruption may be temporary. Greenspan hasn't spoken publicly since the storm.
While Katrina ``does seem to be at the large end of the scale of disasters we have seen,'' the economic impact is ``very localized geographically'' aside from the spike in gasoline prices caused by pipeline and refining disruptions, Lacker said.
A pause in the rate cycle will at least be discussed at the September meeting, said Brian Sack, a senior economist at Macroeconomic Advisers LLC and former head of monetary and financial markets analysis for the Fed Board of Governors.
``This is very much a developing story,'' Sack said in an interview. ``It is hard for any Fed official to say how temporary the effects are going to be.''
`Significant Commentary'
The FOMC is likely to add ``significant commentary'' about the near-term outlook in its statement and signal that future policy discussions will give added weight to new data, former Fed Governor Susan Phillips said in an interview. Around the start of the Iraq War in March 2003, the committee pledged ``heightened surveillance'' of data and regional anecdotes.
``All of those Fed presidents'' will be dialing business contacts and ``come in with their stories,'' said Phillips, now dean of the George Washington University School of Business in Washington. ``The Fed does need to have rates higher. The question is: At what pace do you do it?''
At a minimum, rising fuel costs and supply disruptions from the hurricane ``makes the economy more vulnerable to other shocks,'' said Rosenblum, the Dallas Fed researcher. ``You have an economy that has no tail winds from monetary policy,'' and so ``other shocks can depress demand.''
U.S. Secretary of Labor Elaine Chao said weekly jobless claims are likely to rise for ``several weeks'' from a weekly average of 317,000 applications over the past month. As far as the national impact of the hurricane, ``it's a little bit early to say,'' Chao said in a Sept. 3 interview.
Trimmed Forecasts
Economists at Lehman Brothers Inc. and Bear Stearns & Co. trimmed their forecasts for third-quarter output, while maintaining the view that the U.S. central bank will raise rates over the final three policy meetings of the year.
``We need to remember the Fed's job is not only to manage growth in the economy,'' Lehman Chief Economist Ethan Harris said in an interview. ``They also have to keep an eye on the inflation picture. They can't just step aside if they see a major inflation shock coming out of this episode.''
The consumer price index rose 3.2 percent for the 12 months ending July. One measure of inflation expectations, derived from yield differences on U.S. Treasury 10-year notes and government inflation-protected securities of similar maturity, show traders in the second quarter expected prices to rise 2.48 percent, down from an average of 2.59 percent annual rate in the first quarter.
A Larger Bulge
``We think the cost of a pause would be a larger bulge in inflation,'' John Ryding, chief economist at Bear Stearns in New York, said in a note to clients.
Lacker said the current surge in energy costs won't trigger ``threshold effects,'' where total spending begins to contract. Retail sales rose 1.8 percent in July and 1.7 percent in June, the largest back-to-back gains since 1993, even as the average price of gasoline rose 15 percent in the same period.
Consumers are more focused on their income prospects than on inflation and ``that is the predominant determinant to their spending,'' he said.
The economy slowed to a 3.3 percent annual rate of growth in the second quarter from 3.8 percent in the first quarter. Prior to the hurricane, both private economists and the Fed board's staff expected the economy to pick up speed, with a Bloomberg survey completed Aug. 8 showing a median estimate of 4.1 percent growth in the third quarter.
Lehman's Forecasts
Lehman dropped its forecast for third quarter growth to a 3.8 percent annual rate from 4.5 percent, and increased its year- end forecast for the consumer price index by 0.8 percentage points to 4.1 percent. Bear Stearns cut its third-quarter growth forecast to 3.5 percent from 4.5 percent.
With so much in flux, there will be greater scrutiny of Fed officials' statements, such as those of Moskow and Yellen, between now and Sept. 20. Fed officials traditionally stop speaking in public a week before a policy meeting.
``There is a lot more uncertainty in forecasting both the economy and the Fed right now,'' economist Harris said. ``The economy should be in reasonable shape and the Fed, which was in a very hawkish mood going into this period, probably just continues hiking rates.''

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net.

U.S. Treasury Investors Trim Bets That Yield Curve Will Flatten

2005-08-14T19:51:00.000-07:00

(Bloomberg) -- U.S. Treasury note traders are paring bets that 10-year yields will fall as two-year yields rise, a sign of waning confidence in the Federal Reserve's ability to contain inflation.
``People are no longer convinced that inflation is dead,'' said Tim Policinski, who manages $1.7 billion in bonds at Fort Washington Investment Advisors Inc. in Cincinnati.
Policinski is among investors who ended trades that anticipated a narrowing of the gap between 2-year and 10-year yields after reports showed wages rising at the fastest pace in a year. The government tomorrow may say consumer prices rose 0.4 percent in July, compared with no change in June, according to the median estimate of 55 economists surveyed by Bloomberg.
The gap between yields on two- and 10-year Treasury notes narrowed to 21 basis points from 197 basis points in June 2004, before the first of the Fed's 10 quarter-percentage point interest-rate increases. This year alone the difference shrank by 90 basis points. A basis point is 0.01 percentage point.
The so-called curve-flattening trade has been one of the most profitable bets in the $4 trillion market for Treasuries. An investor may have made about $300,000 for each $10 million in such trades this year, Policinski said. The 3 percent return is about 1 percentage point more than the return on Merrill Lynch & Co.'s U.S. Treasury Master Index.
The yield curve, a chart of the yields of bonds of the same quality and different maturities, hasn't been this flat since 2001. The average the past five years is 155 basis points.
Since the Fed began raising interest rates in June 2004, two- year yields climbed with them. At the same time, 10-year yields declined as higher borrowing costs restrained inflation.
Predictive Powers
Investors and strategists watch the yield curve because of its powers in predicting economic growth. An inversion, when long- term yields fall below short-term yields, preceded each of the past four recessions, and last happened in December 2000.
There is ``a misconception'' to the importance of the yield curve, Fed Chairman Alan Greenspan said in Congressional testimony last month. The yield curve's ``efficacy as a forecasting tool has diminished very dramatically,'' he said.
The curve may range from 25 basis points to 50 basis points the rest of the year, said William Prophet, an interest-rate strategist in Stamford, Connecticut at UBS Securities LLC, one of the 22 primary dealers of U.S. government securities that trade with the Fed's New York branch. John Herrmann, director of economic commentary at Cantor Viewpoint in New York, took off his July call the yield curve will invert.
``A correction seems imminent, and this overcrowded trade will likely end in tears,'' U.S. debt strategists at Lehman Brothers Inc. in New York led by Jeffrey Biby wrote in a report dated today.
`Most Damage'
The yield on the benchmark 4 1/4 percent note due in August 2015 closed at 4.24 percent on Aug. 12, according to bond broker Cantor Fitzgerald LP. The 3 7/8 percent note that matures in July 2007 yielded 4.04 percent.
Faster inflation, which erodes the purchasing power of fixed- income payments, is one reason why long-term bond yields rise. The 10-year note will yield 4.60 percent at year-end and the Fed's interest-rate target will be 4 percent, according to the median estimate in a Bloomberg survey published on Aug. 9.
The Fed will likely keep raising its rate for overnight loans between banks longer than anticipated, said Andrew Harding, director of bonds at Allegiant Asset Management.
``Where will the most damage on the curve be? The five- to 10-year area,'' said Harding, who added his Cleveland-based firm ended yield-curve flattening trades on Aug. 4.
Inversion
The Labor Department on Aug. 5 said worker wages grew 0.4 percent in July, the fastest pace in a year. A week earlier, the government said prices paid by consumers for goods and services excluding food and energy rose 2 percent last quarter. After revisions, it was the fifth quarter at or above that level. The central bank's estimate for inflation on that basis this year is between 1.75 percent and 2 percent.
Rising interest rates and record energy costs may restrain economic growth in 2006, keeping inflation under control, said Lacy Hunt, chief economist at Hoisington Investment Management in Austin, Texas. Crude oil for September delivery ended last week at $66.86 a barrel, up 47 percent from a year ago.
Hoisington is staying invested in longer-term Treasuries on the ``reasonable chance'' the yield curve will invert, Hunt said. The firm's Wasatch-Hoisington U.S. Treasury Fund has returned 14 percent the past year, outperforming 99 percent of similar funds, according to data compiled by Bloomberg.
``If we see an inversion of that curve, that would be a very strong sign that economic activity is going to decelerate sharply and perhaps even fall into a recession,'' he said.
The Fed
After narrowing in the first half of the year, the yield curve traded in a range between 25 basis points and 35 basis points from June 22 to Aug. 11.
``The Fed wants longer rates higher, and it will keep going until it gets what it wants,'' David Brownlee, who manages $7 billion at N.L. Capital Management in Montpelier, Vermont. Brownlee said he took off curve-flattening trades.
The economy will expand at a 4.1 percent annual rate this quarter, the fastest since the first three months of 2004, the median forecast of 66 economists in a Bloomberg survey showed.
When it raised its benchmark rate to 3.5 percent on Aug. 9, the Fed said in a statement that ``spending, despite high energy prices, appears to have strengthened since late winter.'' The central bank also said ``pressures on inflation have stayed elevated.''

To contact the reporter on this story:
Al Yoon in New York at at ayoon@bloomberg.net

Fed Raises Funds Rate to 3.25%, Keeps "Measured" Plan

2005-06-30T14:46:00.000-07:00

(Bloomberg) -- Federal Reserve policy makers raised the benchmark U.S. interest rate a quarter point to 3.25 percent and restated a plan to carry out further increases at a ``measured'' pace.
The Federal Open Market Committee's decision to keep the ``measured'' language suggests central bankers are concerned that low long-term interest rates outside their direct control are still stoking the economy, making it necessary for them to keep raising their overnight bank lending rate to head off faster inflation. Today's rate increase, the ninth straight, brought the Fed's target to the highest since June 2001.
``As far as the Fed is concerned, it's still on track to raise interest rates again,'' said former Fed Governor Lyle Gramley, now a senior adviser at the Stanford Washington Research Group in Washington. ``It suggests that the economy is still doing quite well, and that further increases in short-term rates lie ahead of us.''
The statement after the FOMC concluded its two-day meeting in Washington today said that monetary policy ``remains accommodative,'' suggesting there's still room to raise the target rate, that the expansion is firm and the job market is improving. ``With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' the statement said.
Investors pushed bond yields down, comforted by the prospect that the Fed has inflation under control. The benchmark 10-year Treasury note rose about a half-point, pushing its yield down 7 basis points to 3.91 percent at 5 p.m. in New York.
Inflation
One phrase that changed concerned inflation. ``Pressures on inflation have stayed elevated, but longer term inflation expectations remain well contained,'' today's statement said. The text from the May 3 meeting had said pricing power was ``more evident'' and that pressure had ``picked up in recent months.''
Today's wording is ``a little bit more inflammatory from a semantic standpoint than their prior statements,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. ``The Fed is trying to send a signal that they think rates should be higher, whether it's bond yields or short-term rates.''
All 22 of Wall Street's biggest bond trading firms, the so- called primary dealers in government debt that trade directly with the Fed, predicted an increase to 3.25 percent, according to a Bloomberg News survey. Eighteen predict the Fed will raise its target rate to at least 3.75 percent by year-end. Forecasts for 2006 range from 3 percent to 5 percent.
Forecasts
Today's vote to raise the target rate was unanimous.
The statement shows ``the Fed isn't finished and will continue to tighten,'' said Sage Advisory Services Ltd. co-founder Mark MacQueen in Austin, Texas. Sage Advisory manages $3.8 billion. ``This has taken away the belief some market participants may have had that the Fed was about finished.''
Any major changes to the Fed statement, such as dropping ``measured,'' may wait until after Chairman Alan Greenspan presents the FOMC's semi-annual forecast to Congress on July 20, giving him a way to foreshadow the change before the next Fed meeting in August.
Greenspan and other FOMC members have been trying to interpret what the low level of long-term rates means for monetary policy. Yields on U.S. 10-year notes fell from 4.69 percent in the past year, even as the Fed raised the overnight bank lending rate by a total now of 2.25 percentage points.
`Conundrum'
Greenspan, who is 79 and whose term as a governor expires in January, has called the situation a ``conundrum'' that is ``without recent precedent.'' Economists including Chris Rupkey at Bank of Tokyo-Mitsubishi in New York say the Fed's increased openness under Greenspan may have contributed to lower bond yields by removing risks that the FOMC would surprise investors.
Today's statement reinforces that the FOMC takes a different view than some investors and economists about what the low yields signify for the economy.
David Rosenberg of Merrill Lynch & Co. in New York is among the economists who interpret the low yields as a signal of slowing growth worldwide that will force the Fed to stop raising rates. Bill Gross, chief investment officer and manager of the world's largest bond fund at Pacific Investment Management Co., said June 21 that an overnight rate of 3.5 percent ``is as much as the Fed can risk'' and that by the beginning of 2006 the central bank may begin reducing rates.
``Certainly they're going to 3.5 percent in August and maybe more, depending on what the housing market does,'' Gross said in an interview today.
Views Differ
Yet Fed officials in recent speeches expressed less concern about a potential slowdown than about so-called imbalances such as a record current account deficit, soaring home prices and low U.S. savings. Greenspan cited ``froth'' in the housing market on May 20. On June 15, Governor Donald Kohn said he was concerned about ``unusual imbalances.''
Today's statement reinforced that the FOMC sees strength in the world's largest economy. ``Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually,'' today's statement said. Growth in productivity and monetary policy are both ``providing ongoing support to economic activity.''
The U.S. economy expanded at a 3.8 percent annual rate from January through March, an eighth straight quarter of growth exceeding 3 percent, a Commerce Department report showed yesterday. The economy expanded by 3.7 percent since the first quarter of 2004, the fastest among the Group of Seven industrialized nations. Low interest rates supported business investment spending and consumer purchases.
Economic Growth
With today's action, the U.S. policy rate is 1.25 percentage points above the European Central Bank's refinancing rate, 0.75 percentage points higher than the Bank of Canada's overnight rate, and 1.5 percentage points below the Bank of England's base lending rate.
The U.S. continues to grow even as oil prices reach records, while inflation remains tame. Crude oil for August delivery reached $60.95 a barrel on June 27, the highest since the New York Mercantile Exchange began trading the contract in 1983; the price was about $57 a barrel earlier today.
The Commerce Department said today its price gauge tied to spending patterns and excluding food and energy costs, Fed policy makers' preferred measure for tracking inflation, rose 0.2 percent last month and was up 1.6 percent from May 2004. The central bank earlier this year projected the price index would rise 1 percent to 2 percent this year.
Inflation
Not all of the economic data has been strong. Orders for durable goods excluding transportation equipment declined in three of the past four months. Retail sales fell 0.5 percent in May and employers added 78,000 jobs in the same month, less than half what economists expected.
The Commerce Department today said personal spending stalled in May after rising in each of the prior three months, while incomes rose 0.2 percent after a 0.6 percent gain in April that was the biggest this year.
Even so, robust housing price increases may be buoying consumer confidence, which rose to the highest level in three years in June, according to the New York-based Conference Board. Low mortgage rates, which are usually linked to the yields on 10- year Treasury notes, have fueled the surge.
The average rate on a 30-year mortgage fell to 5.53 percent from 6.25 percent over the past 12 months. Average U.S. home prices rose 12.5 percent from the first quarter of 2004 to the first quarter of 2005, according to an index tracked by the Office of Federal Housing Enterprise Oversight. Twenty-four states showed average home price gains ranging from 10 percent to 31 percent during the period.
``What may be quite critical here with these lower long-term rates than we ordinarily expect, is it potentially engendering inflationary forces?'' Greenspan told the Joint Economic Committee of Congress on June 9. ``That's something which, needless to say, we are focusing on very extensively.''

To contact the reporters on this story:
Alison Fitzgerald in Washington at afitzgerald@blooomberg.net;
Craig Torres in Washington at ctorres3@bloomberg.net

Trade Deficit Widens Less Than Expected

2005-06-11T11:53:00.000-07:00

(Bloomberg) -- The U.S. trade deficit widened less than expected to $57 billion in April as record imports signaled healthy consumer demand and unprecedented exports provided good news on manufacturing.
The trade gap in goods and services followed a $53.6 billion deficit in March that was narrower than the government first reported, the Commerce Department today said in Washington. Imports rose 4.1 percent, the biggest increase since November 2002, as Americans paid record prices for oil and bought more Chinese textiles. Exports rose 2.9 percent, the most this year.
``The huge U.S. trade deficit may finally be stabilizing,'' said Peter Kretzmer, a senior economist at Banc of America Securities Inc. in New York.
The report supported Federal Reserve Chairman Alan Greenspan's testimony before Congress yesterday that the U.S. economy is on ``relatively firm footing.'' Strength in exports from manufacturers such as airplane-maker Boeing Co. led some economists to raise growth estimates, and the dollar climbed to a nine-month high against the euro.
``The economy is on a somewhat stronger growth trajectory,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. He said the economy may grow at about a 3.5 percent annual rate this quarter compared with his previous estimate of 3.1 percent.
The figure showing March's deficit was narrower than first reported suggests first-quarter economic growth will be revised higher. Adjusted for inflation, April's trade gap of $56.1 billion was lower than the $59.1 billion average for the first quarter. A narrower gap would contribute to growth this quarter as well.
Another report today showed import prices fell 1.3 percent in May, more than forecast and the first decline this year.
Healthy Demand
Imports were $163.4 billion in April, exports reached $106.4 billion and the nation's trade deficit with China widened 14 percent to $14.7 billion. While trade gaps subtract from growth, economists also consider rising imports a sign of healthy demand.
``This report supports Greenspan's rosy economic view that the economy is likely to continue to grow unabated this quarter thereby justifying continued increases in short-term rates,'' said Anthony Chan, a senior economist at JPMorgan Asset Management in Columbus, Ohio, who accurately predicted the gap.
Economists expected the deficit to widen to $58 billion for the month compared with a previously reported $55 billion gap in March, according to the median estimate of 68 economists' forecasts in a Bloomberg News survey.
Dollar
The dollar advanced against the euro to $1.2119 at 4:22 p.m. in New York from $1.2230 late yesterday. It's the highest dollar value against the euro since September. The dollar rose to 108.63 yen from 107.43.
U.S. 10-year Treasury notes fell for the third day, the longest drop since March, pushing the yield above 4 percent for the first time this month.
The trade gap is still running wider than last year, when it reached a record $617.6 billion. The deficit reached $228.7 billion in this year's first four months compared with $187.3 billion in the same period of 2004.
The record imports in April reflected the highest prices ever for petroleum and a jump in purchases of Chinese textiles. The value of U.S. oil imports rose in April to $14 billion from $13.4 billion the previous month. The price per barrel increased to $44.76, the most ever in the report, compared with $41.14 in March. The nation imported 313.8 million barrels for the month compared with 326 million barrels in March.
Import Prices
Oil may not contribute to the trade deficit in May. A Labor Department report today showed prices of imported goods fell 1.3 percent that month, more than forecast and the first decline this year, reflecting lower costs of petroleum, autos and building materials.
Americans spent 5.5 percent more on foreign-made consumer goods and 7.6 percent more on capital goods. Imports of autos and parts rose 1.2 percent in April.
Toyota Motor Corp. and Nissan Motor Co., Asia's two biggest automakers, said last month U.S. sales of cars and trucks increased more than 25 percent in April compared with the same month last year.
The rise in exports reflected increases in business equipment and industrial supplies. Foreign businesses spent 5.5 percent more on capital goods, led by purchases of commercial aircraft. Chicago- based Boeing, the world's No. 2 commercial-jet maker, said this month it delivered 16 aircraft to foreign buyers in April compared with 12 a month earlier.
Industrial supplies rose 5 percent, led by sales of fuel oil and plastics. Exports of consumer goods fell 1.4 percent.
Currencies
A drop in the value of the dollar may be contributing to the gains in exports. A cheaper dollar makes U.S.-made goods less expensive to foreign buyers. The dollar is down 14 percent against a trade-weighted basket of currencies from the nation's biggest trading partners since reaching a high in February 2002, according to Federal Reserve figures.
``We saw decent exports here. The weak dollar is beginning to have its effect,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, in an interview. ``I think that will continue to happen, although I really don't expect the trade deficit to narrow until the end of this year if at all.''
Because the U.S. imports about 50 percent more goods and services than it exports, exports have to grow about twice as fast just to stabilize the trade deficit, economists said.
China
April's wider gap with China reflected an 11 percent increase in textile imports. Textile imports are up 52 percent so far this year from the same four months of 2004, the report showed. The overall trade deficit with China is up 35 percent so far this year.
China came under renewed pressure from the world's richest nations and the International Monetary Fund to make its currency's exchange rate more flexible. ``For their own sake and the sake of global economy, we're urging them to move to greater flexibility,'' Treasury Secretary John Snow said in an interview yesterday.
In London, where Snow and other finance ministers from the Group of Eight nations gathered for two days of talks, U.S., Japanese and IMF officials again urged China to end its decade-old currency link to the dollar.
``China needs to throw the G-8 a bone here,'' said Kenneth Rogoff, a Harvard University professor who was formerly the chief economist at the IMF, in an interview. ``They need to do some gesture in this dimension, even if switching to a basket'' of currencies of pegging the yuan only to the dollar.
By region, the department reported the trade deficit with Japan narrowed to $7.2 billion from $7.8 billion. The deficit with the Organization of Petroleum Exporting Countries widened to $7.1 billion from $6.6 billion.
The deficit with Canada, the largest U.S. trading partner, widened to $9.8 billion from $9.3 billion. The gap with Mexico widened to $4.4 billion from $4.3 billion. The deficit with Europe increased to $11.8 billion from $10.9 billion.
The U.S. economy is likely to grow at a 3.3 percent annual pace this quarter and expand 3.5 percent this year, according to the median estimate of economists surveyed by Bloomberg News from May 31 to June 8.

To contact the reporter on this story:
Carlos Torres in Washington ctorres2@bloomberg.net

Europe Kaput

2005-06-01T13:06:00.000-07:00

By William F. Buckley Jr.

The negative vote in France tells us some things, but fails to tell us others we are curious to know. Most sharply, it flashes out at us the difference between parliamentary approval and popular approval. All the voting, up until Sunday's, had been by parliaments, except for Spain. Scheduled for Wednesday, June 1, is a second referendum vote (in the Netherlands). Other votes (with the exception of Malta's) are to be popular votes. The big story, of course, is that if the Dutch follow the French, there isn't much point in going any further, because the whole idea of a European Constitution will have crashed.
What's going on?
We are told that the elite and the non-elite -- the commoners -- are differently inclined. In France, this was so. There are always the exceptions, but the elite in France voted Yes on the constitution that sophisticated craftsmen, under the direction of Valery Giscard d'Estaing, labored over for three years, producing over a hundred pages of laws and regulations per year.
What were they up to?
They wanted a country called Europe. They wanted, after six centuries of them, to avoid internecine wars. To that end, six nations brought forth a precursor to the
European Union in 1951, which spawned the European Economic Community in 1957, which brought on the European Union of 1992.
By now, "Europe" meant 25 countries, 26 assuming the accession of Turkey in coming years. The first goal was a reduction in tariff barriers. This happened, and proved successful, creating an inertia that pointed to further relinquishments of national power, comparable to the American experience as member states of the union gave over power to the federal government.
The vision has been pretty heady. Europe would be the largest economic unit in the world, a union of the nations that provided the cultural, economic, military and artistic overhead of the Western world up until the United States achieved parity, and then supremacy. There would be problems, it was acknowledged in the thousand forums at which these matters were discussed. But these problems would be negotiated.
What haunted the vision, in recent years, were two demographic ice floes. The first, the diminution of the birthrate in native populations; the second, the perception that genuine freedom had to include the freedom to migrate. If simultaneously (to take only a single example), Swedes diminish in numbers by their negative birthrate, and Turks are free to immigrate to Sweden, the cultural contours of existing society will be gradually reshaped.
Such developments the elite can, with a measure of calm, live with, but they generate apprehension in others, men and women who have looked to their governments to protect their special interests. We know that 70 percent of French farmers voted No on the new constitution. Now, French farmers are the most coddled economic tribe in the entire world, so why should they invite any change in the laws they live under?
Public and blue-collar workers, and of course the unemployed, voted No on the constitution. Their leverage on the immediate future of France, which is the future they are concerned with, depends on exertions within a political framework they are familiar with. If the eggheads in Paris want a great visionary constitution in the place of what they have got now, let them go for it, but don't let them hallucinate that this has the backing of the French working class.
The shock of the May 29 vote will affect politics everywhere. Poor
Tony Blair is all but speechless trying to handle it. On the one hand, he has been a leader in encouraging the European idea. But a lurking skepticism among the Brits brought him several years ago to pledge that he would not take Great Britain into Europe without a plebiscite. It was expected that by the time a vote became relevant, the advantages of Europe would overwhelm parochial concerns.
Well, although Mr. Blair had thought the British plebiscite could be safely scheduled for spring 2006, he faces now the real possibility that by spring 2006, the whole idea of a united Europe will have given way to the sturdy weeds of tradition and nationalism that indeed have brought wars in the past, but which the French people, for all their exalted talk about an exalted Europe, just don't want to be without.

Euro Extends Drop to Seven Month Low After France Rejects EU Constitution

2005-05-30T18:44:00.000-07:00

(Bloomberg) -- The euro fell to a seven-month low against the dollar and headed for its biggest monthly loss since January on concern the European Union is being derailed by opposition to a proposed constitution.
The Netherlands is predicted tomorrow to follow the decision of French voters to reject a European treaty, throwing into doubt the future of the project. The euro is down 8 percent this year as growth in the 12-nations that share the single currency lags behind that of the U.S. European Central Bank policy makers will probably cut their growth estimates when they meet June 2.
``I'd be looking for levels to sell the euro,'' said Lawrie Dryden, head of currency and asset allocation in Sydney at State Street Global Advisors, which manages about $31.7 billion of funds. ``There are real concerns about growth in Europe. The man in the street is feeling his plight is being ignored by the politicians, so the votes are a popular reaction.''
Against the dollar, the euro fell to $1.2388 at 10:28 p.m. in Tokyo, the lowest since October 15, from $1.2475 late in Asia yesterday, according to electronic currency-dealing system EBS. The euro has lost 3.7 percent this month. The euro will probably decline toward the $1.20 area within a month, Dryden forecast.
Japanese Jobless Rate Falls
The yen also advanced to an almost three-month high against the euro after government reports showed the Japanese jobless rate fell to the lowest in more than six years and household spending rose. The economic reports improve prospects for a recovery in the world's second-biggest economy.
The yen climbed to 134.10 against the euro from 134.80 immediately before the report was released and 134.66 yesterday. Against the dollar it traded at 108.20 from 108.00 yesterday.
The unemployment rate fell to 4.4 percent in April from 4.5 percent the previous month, the lowest since December 1998. Spending by households headed by salaried workers increased 3.6 percent from March, the first gain in three months, a separate government report showed.
``There are a number of reasons why you'd be supportive of the yen,'' said Greg Gibbs, a Sydney-based senior currency strategist at RBC Capital Markets, in an interview. ``If you look relative to Europe the numbers out of Japan have been looking a lot better.''
The currency last week halted a three-week decline after government reports showed retail sales and exports rose more than expected. The yen is down 4.9 percent this year on signs growth in the U.S. is outpacing that of Japan.
Dutch Referendum
A survey of 16,850 Dutch people yesterday found 53.2 percent of voters will reject the constitution, three days after France voted 55 percent to oppose it.
The constitution, which creates a European president and foreign minister for the first time and gives more power to the European Parliament, must be ratified by all 25 members of the European Union by November 2006 in order to take effect.
``Investors worry that rejection of a Federal system for Europe will drastically reduce the likelihood of much needed further reforms to improve economic growth,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``Fallout could include pressure on the ECB to cut interest rates.''
ECB policy makers may lower their 2005 growth estimate for the third time in six months when they meet on June 2, according to the median forecast of 21 economists polled by Bloomberg News. They will keep the benchmark interest rate at 2 percent, all 37 economists in a separate survey predicted.
The Federal Reserve's interest-rate target for overnight loans between banks is 3 percent.

To contact the reporter on this story:
Rodrigo Davies in London at rdavies13@bloomberg.net

Dollar Gains: U.S. Economic Growth To Exceed Expansion In Japan, Europe

2005-05-16T05:43:00.000-07:00

(Bloomberg) -- The dollar climbed to the highest in a month against the yen and traded near the strongest since October versus the euro on signs the U.S. economic expansion will exceed growth in Japan and Europe.
The U.S. currency has rallied for three consecutive weeks versus the euro as reports showed U.S. employers boosting hiring and consumers increasing spending. A Federal Reserve report today may show manufacturing in the New York area grew at a faster pace in April, economists said before a report today.
``We've had some very encouraging economic data from the U.S.,'' said Paul Robson, a currency strategist at Royal Bank of Scotland Plc in London. ``The dollar can continue to push higher,'' said Robson, who predicts the U.S. currency may strengthen to $1.25 per euro this week.
The dollar advanced to 107.49 yen at 8:13 a.m. in New York from 107.32 late on May 13 in New York, according to electronic currency-dealing system EBS. The U.S. currency was at $1.2618 per euro from $1.2695. Earlier today, it rose to $1.2581 compared with the euro, the highest since Oct. 21.
Some investors sold the dollar after it failed to rally beyond $1.2560 per euro, the strongest level it reached on Oct. 21, said Neil Jones, a director of foreign-exchange sales at BNP Paribas SA in London.
``There's not quite enough momentum at the moment to make a big push lower,'' said Jones. ``The recent strong U.S. data and pessimism about Europe seem to be reflected in the price.''
Empire State
The New York Federal Reserve's Empire State manufacturing index rose to 11.7 from 3.1 in April, according to the median estimate of economists surveyed by Bloomberg News. The dollar fell by a cent against the euro on April 15 when the index fell to the lowest since April 2003. The report is scheduled for release at 8:30 a.m. New York time.
``While there is potential for upside surprises from the U.S. economy, the U.S. dollar still has the capacity to rally,'' said Monica Fan, London-based global head of foreign exchange strategy at RBC Capital Markets, speaking from Sydney. ``The U.S. dollar will get further support.''
Japan's current account surplus unexpectedly shrank in March to its lowest level in more than a year, a government report showed today, as higher prices of oil and iron ore raised the value of imported goods, sapping economic growth.
Treasury Report
Gains in the dollar may be limited ahead of a Treasury Department report today that may show international investors reduced their purchases of U.S. assets in March.
Foreigners probably bought a net $70 billion in Treasury notes, corporate bonds, stocks and other financial assets in March, down from $84.5 billion in the prior month, according to the median estimate of economists in a Bloomberg survey. The report will be released at 9:00 a.m. in Washington.
A technical chart suggested the dollar's rally may wane. The U.S. currency's 14-day relative strength index against the euro was 26.08, the lowest since Feb. 8. The index is a gauge of momentum in a given period, and a level above 70 or below 30 signals a change in direction.
Traders are the most bullish on the U.S. currency in more than 18 months, according to a Bloomberg survey. Seventy-five percent of the 52 strategists, investors and traders polled on May 13 from Sydney to New York said to buy the dollar against the euro, up from 55 percent in the prior week.
`Heading Higher'
The European Commission on May 12 cut a forecast for second- quarter growth in the 12-nation euro region to 0.4 percent, from 0.5 percent. The U.S. economy is expected to expand at an annualized 3.2 percent rate in the same period, according to a Bloomberg survey this month.
A government report tomorrow may show Japan's economy, the world's second largest, probably expanded at an annual 2.5 percent pace in the three months to March 31, according to the median forecast of 20 economists surveyed by Bloomberg News, after growing at a 0.5 percent rate in the previous quarter.
``The U.S. is growing at a faster pace than almost everywhere else,'' said Callum Henderson, global head of currency strategy at Standard Chartered Plc in Singapore. ``The dollar is heading higher'' and may rise above $1.25 per euro this week.
The dollar's gains extended after it closed above a key resistance level against a basket of six currencies last week, Henderson said. The New York Board of Trade's Dollar Index, which measures the dollar's value against six counterparts, was 86.26, from 86.10 late on May 13 in New York, closing above its 55-week moving average of 85.90.

To contact the reporter on this story:
Rodrigo Davies in London at rdavies13@bloomberg.net

What We Lost At The Astor

2005-05-12T08:18:00.000-07:00

William F. Buckley is a favorite of mine. I found this article yesterday and thought I would pass it on to you. I encourage you to seek this author out in your local bookstores and in his nationally syndicated columns in newspapers and magazines.

By William F. Buckley Jr.
This is a morality tale, springing from the old saying, "I lost it at the Astor." For the benefit of the newborn (age 70 or younger), the Astor was a hotel with a famous bar popular with the young, at which seductions were frequently initiated, resulting in the loss of virginity.
The Astor, reconceived in formal economic terms, usefully summons John Maynard Keynes as the great seducer -- so that one can ruminate, with appropriate melancholy, on the theme of "I lost it with Keynes." What was lost was the innate sense of national husbandry, which taught us that deficit spending was wrong. Why? Because it was simply wrong -- not right, not moral -- to spend money you hadn't set aside.
Keynes taught us, of course, that deficit spending is morally neutral. It is simply an instrument of economic policy, useful -- indeed, invaluable -- in correcting maladjustments. If there is great unemployment, and the impulse to spend is anaesthetized, you get things like national depressions. To avoid these you need to deploy hot cash into the economy, such as will revitalize consumption, induce production and restore full employment.
Say's Law (Jean-Baptiste Say, 1767-1832) taught that there can't really be overproduction, because the appetite of man is infinite. If therefore there is unemployment, that's because something has got in the way of the impulse to satisfy the appetite. In Keynesian doctrine, what got in the way was an imbalance between production and consumption, which is mitigated by federal spending.
Of course Keynes was absolutely right on that score, and for 60 years deficit spending has been approved even by people who thought themselves impregnable to the lures of misbehavior at the Astor.
But what crept into the act, with the acceptance of deficit spending as required for national economic policy, was an attitude of detachment toward the old principle that you should not spend what you do not have. And this detachment is degenerate, as witness popular political attitudes on the matter of Social Security.
President Bush didn't attack the Social Security problem in moral terms. He'd have been laughed out of town if he had attempted this, but that doesn't bar others from attempting it. What Mr. Bush said wasn't that, pure and simple, Social Security payments on the present schedule were unearned. What he said was that beginning in the year 2017, there wouldn't be enough money in the "bank" to pay them out as prescribed. The kind of money he was talking about could not simply be issued as a Keynesian infusion into the economy. The federal government can't just write checks for $300 billion because money on that scale transcends Keynesian instrumentation, becoming simply huge ventures into national inflation.
What Mr. Bush might have said, summoning the moral authority of lost norms, was that Social Security payments correctly do two things. The first is to repay the American 65-year-old the money taken from him during his working life, plus interest. The second, to provide insurance against such emergencies as bring on destitution.
Before losing it at the Astor, an American listening to this explanation would have found it entirely reasonable. But in the effusive economic pattern of welfare-state thinking, he has come to accept Society Security as a kind of bonanza. Combining Social Security with longevity, we anticipate, with the present scheduling, welfare payments to millions and then tens of millions of Americans. And there is no movement by any organized body of American consumers that is prepared to say: Just give us back what you borrowed from us, and we'll call it quits.
You can't, in these days, successfully appeal to Americans to reason in that way. If the accounting goes forward as it now threatens to do, Social Security will give the retired American who lives to age 80 twice or three times what he invested in the Social Security program.
Mr. Bush didn't make an appeal based on these moral maxims. But he made a huge first step by saying simply that there wasn't the money there to pursue the program as conceived and elaborated over the years. He took the extraordinary step of proposing reduced payments to middle- and upper-income beneficiaries. And most of them (as witness the pronouncements of the AARP) are ready to fight for their benefits/extortions to the death.
He may not win this through remedial legislation. He has the alternative of letting the impact of inflation make its own way, and if that happened, we'd have lost it all at the Astor, including any pride we take in responsible self-government.

China Changes Offshore Investment Rules, Venture Capital Cools

2005-05-10T06:14:00.000-07:00

Global venture capital funds slowed investment into Chinese companies in the first quarter after the country's foreign exchange regulator issued rules that may hinder international share sales and capital raising by China businesses.
Chinese residents must for the first time get approval from the State Administration of Foreign Exchange before starting or investing in an offshore company, according to notices from the regulator dated Jan. 24 and April 8. Venture capital into China slowed by one-third to $552.6 million in the first quarter from a year earlier, according to the Asian Venture Capital Journal.
Warburg Pincus LLC, Newbridge Capital LLC, the Carlyle Group and other private equity and venture capital firms have used international holding companies to exit their China investments through initial public offerings and stake sales. The new rules are designed to stop companies setting up overseas to strip state- owned assets and avoid paying domestic taxes.
``It's a big headache,'' said Andrew Qian, managing director for New Access Capital Co., a Shanghai-based corporate financial advisory that has postponed several deals this year, including a $3 million investment by a U.S. venture capital fund in a Shanghai-based industrial gas supplier. ``Every private equity fund is scrambling to figure out what the measures mean and how to comply with them.''
The changes led to the Beijing-based China Venture Capital Association to send a letter on April 30 to the regulator, calling for consultation and a revision of the rules.
Detrimental
``SAFE has valid concerns about people transferring assets offshore,'' said Chang Sun, chairman of the association and a Hong Kong-based managing director of Warburg Pincus in Asia. ``The rules as currently published are impractical, hard to implement, and detrimental to foreign investment in China.''
The number of announced private equity deals in China in the first quarter was 19, compared with 31 during the same period last year, according to the Asian Venture Capital Journal, that provides industry data.
The regulations will track cross-border capital flows and control the transfer of Chinese assets from domestic to offshore companies, including those in the Cayman Islands and British Virgin Islands, where many of the Chinese companies listed in Hong Kong and the United States have headquarters.
China Techfaith Wireless Communication Technology Ltd., which raised $142 million in a Nasdaq listing last week, included a clause in its sale documents advising investors about possible risks related to the new rules by the foreign exchange regulator. The company said it cannot predict how the notices will ``affect our business operations or future strategy.''
Dampening
The number of Chinese companies listed on Nasdaq is expected to double to 40 by the end of this year, Stuart Patterson, Asia Pacific senior managing director of Nasdaq Stock Market Inc., said last month.
``There is definitely a dampening affect on the number of deals getting done,'' said Sun of the venture capital association, a trade group of 100 members with $1.3 billion invested in Chinese companies. ``A number of pre-IPO deals have been affected.''
Chinese entrepreneurs and international venture capital funds have reorganized their businesses offshore because the local regulations do not recognize different classes of shares and restrict the sale and public trading of equity held by founding stockholders, according to Barbara Mok, a partner with Jones Day in Hong Kong.
Typically, an offshore reorganization involves Chinese entrepreneurs swapping equity between a local business and an offshore holding company, Mok said. That allows them to issue additional shares in offshore jurisdictions to international investors.
Less Flexible
``Chinese joint stock companies have more restrictions and less flexibility compared to companies registered under the British common law system,'' Mok said.
Semiconductor Manufacturing International Corp., a Shanghai- based chip producer incorporated in the Cayman Islands, raised $1.8 billion through an initial public offering last year on the Hong Kong stock exchange.
The top five Chinese companies listed on the Nasdaq last year, including Shanda Interactive Entertainment Ltd. -- which operates China's most popular online game Legend of Mir II -- raised about $547 million.
Foreign investors must now register and obtain foreign exchange approval before taking equity in a Chinese domestic enterprise prior to an offshore restructuring, according to the regulations.
Supervision
The government is strengthening its supervision of cross- border money flows in order to address fraud and tax evasion, said Xiaohu Ma, a Hong Kong-based partner with U.S. law firm Morrison & Foerster LLP.
``Offshore restructuring has allowed privatized Chinese state-owned enterprises to trade domestic assets inexpensively to offshore companies,'' said Ma. ``It also permitted Chinese citizens to avoid capital gains taxes by selling shares in the offshore company, rather than domestically.''
The new rules also require Chinese residents who restructure their companies prior to the January 24 notice to register their deals. That may create problems for international venture capital investors now preparing initial public offers or making additional private equity deployments, says David Lin, a lawyer with O'Melveny & Myers LLP in Hong Kong.
``People are nervous,'' said Lin. ``The law, itself, is retroactive and could reach transactions in the past.''
Companies completing their offshore reorganization prior to January 24 and which are contemplating initial public offerings overseas have increased risk as a result of the new rules, Lin said.
``If any of the Chinese resident shareholders failed to fulfill their SAFE obligations, for example, then there may be serious ramifications,'' Lin said. ``That includes a prohibition on distribution of profits to overseas foreign shareholders.''

Dollar Rises For Week Versus Euro as U.S. Job Growth Increases

2005-05-08T03:12:00.000-07:00

The dollar rose for a second week against the euro after U.S. job growth accelerated in April, boosting speculation the Federal Reserve may raise its interest- rate target more than expected.
Traders bought more of the U.S. currency yesterday after the Labor Department said employers added 274,000 workers, up from 146,000 in March. The report suggests the economy is growing at a faster rate after slowing last quarter. Higher rates may lure international investors to dollar-based assets.
``This is possibly the beginning of a run of stronger data,'' said Derek Doody, a proprietary foreign exchange trader at Bank of Ireland Plc in Dublin. ``It's certainly positive for the dollar.''
Against the euro, the dollar rose 0.4 percent to $1.2819 at 5 p.m. yesterday in New York, from $1.2873 a week earlier, according to electronic currency trading system EBS. It rose as high as $1.2810, the strongest since April 15. The U.S. currency also rose versus the yen, climbing 0.3 percent to 105.06 from 104.75, for the first weekly gain in four.
The jobs growth ``is a dollar-buy number,'' said Lara Rhame, a currency strategist at Credit Suisse First Boston in New York. It ``is another proof the underlying economic fundamentals of the U.S. remain very solid. The Fed is going to keep raising interest rates.'' She said the dollar may rise to $1.27 per euro next week.
The U.S. jobless rate was 5.2 percent in April, while Germany's is 11.8 percent, the highest since World War II.
`Relieves Some Concern'
During April the dollar declined against the euro and the yield on the U.S. 10-year note fell a half percentage point as several indicators including retail sales, consumer confidence and first quarter gross domestic product were short of forecasts.
``Everyone was looking at the weak economic numbers and this certainly relieves some of the concern about a prolonged soft patch'' in the economy, said Grant Wilson, a currency trader in Pittsburgh at Mellon Financial Corp., which manages about $700 billion in assets. ``The dollar is powering ahead, particularly versus the euro.''
A government report on May 12 may show advance retail sales for April expanded 0.7 percent, the fastest pace since December, from 0.3 percent in March, according to the median forecast of 41 economists in a Bloomberg survey. Excluding autos, sales likely expanded 0.5 percent from 0.1 percent.
Rate, Yield Differences
Fed policy makers lifted their target rate by a quarter percentage point to 3 percent on May 3, the eighth consecutive increase since June. A day later, the European Central Bank kept its benchmark rate at 2 percent, the level it has been at since June 2003.
Investors expect several more Fed rate increases this year. The yield on December Eurodollar futures contracts surged almost 20 basis points after the jobs report, finishing the week at 4.01 percent, the highest in three weeks. The futures settle at a three-month lending rate that has averaged 21 basis points above the Fed's target over the past 10 years.
The yield advantage of two-year Treasury notes over equivalent German government notes is near the widest since 2000. The gap was 145 basis points yesterday, up from 132 a day earlier. The yield premium has averaged 45 basis points in the past year. A basis point is 0.01 percentage point.
``Sooner or later, the yield differential between Europe and the U.S. has to start to kick in, and it's more favorable to the dollar,'' said David Durrant, a currency strategist in New York at Julius Baer Investment Management, with $22 billion in assets. ``The question is whether it will be able to attract funds to the U.S. given the concerns in the market by a soft patch in the economy.''
Comparative Growth
Fed policy makers said on May 3 that U.S. spending growth is slowing, spurring speculation they may ease the pace of rate increases.
``The solid pace of spending growth has slowed somewhat, partly in response to earlier increases in energy prices,'' the central bank said in a statement accompanying its decision to raise rates.
U.S. gross domestic product will probably expand 3.8 percent this year, according to the median forecast of analysts surveyed by Bloomberg early last month. The ECB last month lowered its 2005 growth estimate to 1.6 percent for the 12-nation euro region.
China `Working Hard'
Japan's currency traded near a seven-week high against the dollar yesterday as speculation mounted that China has moved a step closer to letting its currency fluctuate, which may reduce the competitiveness of China's exports compared with Japan.
China is ``working very hard'' to change its exchange-rate system, though hasn't yet decided on a particular course of action or a timeframe for any move, Deputy Finance Minister Li Yong said yesterday at a press briefing in Istanbul.
``If you look at the comments from the Chinese policy makers over the last two weeks, it looks like there's a different tone on the topic,'' said Jim O'Neill, head of global economics research at Goldman Sachs Group Inc. in London. ``They're now recognizing they don't have much of a choice.''
A currency shift by China would send the yen past 100 per dollar, the strongest since 1995, when China pegged its currency at around 8.3 per dollar, O'Neill predicted.

To contact the reporter on this story:
Joshua Krongold in New York at jkrongold2@bloomberg.net.

Fed's Blunder Should Make Asia Green With Envy: Andy Mukherjee

2005-05-04T18:53:00.000-07:00

(Bloomberg) -- The U.S. Federal Reserve's recent faux pas should make central bankers in Asia green with envy even if it doesn't exactly make Chairman Alan Greenspan swell with pride.
After all, how many central banks in the Asian region can cause stocks and bonds in their countries to move simply by NOT saying what they were expected to say, as the Fed managed to do when it mistakenly omitted a sentence on inflation expectations in its policy statement this week?
No policy maker in the world's most-populous continent can claim to match the Fed's mastery over ``open mouth operations,'' a term economists use to describe a central bank's ability to alter rates by making -- or not making -- certain statements, as opposed to ``open market operations,'' which involve buying or selling of securities by the monetary authority to effect the same change.
Every central bank wants credibility: It wants both its actions and words to be taken seriously. While that's a valid aspiration, where many of the Asian banks go wrong is in thinking they'll get more respect from the market by being voluble.
Whereas the Fed made do with a 180-word statement at the end of its latest rate-setting meeting, including the sentence that was left out for two hours on the cutting-room floor, the Reserve Bank of India last week used almost 3,000 words to explain its semi-annual monetary stance.
Brevity Is the Soul
Among other major economies of Asia, Bank of Japan (about 130 words) and Bank of Korea (180 words) seem to believe in short monetary policy statements. Bank Negara Malaysia manages with a 250-word announcement every quarter. Bank of Thailand makes a 270- word announcement every six weeks.
The Monetary Authority of Singapore, which has credibility as an inflation hawk, took more than 800 words to communicate its six-monthly policy to the market in April.
Shorter policies are better because they force central bankers to distil their views and express them in words that can be easily compared by market participants from one announcement to another.
This comparison is essential if phrases such as ``measured'' pace, which has been equated by the U.S. market with a quarter percentage point rise since the Fed introduced it in May 2004, are to have any common interpretation. Unless the market generally agrees on the meaning of a term, the central bank won't be able to use that phrase to guide the market.
No Comparison
In October 2004, when the Reserve Bank of India raised a key rate at which the central bank drains funds from the banking system by a quarter-point, it said that the stance of the policy would be on ``provision of appropriate liquidity to meet credit growth and support investment and export demand in the economy while placing equal emphasis on price stability.''
It's hardly a stance that contains a lot of information.
Sure, ``appropriate'' was a new word that had been used in place of ``adequate.'' But the market had no benchmarks to compare if ``adequate'' liquidity meant banks would have less money to buy bonds than they would under ``appropriate'' liquidity.
Similarly ``equal emphasis on price stability'' was a change from ``continuing a vigil on movements in the price level.'' But the market had no yardsticks to compare the two stances in terms of what they would mean in operational terms.
Looking Ahead
Subsequent communication didn't do much to guide the market. That became clear last week when Indian bond traders were caught completely off-guard by another quarter-point rate increase, which shouldn't have been a surprise if the central bank's words had had their desired impact on traders' expectations.
A policy statement isn't merely an occasion to justify the decision being announced; it should tell traders what central bank action to expect in the future.
In October 2004, the South Korean central bank left its target rate unchanged and said very little about the future direction of interest rates. As a result, when it cut rates by a quarter-point a month later, the decision took traders by surprise. Once again, the November statement gave no guidance. It wasn't until March this year that minority expectations of further cuts finally went away.
``To the extent that central bank talk provides useful guidance to markets about the likely future path of short-term interest rates, policy makers will exert greater influence over the longer-term interest rates,'' Fed Governor Ben Bernanke, who has been named to lead the Bush administration's Council of Economic Advisers, said in an October 2004 speech.
Talk the Walk
It isn't that Asia has to get on a long learning curve of central bank transparency. Before 1994, the Fed made no statement at all after any rate-setting meeting. It didn't even announce the decision on the federal funds rate. Between 1994 and mid- 1999, only changes to the target rate were announced; no communication was issued if there was no change.
After every upheaval in the financial markets, Asian central bankers should ask of themselves if there was anything they could have said differently that would have prevented the turmoil.
The overall aim, as Bank of England Governor Mervyn King says, is ``to make monetary policy less exciting and more boring.''
To do that, a central bank needs to talk the walk as much as it needs to walk the talk.

Federal Reserve Raises Target Rate to 3 Percent, Keeps 'Measured' Language

2005-05-04T18:47:00.000-07:00

Federal Reserve policy makers raised the benchmark U.S. interest rate a quarter-point to 3 percent and restated a plan to carry out further increases at a ``measured'' pace to head off faster inflation.
`The stance of monetary policy remains accommodative,'' the Federal Open Market Committee said in a statement released after the meeting in Washington. ``With underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.''
Retaining the ``measured'' language suggests the Fed is confident it can contain inflation through a gradual increase in borrowing costs, without causing more of a slowdown in the world's biggest economy. Today's increase, the eighth straight since June, puts the overnight bank lending rate at the highest since just after the September 2001 attacks.
``Pressures on inflation have picked up in recent months at pricing power is more evident,'' today's statement said. ``Recent data suggest the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices.''
``The committee perceives that, with the appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal,'' the statement said. Labor markets ``apparently continue to improve gradually.''
The vote to raise the overnight bank-lending rate was unanimous.
Forecasts
All 104 economists surveyed by Bloomberg News expected a quarter-point increase. Reflecting debate within the Fed itself, a separate survey of 22 bond firms that trade government securities directly with the central bank showed that nine of the firms expected ``measured'' to remain in today's statement and five predicted it would be removed. The rest offered no opinion.
``They have a little bit of a dilemma, in that there have been some inflation straws in the wind and there have been some straws indicating weakness,'' said Robert McTeer, former president of the Federal Reserve Bank of Dallas, in an interview. ``They tend to cancel each other out, and the default position is a quarter-point.''
Chairman Alan Greenspan and the rest of the FOMC are trying to determine how high the overnight bank-lending rate needs to go to restrain inflation without hurting economic growth. Crude oil prices are up about a third over the past 12 months.
Since the last Fed meeting March 22, a government report showed that consumer prices excluding food and energy jumped 2.3 percent for the 12 months ending March. The Fed's survey of regional economies released in April said ``upward price pressures have strengthened,'' while actual increases by retailers have ``remained moderate.''
Slowdown
``The inflation rate is beginning to move up a little bit,'' said former Fed Governor Lyle Gramley, now an economic adviser at the Stanford Washington Research Group in Washington, before the decision. ``That's got to be a bit worrisome to any member of the FOMC.''
The U.S. economy grew at a 3.1 percent annual rate in the first quarter, the slowest in two years. U.S. employers added 110,000 workers to payrolls in March, the fewest since July. Retail sales excluding automobiles fell 0.1 percent March, the first decrease since April 2004, as consumer confidence dipped to a five-month low.
Even so, in recent speeches Fed officials, including Governors Donald Kohn and Susan Bies, said the economy remains strong and suggested inflation is the larger concern.
``As the economy expands, our attention shifts a little bit more to the inflation side,'' Kohn said in an April 22 speech. That's becoming more of a threat to a stable economy than slowing growth, he said.
Debate on Wording
Fed officials, in the minutes from their March 22 meeting, debated concern about whether the ``measured pace'' wording limited their freedom. Ultimately the FOMC decided that the phrase doesn't necessarily ``rule out either picking up the pace of firming or pausing'' the increases, the minutes showed when released in April.
``The phrase `measured pace' has lost its usefulness,'' said David Resler, chief economist at Nomura Securities in New York, before the decision. ``They've told us it doesn't mean anything. It doesn't limit what they do.
Some Fed officials including St. Louis Fed President Bank President William Poole have estimated that a neutral interest rate that neither fuels inflation nor brakes growth is between 3 percent and 5 percent.
Rate History
The Fed's target rate is now about equal to overall consumer price inflation, which was 3.1 percent at an annual rate in March.
The overnight bank-lending rate is the highest since September 2001, when the Fed lowered the rate 50 basis points five days after the terrorist attacks on the World Trade Center and the Pentagon that shut down U.S. financial markets for five days.
The steady increases in the policy rate since June so far has had little effect on market interest rates that determine what consumers pay on loans or earn from savings.
For example, the average rate on a benchmark 30-year fixed mortgage fell to a two-month last week of 5.78 percent compared with 6.25 percent when the Fed began increasing rates in the final month of June 2004, according to Freddie Mac, the second-largest purchaser of U.S. mortgages.
`Conundrum'
Bond investors, confident the Fed has inflation under control, also have kept yields low on government debt, something Chairman Greenspan told Congress in February was a ``conundrum.''
Yields on the benchmark 10-year Treasury note were at 4.19 percent this morning, down from 4.68 percent on June 29, the day before the Fed raised interest rates for the first time in a year.
Even with the first-quarter slowdown, the U.S. is the fastest- expanding economy in the Group of Seven industrial nations, as growth falters in Europe and Japan.
With today's action, the U.S. policy rate is 1 percentage point above the European Central Bank's refinancing rate, 0.5 percentage point higher than the Bank of Canada's overnight rate, and 1.75 percentage points below the Bank of England's base lending rate.
Fed Governor Ben Bernanke excused himself from policy meetings after President George W. Bush on April 1 named him to lead the Council of Economic Advisers. Bernanke's Senate confirmation hearing is pending.

To contact the reporter on this story:
Alison Fitzgerald in Washington at afitzgerald@blooomberg.net;
Craig Torres in Washington at ctorres3@bloomberg.net

U.S. Treasuries May Rise as Fed Seen Keeping Rate-Increase Pace

2005-05-01T21:06:00.000-07:00

U.S. 10-year Treasury notes may rise for a second week as investors expect that evidence the economy is slowing will prevent the Federal Reserve from accelerating its pace of interest-rate increases.
Ried, Thunberg & Co.'s weekly index measuring the outlook for U.S. government debt rose for the first time in a month to 41 from 40 in the prior week. Readings below 50 mean investors still expect the 10-year note's price to fall by the end of June. The 47 international investors polled April 29 by the Jersey City, New Jersey-based firm manage a combined $1.33 trillion.
Almost 70 percent of survey participants said Fed policy makers will refer to signs of sluggish economic growth after government reports showed gross domestic product, durable goods and retail sales fell short of forecasts. The central bank has raised overnight bank lending rates seven times since June.
``I am relatively bullish the next two months because of the current conditions of the economy,'' said Richard Waugh, a managing director at Principal Global Investors in Des Moines, Iowa, which manages $80 billion in fixed-income assets. ``There is nothing that is going to make me desert the market.'' Waugh didn't participate in the latest survey; he has participated in previous surveys.
Slower growth boosts demand for Treasuries as investors seek the safety of government debt and as returns from stocks and other assets diminish. U.S. government debt has returned 1.8 percent this quarter, after losing 0.4 percent in the first three months of the year, according to Merrill Lynch & Co. data.
Reaction to the Fed
The benchmark 4 percent note due in February 2015 rose 11/32 last week, or $3.44 per $1,000 face amount, to 98 3/8, according to New York-based bond broker Cantor Fitzgerald LP. The yield, which moves in the opposite direction, fell 4 basis points, or 0.04 percentage point, to 4.20 percent.
The note's yield has declined from 4.76 percent on June 29, 2004, the day before the Fed started a series of interest-rate increases that pushed its target for overnight bank lending to 2.75 percent from a 46-year low of 1 percent.
Fed policy makers will raise the federal funds rate a quarter-point to 3 percent at their meeting tomorrow, all 93 economists surveyed by Bloomberg News said. The Fed usually makes its announcement on rates at about 2:15 p.m. Washington time.
The Fed in its March 22 statement said inflation pressures ``have picked up in recent months and pricing power is more evident.'' Inflation erodes the value of bonds' fixed payments.
Two-year notes, more sensitive to changes in expectations for monetary policy, may fall for a third week as the Fed increases rates. Two-year yields rose an average of 4.06 basis points on days of the Fed's last five rate increases. Ten-year yields have changed less, gaining an average of 1.76 basis points.
Comparative Returns
Merrill Lynch indexes show two-year Treasuries have returned 0.13 percent, including reinvested interest, so far this year, compared with 1.4 percent for 10-year Treasuries. By comparison, the benchmark Standard & Poor's 500 Index is 4.5 percent lower.
``If you can't get a positive return out of equities with 3 to 4 percent economic growth numbers, what's wrong with a four- and-a-quarter Treasury note?'' said Andrew Harding, who manages about $7 billion as director of taxable fixed-income assets at National City Investment Management in Cleveland.
`Something More'
The yield on the 10-year note will range between 4.25 percent and 4.60 percent over next three months until ``we sort out whether this is a soft patch or something more,'' said Robert Gahagan, who oversees $8.5 billion as head of taxable fixed income at American Century Investment Management in Mountain View, California.
Gahagan, who participated in the Ried Thunberg survey, said his funds are overweight 10-year Treasuries and underweight two- year notes. The difference in yields between the two securities could narrow to as little as 25 basis points as the Fed continues to raise interest rates, he said.
The gap between two-year and 10-year Treasury yields, or spread, narrowed to 54.8 basis points on April 29, the smallest since March 2001. The spread has averaged 1.47 percentage points over the past year.
The 10-year Treasury's yield fell to a two-month low of 4.13 percent after the Commerce Department said U.S. gross domestic product expanded at a less-than-expected 3.1 percent annual rate in the first quarter, slower than the 3.8 percent in the prior three months. The note's yield is down almost 50 basis points since the Fed's last meeting on March 22.
Shorter Duration
Some investors said yields are too low to justify buying 10- year Treasuries when the Fed is expected to continue raising rates to fight inflation.
The Commerce Department said April 29 that a core measure of inflation, excluding volatile energy prices, was up 1.7 percent from March last year, compared with a 1.6 percent annual pace in February.
``At these levels we're a better seller than a buyer,'' said Michael Materasso at Fiduciary Trust Co. International, who oversees $17 billion as global head of fixed income for in New York.
Ried Thunberg's survey participants said they increased holdings of Treasury and so-called agency debt in their portfolios to 33 percent last week from 32 percent the prior week. Agency debt includes bonds sold by mortgage-finance companies Fannie Mae and Freddie Mac. Ried Thunberg is a unit of London-based ICAP Plc, the world's largest interdealer broker.
The government on May 6 will report job growth for April. The median forecast of economists surveyed by Bloomberg is for an increase in non-farm payrolls of 173,000, up from 110,000 in March, and an unchanged unemployment rate of 5.2 percent.
A weak jobs report may push down the yield on the 10-year note to ``test 4 percent,'' a level last seen on Feb. 10, said William Chepolis, part of a group that manages $11 billion at Deutsche Asset Management in New York. Chepolis didn't participate in the survey.

To contact the reporter on this story:
Michael McDonald in New York at mmcdonald10@bloomberg.net.

Treasuries Rise as Goods Report Signals Growth Slowing in Parts of Economy

2005-04-27T10:00:00.000-07:00

U.S. Treasury notes rose after the government reported durable goods orders fell in March by the most in more than two years, a sign the U.S. economy is slowing.
Slower growth may lead the Federal Reserve to ease the pace of interest rate increases, boosting demand for bonds. The yield on the 10-year note is almost half a percentage point lower in the past month as several indicators including retail sales and consumer confidence were short of forecasts. Interest-rate futures yields have similarly tumbled.
Yields may ``continue to fall near term because the data is deteriorating,'' said Dominic Konstam, head of interest-rate strategy at Credit Suisse First Boston Inc. in New York, one of the 22 primary U.S. government securities dealers that trade with the Federal Reserve New York branch. ``It is a concern that what we're seeing now is the beginning of a protracted slowdown.''
The 4 percent note maturing in February 2015 rose 5/16, or $3.13 per $1,000 face amount, to 98 7/32 as of 12:35 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield fell 2 basis points, or 0.2 percentage point, to 4.23 percent.
Durables orders unexpectedly fell 2.8 percent last month, the Commerce Department said today. Excluding aircraft and other transportation equipment, orders fell 1 percent. Forecasts called for increases in both.
``This particular data really reinforces the tone that we have been experiencing over the last three to four weeks in the Treasury market,'' said John Miller, a fund manager at Nuveen Investments, which oversees $56 billion of bonds.
Europe Slowing Too
At the same time, German 10-year bunds rose, with yields falling to a record low, as waning consumer and business confidence in Europe spurred speculation the European Central Bank will refrain from raising its main interest rate this year.
Consumer confidence in Germany, Europe's biggest economy, fell for a first month in eight and French business sentiment dropped to the lowest in 18 months in April, reports showed today. German unemployment is the highest since World War II. The 10-year bund's yield fell as low as 3.40 percent today.
The U.S. economy probably grew 3.5 percent in the first quarter, slowing from a 3.8 percent pace in the previous three months, according to the median estimate of 82 economists in a Bloomberg survey. The Commerce Department reports quarterly gross domestic product tomorrow.
A monthly index of manufacturing in the Chicago area is expected to fall to 62.5 in April from 69.2 percent in March, according to the median estimate. The Purchasing Managers Association of Chicago will issue its index April 29. A reading above 50 signals expansion.
The Institute for Supply Management may report on May 2 its National factory index fell to 55 in April from 55.2 in March, the fifth month of declines, a separate survey shows.
GDP Forecast Lowered
John Herrmann, chief U.S. economist at Cantor Fitzgerald LP, said in an e-mail that he is lowering his forecast of economic growth for the first quarter to 3.2 percent from 3.4 percent as a result of the March durable goods report.
``The Fed needs to be very careful in raising rates,'' said CSFB's Konstam. ``They may have to pause.''
Still, the durable goods report doesn't change the longer- term pattern of growth, said David Malpass, chief economist at Bear Stearns Cos. in New York.
``I think it was a temporary slowdown after a fast increase, like in 2004,'' Malpass said. ``I don't think it's a lasting slowdown or a material change in trend.''
Rate Expectations
Traders reduced expectations about the level of U.S. interest rates at the end of the year, following the durables report. The yield on the December futures contract was 3.92 percent, down from 3.98 percent yesterday and from this year's highest of 4.34 percent, reached March 28. The contracts settle at a three-month lending rate that averaged 21 basis points higher than the Fed's target over the past decade.
The 3 3/4 percent note maturing in 2007, the most sensitive to changes in benchmark interest rates, had its biggest one day- gain in more than 10 days, rising about 3/32. The yield fell 6 basis points to 3.59 percent.
``The two biggest risks to the longer parts of the Treasury yield curve are higher inflation and short rates moving higher,'' said Nuveen's Miller. ``Both risks may prove to be mitigated, which should be bullish for that part of the curve.''
Fed policy makers raised the target for overnight bank lending by a quarter percentage point to 2.75 percent at their last meeting on March 22 and stuck to a ``measured'' stance on future increases.
They are expected to raise again on May 3, to 3 percent, according to all 81 economists in a Bloomberg News survey. It would be the eighth Fed increase since June. The European Central Bank has kept its key interest rate at 2 percent since June 2003.
Debt Auction
Konstam said his firm's trading desk has been reducing short positions in Treasuries in the last couple of weeks in response to weaker U.S. economic data.
Gains in Treasuries may be limited as the government plans to auction $24 billion of two-year notes today. The Treasury yesterday sold $9 billion of five-year Treasury Inflation- Protected Securities, or TIPS, at a 1.2 percent yield.
Today's declines in durable goods orders followed a report yesterday showing new-home sales surged to a record pace. New- home sales rose to a 1.431 million annual rate in March, the Commerce Department said.
The Bank of Korea, which holds $67 billion of U.S. Treasuries, denied a report that it planned to sell securities from its reserves. The country is the fourth-largest foreign holder of U.S. debt after Japan, China and the U.K.
The local Yonhap Infomax news service said the monetary authority would sell some of its holdings to fund a $17 billion contribution to Korea Investment Corp., an entity that will be set up in July to manage part of the country's foreign currency reserves.
``We have no plan to sell U.S. Treasuries to contribute to the fund,'' Yoon Yong Jin, head of the central bank's U.S. dollar management team in Seoul, said in an interview. ``We have lots of cashable dollar reserves, including cash and short-term bills.''

To contact the reporters on this story:
Vivianne C. Rodrigues in New York at at vrodrigues@bloomberg.net

Yen May Rise; Pressure Grows to Let Chineese Yuan Gain

2005-04-25T07:35:00.000-07:00

The yen may advance for a third week on speculation the U.S. will intensify pressure on China, Asia's second-largest economy and the biggest market for Japanese exports, to let the yuan gain, a Bloomberg survey indicates.
Sixty percent of the 70 strategists, investors and traders polled on April 22 from Sydney to New York advised buying yen against the dollar, double the previous week. Fifty-nine percent said to buy Japan's currency versus the euro. More people advised selling the dollar against the euro than purchasing it.
The yen is up 2.7 percent from a five-month low on April 5 after Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow said China should cease trying to prevent its currency from appreciating. Chinese Central Bank Governor Zhou Xiaochuan said on April 23 that preparations to loosen the yuan's decade old peg may be accelerated in response to international pressure.
``People have been forced to put on a long yen position because of the comments from the Fed and from Treasury,'' said Thanos Papasavvas, head of currency management in London at Credit Suisse Asset Management, which oversees $310 billion. ``The cost of getting left behind is too great if this really is the time China moves.'' A long position is a bet on a currency's appreciation.
Zhou Comments
A stronger yuan, which has been fixed at about 8.3 per dollar since 1995, may reduce the competitiveness of China's exports compared with Japan. The yen was at 105.77 to the dollar at 7:03 a.m. in New York, after gaining 1.7 percent last week to 106 late on April 22, according to electronic currency-dealing system EBS. Against the euro, it was at 137.14 from 138.50
The yen retreated from a one-month high earlier today after Wei Benhua, deputy director of the State Administration of Foreign Exchange, said China won't change the peg in the ``short term,'' according to the official Xinhua News Agency's Web site. Last week, the yen rallied after Greenspan told the Senate Budget Committee in Washington on April 21 that he's ``certain'' China will float its currency and predicted change ``sooner, rather than later.'' Zhou said two days later that the demands of foreign officials may be taken into account.
``If there is more pressure from outside, it will force us to speed up our reform,'' Zhou said at the Boao Forum on the southern Chinese island of Hainan on April 23, the first time China's government has said it may alter its schedule for making the exchange rate more flexible. He didn't give a timetable.
Zhou, President Hu Jintao and Premier Wen Jiabao are among Chinese officials who have said over the past two years they are prepared to let the yuan trade more freely. Still, ``we don't see that the pressure is that strong right now,'' Zhou said.
Boost to Yen
Complaints from the Bush administration and Congress will spur more buying of the yen this week, said Tony Norfield, global head of currency strategy at ABN Amro Holding NV in London.
``We are not looking for a move by China until the fourth quarter, but the noises coming from the U.S. will keep the issue ticking over and lift Asian currencies, including the yen,'' he said. Norfield recommended on April 21 that clients wager on the yen's advance versus the euro.
The yen may surrender its gains in the event China doesn't shift currency policy soon and weaken toward 109 per dollar, said Papasavvas. Credit Suisse Asset Management may consider buying yen at that level, he said.
The yen's advance last week was a surprise to most participants in Bloomberg's weekly currency survey. More people said to sell the yen than buy it on April 15. The poll correctly forecast the direction of the dollar in 20 of the past 28 weeks versus the euro and in 16 weeks against the yen.
Japanese Economy
Any rally in Japan's currency may be limited on speculation government reports this week will show the nation's economy is struggling to grow. Household spending declined in March and Tokyo consumer prices fell for a fourth straight month in April, according to the median forecasts of economists polled by Bloomberg.
``The outlook still remains yen negative,'' said Samarjit Shankar, director of global strategy for the foreign exchange group in Boston at Mellon Financial Corp., which manages $707 billion. Economic reports are ``expected to disappoint once again.'' The yen may weaken to 110 per dollar by June, he said.
More Bearish
Thirty-eight percent of the traders polled said to sell the dollar against the euro and 32 percent said to buy it. The rest advised holding.
A Commerce Department report on April 28 will show the U.S. economy grew at an annual 3.5 percent last quarter, down from 3.8 percent in the fourth quarter, according to the median estimate of 44 economists in a Bloomberg survey. The Conference Board's index of consumer sentiment may decline to 98 in April from 102.4, based on the median estimate of a separate survey.
``The U.S. economy may be slowing a bit,'' said Tohru Sasaki, a currency strategist at JPMorgan Chase & Co. in Tokyo. ``The dollar trend has turned.''
The U.S. currency has lost 1.9 percent since reaching a two- month high of $1.2766 per euro on April 14. The dollar is still 3.9 percent higher since Dec. 31.
Japanese investors are more bearish on the dollar versus the yen, according to a survey of clients by the Bank of Tokyo Mitsubishi Ltd.
The proportion of customers who said they were dollar ``bears'' increased to 29.6 percent from 19 percent the week before. The number of ``bulls'' fell to 18.5 percent from 33.3 percent, the survey showed.
Bank of Tokyo-Mitsubishi, a unit of Japan's second-largest lender by assets, each Friday surveys about 40 Japanese companies, including exporters, importers and foreign banks in Japan, on their outlook for the dollar against the yen.
The following are the results of Bloomberg's survey showing the number of recommendations for major currencies:
BUY SELL HOLD
Euro 27 22 20
Yen 42 14 14
British pound 21 27 19
Swiss franc 33 15 18
Australian dollar 25 21 21
Euro versus yen BUY SELL HOLD
10 40 18

To contact the reporter on this story:
Mark Tannenbaum in New York at at mtannen@bloomberg.net

U.S. Has No Advantage In Boxer Shorts

2005-04-23T03:18:00.000-07:00

(Bloomberg) -- The heat is on China to do something about its yuan problem.
The 8.3 solution -- the rate at which China's currency is pegged to the U.S. dollar -- has become intolerable to the panic- stricken governments of the U.S. and the European Union in the face of soaring Chinese imports.
Put aside for a moment the likelihood that a stronger yuan will benefit other low-cost producers -- the Philippines, Malaysia, Pakistan -- at the expense of China without creating one new manufacturing job in the U.S. Our elected representatives never let bad economics interfere with what they think is good politics.
The U.S. Senate is considering legislation that would slap a 27.5 percent tariff on Chinese goods unless China moves to a more ``flexible'' currency regime within six months. (Flexibility, it should be noted, is limited to one direction when it comes to the yuan: up.)
At the same time, the U.S. textile industry has petitioned the Bush administration to impose caps on textile imports from China. As part of China's accession to the World Trade Organization in December 2001, ``China agreed to let WTO members re-impose quotas if the import surge caused a market disruption,'' says Dan Ikenson, a trade policy analyst at the libertarian Cato Institute in Washington.
Data Lobbying
At the start of this year, the last vestiges of a decades-old quota system for textiles were eliminated. U.S. apparel imports from China soared 62 percent in the first quarter, according to a Commerce Department report. The department now releases preliminary data on textile and apparel imports on a biweekly basis, well ahead of the monthly trade report, ``allowing decision makers to more quickly analyze the impact of imports on the U.S. market,'' according to Commerce Secretary Carlos Gutierrez.
Sound familiar? Back in 1999, steel imports were a hot-button issue. In response to pressure from the highly protected steel industry in search of more protection, Commerce agreed to release steel import data three weeks prior to the trade data, giving new meaning to the notion of politicized data.
Three years later, President George W. Bush imposed tariffs of up to 30 percent on imported steel products. It was billed as ``relief'' to steel workers when in reality it was thinly disguised insurance for Bush's re-election. (The steel-producing states just happened to be key swing states.)
Bigger Losers
Like the steel industry, protecting the domestic textile industry ends up doing more harm than good. It strives to help a small group (textile producers) at the expense of a big group (textile consumers).
If consumers have to pay more for underwear, shirts and slacks, they'll have less disposable income to buy toasters, blenders and vacuum cleaners. Reduced demand for those products translates into reduced output, hiring and profits.
And it's not even clear that the domestic textile industry benefits. If China's imports become more expensive, either through tariffs, quotas or a stronger yuan, it will just ``shift the sources of imports'' to countries like the Philippines, Ikenson says.
The U.S. has no comparative advantage manufacturing boxer shorts and cotton dresses. No matter how strong the yuan, ``sneakers for the new millennium'' is not going to become a campaign slogan.
Founding Garments
The U.S. does have a thriving textile industry making so- called ``smart'' fabrics, with ``higher-value added applications in the auto, aerospace, furniture and medical industries,'' Ikenson says.
If displaced textile workers really want to point a finger, they should be griping about productivity, not China.
Between 1980 and 2000, productivity doubled in the textile industry, according to Ikenson. That means textile manufacturers produced the same output with half the number of workers. The goal should be to achieve the same efficiencies in the next 20 years, as painful as it may be for redundant workers.
The textile industry has an even longer history of protection than the steel industry.
``One of the first acts of the first congress of the United States was to impose tariffs on imported gloves, hats and clothing,'' Ikenson writes in an op-ed that first appeared in the Asian Wall Street Journal.
That was in 1789. The U.S. was an agrarian economy.
Today the average tariff on clothing and shoes is 11 percent, ``almost six times higher than the average tariff on everything else,'' Ikenson says. ``America's status as an economic superpower does not hinge on its ability to produce socks.''

To contact the writer of this column:
Caroline Baum in New York at cabaum@bloomberg.net.

Yen Drops on Concern Japan's Narrowing Trade Surplus May Hamper Recovery

2005-04-21T05:06:00.000-07:00

(Bloomberg) -- The yen fell against the dollar and the euro after a government report showed Japan's trade surplus narrowed, stoking concern exports won't be strong enough to sustain a recovery in the world's second-largest economy.
Japan's surplus shrank to 1.12 trillion yen ($10.5 billion) in March, compared with the median forecast in a Bloomberg survey for a widening to 1.2 trillion yen. Japan's currency has dropped 4.1 percent this year against the dollar, in part on concern the country's economy is faltering. A separate report today showed foreigners sold Japanese shares for the second week in three.
``There's now doubts creeping in about whether the recovery story is in place for Japan,'' said Neil Mellor, a currency strategist at Bank of New York in London. Today's report ``is negative for the yen.''
Against the dollar, the yen fell to 107.22 at 7:23 a.m. in New York, from 106.84 late yesterday in New York, according to electronic currency-dealing system EBS. It dropped to 140.29 per euro, from 139.84. The dollar was at $1.3083 per euro, from $1.3086, after dropping to $1.3114, the weakest since March 22.
``Looking at the trade figures, it's not positive for the yen,'' said Tomohisa Kawaguchi, a manager of foreign exchange in Tokyo at Citigroup Inc. ``Stocks are down as well,'' hurting demand for Japan's currency. The Nikkei 225 Stock Average fell 0.9 percent to 10,984.39.
Dollar `Vulnerable'
The dollar traded near a one-month low against the euro before a regional U.S. factory index that may add to concern economic growth is slowing.
The Philadelphia Federal Reserve Bank's index probably fell for the second month in three, according to the median forecast in a Bloomberg survey of economists. The dollar declined the most in five weeks against the euro on April 15 after a similar index from the New York Fed showed manufacturing slowed.
``There's big concerns now about the outlook for the U.S. economy and serious worries that the soft patch we thought we were in could become a long-term slowing,'' said Michael Klawitter, a currency strategist at WestLB AG in Dusseldorf.
Demand for the dollar was also hurt by yesterday's decline in U.S. stocks, stoking concern foreign investment into the country will wane.
``The dollar is very vulnerable to what U.S. equities are doing,'' said Shahab Jalinoos, a currency strategist in London at ABN Amro Holding NV. ``The U.S. still needs to see capital inflows coming in to finance the current-account deficit and when stock markets are weakening that becomes more difficult.''
The Dow Jones Industrial Average and Standard & Poor's 500 Index yesterday fell to lows for the year. The dollar slid for three years through 2004, in part on concern foreign investment would fail to offset a widening gap in the current account, the broadest measure of trade. A wider deficit means more dollars must be converted to other currencies to pay for imports.
Yield Attraction Ebbs
The dollar has also dropped this week as the yield advantage on U.S. Treasury notes compared with Europe reached the smallest in a month. Ten-year Treasuries yield 77 basis points more than German bunds with a similar maturity, compared with 93 basis points two weeks ago. A basis point is 0.01 percentage point.
``The dollar is vulnerable,'' said Ashley Davies, a currency strategist at UBS AG in Singapore. ``Fed and growth expectations have been pared back. The fall in yield has taken one of the key pillars of support for the dollar.''
UBS AG, the biggest trader in the daily $1.9 trillion-a-day foreign-exchange market, predicts the dollar will fall to $1.33 per euro in a month.
`Top of the Range'
Losses in the dollar versus the euro may be limited as charts that some traders use to gauge trends indicated the euro will struggle to gain further, said Luke Waddington, head of trading and interbank currency sales in Tokyo at Royal Bank of Scotland Plc.
Today's high of $1.3114 is close to a 50 percent retracement of the euro's decline from a high of $1.3482 per dollar on March 11 to a 10-week low of $1.2766 on April 14, based on a series of numbers known as the Fibonacci sequence.
``We could be at the top of the range for euro-dollar for now,'' said Waddington. The dollar may rise to $1.3050 per euro before resuming its decline he said.
The dollar may also get support after Japanese Ministry of Finance official Masatsugu Asakawa said his country doesn't plan to reduce holdings of the U.S. currency in its foreign-exchange reserves, the world's largest.
``We are pursuing no currency diversification,'' said Asakawa, 48, who runs the government's U.S. Treasury portfolio as head of the ministry's foreign-exchange department.
Japan sold record amounts of its currency in 2003 and the first quarter of 2004 to keep the yen from appreciating, investing the proceeds mostly in U.S. Treasuries.
The reserves' ``only purpose is to intervene in the forex market,'' Asakawa said in an interview yesterday in Tokyo. ``We need to keep hold of our U.S. dollars.''
The Philadelphia Fed's index probably fell to 10.7 from 11.4, based on the median estimate of 52 economists surveyed by Bloomberg News. The release is scheduled for noon New York time. The New York-based Conference Board may today say its index of leading indicators fell 0.3 percent last month, from a 0.1 percent gain in February, based on a separate survey.

To contact the reporter on this story:
Jake Lee at jlee127@bloomberg.net

Baum: Oil Prices and the Fed

2005-04-09T19:20:00.000-07:00

(Bloomberg) -- Energy is a hot topic, as anyone who's been even semi-conscious for the past year knows. Too bad it's so widely misunderstood.
Take, for instance, the ``expert'' (on what, it's not clear) on TV yesterday morning who said ``you either get tightening from the Fed or (from) oil markets.''
If oil should fall $10 from its current $54.11 price, it would ``increase the likelihood of more Fed rate hikes,'' according to our expert.
He's not alone in his view that higher interest rates and higher oil prices are interchangeable in terms of their effect on the economy. Heck, if Federal Reserve Chairman Alan Greenspan wants to maintain good relationships with lawmakers in Congress, it would behoove him to let OPEC do the heavy lifting.
Five years ago, I penned a column in response to similar nonsense: ``Fed Chairman Ali Naimi Has a Nice Ring to It,'' referring to Saudi Arabia's oil minister, Ali Al-Naimi. Some of my readers thought I was serious.
``If the Organization of Petroleum Exporting Countries is so adept at managing our economy, why not get rid of the central bank and leave the driving to them?'' I wrote on July 5, 2000. ``Instead of using interest rates to affect aggregate demand, encourage OPEC to manipulate aggregate supply and, hence, the price of gas.''
Perhaps you have a hunch how the outcomes of the two options might be different.
Different Strokes
Oil-producing countries, OPEC and non-OPEC alike, manage supply. When OPEC curtailed oil exports to the West in the 1970's, the result was sharply higher oil prices and sharply lower economic growth.
Such an outcome, known as a supply shock, is represented by an inward shift in the supply curve.
That isn't the situation today, where surging global demand -- an outward shift in the demand curve -- raised the price of U.S. light sweet crude to a record $58.28 this week.
The Fed plays in the adjacent ballpark. The central bank influences aggregate demand for goods and services in the economy by adjusting the overnight federal funds rate.
While we can quibble over whether policy makers are trying to slow economic growth or just ease up on the gas, demand is their game, not supply.
Our TV expert assumes that a rise in the price of oil, no matter how induced, is the equivalent of higher interest rates.
Different Outcomes
Consider this: If OPEC stopped pumping oil tomorrow, and prices soared to $105 a barrel, does that mean the Fed should lower the funds rate to 1 percent, increase the money supply and put its imprimatur on what would surely be the next stagflation?
Hardly. That would be the outcome if the Fed eased in the face of supply constraints.
How about looser monetary policy in the face of demand- driven higher oil prices? That wouldn't make much sense either, since cutting the funds rate would stimulate already strong demand.
Yesterday's Wall Street Journal didn't do much better in a front-page article on the Saudi offer to boost output.
First we are told that demand is growing in the U.S. in spite of high gas prices. Demand remains strong in China, India and Asia's booming economies.
The conclusion? ``Higher prices are slowing the world economy,'' the article said, before ``supporting'' the conclusion with... forecasts of stronger demand. Huh?
Supply Response
Last month, the Paris-based International Energy Agency raised its estimates of global demand to 83.4 million barrels a day for 2005. That represents a 2.2 percent increase from 2004, which was up 3.4 percent from the previous year.
The IEA estimated global supply at 83.4 million barrels a day in February, up 2 million barrels from the first quarter of 2004.
Oil producers, it seems, are responding exactly as the law of supply and demand dictates. As the price of a commodity rises, the quantity supplied normally rises.
In the U.S., regulations (on refineries, on gasoline additives) impede the market's ability to produce more oil, at least in the near term. World oil producers aren't exactly holding back.
Malthus Lives
The 11 members of the Organization of Petroleum Exporting Countries produced 29.9 million barrels of oil a day in March, up 1.5 million from a year ago, according to Bloomberg data. This week Saudi Arabia, the world's largest oil producer, said it could increase its capacity, currently 11 million barrels a day, to 15 million in the next 15 years. The Saudis pumped 9.35 million barrels a day in March, according to Bloomberg.
At some point, with the slumbering giant China awakening and gobbling up vast chunks of raw materials, oil demand may exceed the world's ability to produce. Haven't Malthusians of every generation been predicting that demand would exceed supply, only to be proved wrong by a combination of human ingenuity and technological innovation?
If that were to happen with oil, and it's a big if, prices would rise to ration scarce resources. Oil-intensive projects would be delayed or canceled. Incentives to find and develop alternative sources of energy would increase.
What wouldn't happen is a reappraisal of the conventional wisdom about oil supply and demand.

To contact the writer of this column:
Caroline Baum in New York at cabaum@bloomberg.net.

Singapore Dollar May Rise To Seven-Year High In 2005

2005-04-06T17:49:00.000-07:00

(Bloomberg) -- The Singapore dollar may strengthen to its highest since the Asian financial crisis ended in 1998 on expectations the country's central bank this year will bolster the currency to control inflation, a Bloomberg survey showed.
The island's currency may rise 3.7 percent to S$1.60 to the U.S. dollar by year-end, according to the median forecast of 16 analysts and economists surveyed from March 21 to April 4. Twelve participants said the Monetary Authority of Singapore will keep its policy for a ``modest and gradual appreciation'' of its dollar at its semi-annual monetary review on April 12. Four expect the central bank to ease policy to a ``neutral'' stance.
``Inflationary pressures may see the Monetary Authority keep policy intact to curb rising prices,'' said Chia Woon Khien, a strategist at DBS Group Holdings Ltd., Singapore's largest bank by assets. ``Oil prices are definitely one of the things the MAS will be consciously aware of.'' Chia, who participated in the survey, said the currency may rise to S$1.58 by year-end.
The government on Oct. 11 forecast inflation will average between 1 percent and 2 percent in 2005. It averaged 1.7 percent last year, the Department of Statistics said on Jan. 24. Consumer prices gained 0.7 percent in February from January, the government said on March 23.
The Singapore dollar rose 0.3 percent to S$1.6614 against its U.S. counterpart as of 3:35 p.m. local time. It was last at S$1.60 in May 1998. The currency rose 4.1 percent in 2004 after the MAS adopted its ``gradual appreciation'' policy in April of that year.
Overseas Buyers
The MAS seeks to prevent its dollar from rising or falling outside an undisclosed band based on a basket of currencies of its biggest trading partners. The central bank uses the level of the Singapore dollar to control monetary conditions, instead of interest rates.
A stronger currency may make Singapore's goods less attractive to overseas buyers as some companies, such as Maxtor Corp., the world's second-largest maker of computer-disk drives, said on March 4 it would shut a factory in Singapore and move production to China, eliminating 5,500 jobs.
The island's non-oil exports, such as electronics, make up about 70 percent of the economy, according to data compiled by Bloomberg. The government predicts exports and growth in the $104 billion economy will expand at half the pace of last year.
Singapore imports all of its oil, and a 29 percent increase in crude prices this year may encourage the central bank to retain its currency policy.
`Still Appropriate'
``The tightening stance is still appropriate,'' said Yen Ping Ho, a Singapore-based currency strategist at JPMorgan Chase & Co., the second-biggest U.S. bank. Ho took part in the survey and predicted an increase in the Singapore dollar to S$1.58 by year-end. ``Inflationary pressures are still there,'' he said. ``Oil and commodity prices are high.''
Prime Minister Lee Hsien Loong said in an interview on March 18 that ``we have to accept oil prices.'' Lee, who's been finance minister since November 2001, and who was central bank head until August 2004, also said the island wants stable exchange rates.
Singapore's economic growth may be curbed by as much as 0.6 percent this year because of higher oil prices, Trade and Industry Minister Lim Hng Kiang said today.
``If oil prices do not spike up too high, this would be manageable,'' Lim said at a luncheon in Singapore. ``We are able to withstand the oil movements so far.''
`Change the Bias'
Concern over slowing growth in Singapore may prompt the central bank to adopt a ``neutral'' exchange-rate policy that seeks no appreciation or depreciation, said Sanjeev Sanyal, senior economist at Deutsche Bank AG in Singapore, who participated in the survey and predicted the currency to reach S$1.59 year-end.
The government expects the economy to expand between 3 percent and 5 percent this year, down from 8.4 percent growth in 2004.
The economy in the first quarter probably shrank a seasonally adjusted 0.5 percent from the previous three months, according to the median forecast of 12 economists in a Bloomberg News survey. The trade and industry ministry will release the growth figures on April 11.
``The first quarter GDP number could show a very small expansion or it could be a contraction,'' said Tetsuo Yoshikoshi, a market analyst in Singapore at Sumitomo Mitsui Banking Corp. ``Given that, it's possible the MAS will change the bias,'' and the Singapore dollar will weaken to S$1.70 by year-end, he said.
A $5 increase in oil prices cuts GDP growth by as much as 0.6 percentage point, Vivian Balakrishnan, senior minister of state for trade and industry, said on March 3.
Slowing Growth
Singapore's exports may expand in 2005 at less than half of last year's 17 percent pace, International Enterprise Singapore said on Jan. 17, as slowing growth in the U.S. reduces demand for electronics.
``The monetary policy stance will slowly head toward neutral over the next three months even if we don't get a clear announcement in April,'' said Sanyal of Deutsche Bank, Germany's largest. ``The economy is slowing.''
A stronger currency still may be needed to help reduce import costs for companies such as Singapore Airlines Ltd., Asia's most profitable carrier. Jet fuel makes up 20 percent of the airline's operating costs.
`Critical Level'
Higher fuel prices may cause international carriers to lose between $3 billion and $4 billion in 2004, the International Air Transport Association said on Oct. 28, days after prices rose to a then-record of $55.67 a barrel on Oct. 25. Futures contracts reached an all-time high of $57.79 on April 4.
The ``critical level'' for Singapore Airlines will be when fuel prices rise more than $10 a barrel from the current level and if the increase is sustained over a period of about two weeks to a month, the company's Chief Executive Officer Chew Choon Seng said on March 11, when crude closed at $54.43 on the New York Mercantile Exchange.
``The MAS won't ease policy in this environment with inflation coming higher globally,'' said Sabrina Jacobs, a currency strategist in Singapore at Dresdner Kleinwort Wasserstein. ``Commodity prices are relatively strong.'' The Singapore dollar may rise to S$1.58 by the end of the year, she said.
Credit First Suisse Boston S$1.60
Deutsche Bank AG S$1.59
UOB Group S$1.59
BNP Paribas S$1.58
Goldman, Sachs & Co. S$1.62
DBS Group Holdings Ltd. S$1.58
Citigroup Inc. S$1.57 to S$1.60
JPMorgan Chase & Co. S$1.58
Dresdner Kleinwort Wasserstein S$1.58
ABN Amro Bank NV S$1.60
Bank of Tokyo Mitsubishi Ltd. S$1.68
Sumitomo Mitsui Banking Corp. S$1.69 to S$1.70
State Street Bank & Trust Co. Stronger than S$1.60
Standard Chartered Bank S$1.61
UBS AG S$1.58
Skandinaviska Enskilda Banken S$1.67

To contact the reporter on this story:
Christina Soon in Singapore at csksoon@bloomberg.net

Dollar Falls After Technical Gauges Signal Currency Was Poised to Decline

2005-04-06T03:17:00.000-07:00

(Bloomberg) -- The dollar fell against the euro and the yen after charts some traders use to predict price movements suggested it was poised to decline.
``The recent moves upwards in the dollar have been a little excessive,'' judging from technical indicators, said Derek Halpenny, a currency strategist at the Bank of Tokyo Mitsubishi Ltd. in London. ``We might see some retracement in the dollar.''
Against the euro, the dollar fell to $1.2891 at 10:59 a.m. in London, from $1.2869 in New York late yesterday, when it rose as high as $1.28, according to electronic currency-dealing system EBS. The U.S. currency was also at 108.36 yen, from 108.17, after reaching 108.89 yesterday, the highest since Oct. 19.
The U.S. currency yesterday failed to rise above its 200-day moving average against a basket of six major currencies, a signal it will struggle to add to its gains, said Uwe Parpart, senior market strategist in Hong Kong at Bank of America Corp. A separate chart, the so-called relative strength index, also indicated the dollar may decline.
Demand for the dollar has increased on expectations for the Federal Reserve to keep raising interest rates as central banks in Europe and Japan leave them unchanged. The U.S. currency has gained 2.2 percent versus the euro and 2.8 percent against the yen since the Fed lifted its target rate on March 22 and said inflation pressure is building.
``The dollar won't rise much more,'' said Armin Mekelburg, a currency strategist at HVB Group in Munich. ``There is a lack of new impulses to buy.''
`Technical Barrier'
The New York Board of Trade's Dollar Index, a measure of the dollar's value against the euro, yen, pound and three other currencies, closed at 84.66 yesterday, below the 200-day moving average of 85.29.
``We see an interest-rate advantage for the United States against everybody else,'' said Parpart at Bank of America. ``If that gets reflected in the dollar index and it rises above that moving average, then we would expect some further move. But at the moment, it's a technical barrier.''
The U.S. currency's 14-day relative strength index versus the yen closed yesterday at 69.81. The index is a gauge of momentum in a given period, and a level above 70 or below 30 signals a change in direction. The RSI against the euro closed at 36.13 yesterday.
``We can expect at least a pullback in the dollar,'' said Dennis Gartman, an economist and publisher of the daily Gartman Letter in Suffolk, Virginia. ``I wouldn't be buying the dollar again until these trend lines have been broken'' on the Dollar Index.
BOJ Dissent
Japan's currency also rose on speculation the country's central bank may move toward reducing the amount of cash it pumps into the economy.
For the first time in more than a year, at least one of the nine Bank of Japan policy makers voted against the majority decision to keep reserves available to lenders between 30 trillion yen ($276 billion) and 35 trillion yen. Lowering the reserve target would reduce supply of the currency and may boost its value.
The decision ``is consistent with a stronger yen,'' said Harvinder Kalirai, chief market analyst in Sydney at State Street Corp., the world's largest custodian of assets. ``Interest rates are zero, so the BOJ influences policy through the amount of money they put in. This could be the first of many, many steps towards tightening.''
Kalirai forecasts the yen will rise past 100 per dollar this year, the strongest since 1995.
Interest-Rate Gap
The BOJ left its benchmark interest rate near zero today, a level unchanged since 2001. European Central Bank policy makers will probably keep their main rate at 2 percent, where it's been since June 2003, at a meeting tomorrow, according to the median forecast in a Bloomberg survey. The Fed has lifted its target seven times since June, to 2.75 percent.
Interest-rate expectations may still drive the dollar higher, said Richard Yetsenga, a currency strategist in Hong Kong at HSBC Holdings Inc. The U.S. currency may rise to $1.2730 per euro this week, and reach 110 yen in the coming month, he said.
``You're now getting paid to hold dollars instead of euros,'' because of higher interest rates and bond yields, Yetsenga said. ``The dollar is pretty well-supported and should continue to move up.''
Fed policy makers have increased their target for overnight loans between banks to head off inflation as the U.S. expands, in contrast to Europe and Japan, whose economies are faltering.
Europe's Sales Drop
Retail sales in the 12 countries sharing the euro fell for a third month in March as oil prices surged to a record and the number of people out of work rose, the Bloomberg purchasing managers index showed today. The index was 48.5 last month, from 47.3 in February. A reading below 50 indicates a drop in sales.
Japan's index of leading economic indicators fell below 50 percent in February after rising the previous month, signaling that expansion in the world's second-largest economy may slow, a government report showed today.
U.S. benchmark 10-year Treasury notes yield 4.46 percent, 86 basis points more than German bunds with a similar maturity and 310 basis points more than their Japanese counterparts. A basis point is 0.01 percentage point.

To contact the reporter on this story:
Rodrigo Davies at rdavies13@bloomberg.net.

Yen weakens as Japan's Tankan Business Confidence Unexpectedly Declines

2005-03-31T21:26:00.000-08:00

(Bloomberg) -- The yen fell in Asia after the Bank of Japan's Tankan survey showed large manufacturers' confidence unexpectedly fell, the biggest drop this week among the 16 most- traded currencies against the dollar.
Japan's currency has lost 1 percent this week, reflecting concern the country's recovery from its fourth recession since 1991 is faltering. The central bank report today showed business confidence fell for a second quarter, the first back-to-back drop since 2001, when the economy contracted.
``The Tankan was wretched; investors may sell Japanese assets on the back of this,'' said Marshall Gittler, a foreign-exchange strategist in Tokyo at Deutsche Bank AG. ``People want proof the economy is recovering. The yen is going to fall.''
The yen fell to 107.50 against the dollar as of 12:58 p.m. in Tokyo, from 107.15 late yesterday in New York, according to electronic currency dealing system EBS, and down from 106.40 on March 25, the third week of declines. The yen weakened as far as 107.55, 0.1 percent away from the five-month low reached March 30.
The yen ``likely will make a run at 110'' in the next few weeks, Gittler said.
The central bank's quarterly index of confidence dropped to 14 in March from December's 22, and is down from the 13-year high of 26 in September, the central bank said in Tokyo. The median forecast in a Bloomberg News survey was 22, and the lowest estimate was 15.
Against the euro, Japan's currency was at 139.20, from 138.91, down 1.1 percent on the week, the first decline in three. The dollar was at $1.2955 to the euro, from $1.2964.
U.S. Jobs
The dollar may rise against the euro on expectations a report today will show the U.S. added more than 200,000 jobs in March for a second month, reinforcing optimism that growth in the world's largest economy is outpacing Europe and Japan.
U.S. employers may have created 213,000 jobs in March, according to the median forecast of 78 economists surveyed by Bloomberg News. A report yesterday unexpectedly showed jobless claims rose to the highest since January.
``I wouldn't be selling the dollar ahead of payrolls,'' said David Mozina, a currency strategist in Sydney at ABN Amro Holding NV. ``Look at the strength of the economy. The Tankan was horrible and the outlook is bleak for Japan.''
The dollar may rise above 108 yen and $1.30 per euro today, he said.
Weakness in the yen may be limited as large manufacturers said in the Tankan report that profits probably rose 25 percent in the fiscal year ended yesterday, above the 24 percent forecast in December. Companies expect the yen to average 104.52 per dollar this fiscal year, the report said, stronger than the 107.44 average last year.
Japanese Prime Minister Junichiro Koizumi and Economy Minister Heizo Takenaka said the economy is recovering. Central bank Governor Toshihiko Fukui yesterday said the nation should return to sustained growth soon.
`Supporting Corporate Profits'
``The Tankan isn't bad enough to sell the yen at these levels, because expectations on the economy had already diminished,'' said Shimpei Uike, who manages overseas debt in Tokyo at Asahi Life Asset Management, which has $10.5 billion in assets. ``A weaker yen is going to support already increasing corporate profits, keeping the export-led recovery intact.''
The yen may rise above 106 per dollar in a month, he said.
Japan's currency is down 5.2 percent since trading at a five- year high of 101.69 versus the dollar on Jan. 17.
The Tankan, which means short-term economic outlook, reflects the BOJ's survey of 10,443 companies between Feb. 24 and March 31, and is the most closely watched business confidence index in Japan.
`In Trouble'
The yen on March 30 dropped as low as 107.70 per dollar, the weakest since Oct. 22, after the government said industrial production fell 2.1 percent in February, the biggest drop in a year. The unemployment rate rose in February, a separate report showed a day earlier.
``Japan's economy is in trouble,'' said Craig Ferguson, a currency strategist in Melbourne at Australia and New Zealand Banking Group. ``There's no reason to own yen at these levels given the economic outlook.''
The yen may fall below 108 per dollar today, he said.
In other trading, the dollar rose to 1.1981 Swiss francs, from 1.1951 francs. The British pound rose to $1.8862, from $1.8826.

To contact the reporter on this story:
John Brinsley in Tokyo at jbrinsley@bloomberg.net.

Yen Falls for Ninth Day, Longest Streak Since 2001, on Japan Spending Drop

2005-03-29T10:50:00.000-08:00

(Bloomberg) -- The yen fell for the ninth straight day against the dollar, the longest losing streak since 2001, after government reports showed Japanese household spending dropped more than forecast in February and unemployment rose.
``Japanese economic data has been disappointing and the probability is for that weak performance to continue,'' said Jay Bryson, a global economist in Charlotte, North Carolina, at Wachovia Corp. and a former economist at the Federal Reserve. ``We're seeing the yen suffering as a result.''
Against the dollar, the yen slid to 107.57 at 1:18 p.m. in New York, from 107.17 late yesterday, according to electronic currency-dealing system EBS. It dropped as low as 107.60, the weakest since Oct. 22. The dollar traded at $1.2915 per euro, from $1.2897.
Japan's currency is down more than 5 percent since reaching a five-year high against the dollar on Jan. 17. Household spending fell 4.1 percent last month, compared with the median forecast in a Bloomberg survey for a 2.9 percent drop. Japan's jobless rate rose to 4.7 percent, from 4.5 percent.
``It's really been disappointing on the domestic front'' of the Japanese economy, said Samarjit Shankar, director of global currency strategy in Boston at Mellon Financial Corp., which manages $707 billion. The yen may fall as low as 109 per dollar within the next two weeks, he said.
Japan's benchmark Nikkei 225 Stock Average fell 1.6 percent to 11,599.82 today, the biggest drop in more than four months. Foreign investors' net purchases of Japanese shares were the smallest since October in the week through March 18, the finance ministry said on March 25.
Dollar Rally Stalls
The dollar halted a rally against the euro as some investors bet the U.S. currency's gains to the highest in more than six weeks were excessive. It rose as high as $1.2857 yesterday, the strongest since Feb. 11.
An index that measures momentum in securities suggested the U.S. currency was poised to fall after it rose 2.9 percent last week versus the euro, the most in 11 weeks. The dollar stayed lower after an industry report today showed U.S. consumer confidence fell for the second straight month in March.
``This is a good point to start selling the dollar and buying the euro again,'' said Simon Derrick, head of currency strategy at Bank of New York in London. ``The rally in the dollar seems to have lost a bit of momentum, and it's quite likely we're at the end of the move.''
The U.S. currency may fall to $1.33 per euro in the coming month, Derrick said.
The dollar's 14-day relative strength index against the euro closed yesterday at 34.4, the lowest in seven weeks. A level below 30 signals a change in a security's direction.
Consumer Confidence
The Conference Board's index of U.S. consumer confidence declined to 102.4 in March, from 104.4 the previous month. The median forecast in a Bloomberg survey of 60 economists was 103.
``The dollar has made a big move already so I'd expect this uptrend to wane this week,'' said Marios Maratheftis, a currency strategist at Standard Chartered Plc in London. ``If the euro does get any weaker, it will be at a very attractive level.''
The dollar is heading for its best quarter in more than three years against the yen and the euro amid signs the economies of Germany and Japan are struggling to spur growth. It rose last week after the Fed lifted the target rate for overnight loans between banks to 2.75 percent from 2.5 percent and said ``pressures on inflation have picked up.''
The Fed has raised the key rate by 1.75 percentage point, from 1 percent last year. European Central Bank policy makers have kept their main rate at 2 percent since June 2003. The Bank of Japan has left borrowing costs at close to zero since 2001.
Yield Gap
The spread between 10-year Treasury notes and German government bonds of similar maturity is near the widest since 2000. The gap was about 91 basis points, up from 63 at the start of the month and no difference in September. A basis point is 0.01 percentage point.
``We're looking at a substantial widening of the spread between the U.S. and the euro zone,'' said Greg Salvaggio, vice president of capital markets in Washington at currency-trading firm Tempus Consulting. ``That is really making investors flock to the dollar.''
A government report on April 1 may show U.S. employers hired 220,000 workers in March, the second straight month of payroll gains of more than 200,000, according to the median estimate of 66 economists in a Bloomberg survey. The two-month total would be the highest since the economy added 657,000 jobs in April and May of last year.
Japan's Tankan
Demand for the yen may be limited this week before the Bank of Japan's quarterly Tankan survey, scheduled for release on April 1. The release may show confidence among Japan's large manufacturers failed to rise in March, reflecting concern a recovery in the world's second-largest economy isn't durable.
Japan pulled out of its fourth recession since 1991 in the final quarter of last year, expanding at a 0.5 percent annual pace. Gross domestic product contracted in the previous two quarters.
``We've seen dollar-yen power through 107 on the back of disappointing Japanese data'' today, said Monica Fan, head of currency strategy at RBC Capital Markets Ltd. in London. ``The dollar could make further gains against the yen this week on anticipation of a weaker Tankan survey.''
The quarterly index of confidence will be unchanged at 22 points in March from December and below the 13-year high of 26 in September, according to the median of 41 forecasts in a Bloomberg News survey.

To contact the reporter on this story:
Vivianne C. Rodrigues at vrodrigues@bloomberg.net

Yen Falls to Six-Week Low After Confidence Drops at Japanese Manufacturers

2005-03-24T06:41:00.000-08:00

(Bloomberg) -- The yen fell to a six-week low against the dollar and dropped versus the euro after a Japanese government report showed manufacturers in the world's second- largest economy grew more pessimistic.
The yen has lost 4 percent since reaching a five-year high on Jan. 17, on speculation Japan's economy may struggle to sustain its recovery from a recession last year. Today's report suggests the Bank of Japan's Tankan survey of business confidence on April 1 will fall short of expectations, said Uwe Parpart at Bank of America Corp.
``Recent data indicate the economic outlook is less bullish'' in Japan, said Parpart, senior market strategist at the firm's Hong Kong office. The U.S. ``is the opposite of Japan, and it is obviously yen bearish. We saw that played out today.''
The yen weakened to 106.24 per dollar at 9:07 a.m. in New York from 105.95 late yesterday, according to electronic currency dealing system EBS. It fell to 138.01 per euro from 137.52. The dollar was little changed at $1.2994 per euro from $1.2986.
Bank of America expects the yen to trade near 106 per dollar at the end of June, Parpart said. Financial markets in the U.K. and the U.S., the two biggest centers of global currency trading, will shut tomorrow before the Easter holiday.
Confidence among Japanese manufacturers fell to minus 7.6 points in the January-to-March period, from minus 1.3 points in the previous quarter, the government said. Japan's economy grew in the fourth quarter after shrinking in the previous six months.
`Patchy Recovery'
``The yen could well lose further ground against the dollar,'' said Michael Derks, chief global strategist in London at Commonwealth Bank of Australia. ``It's a spluttering, very patchy recovery in Japan.''
The Tankan index of sentiment among large manufacturers probably rose to 23 this quarter from 22 in the previous three months, the central bank may say on April 1, according to the median forecast of 22 economists polled by Bloomberg.
The dollar remained higher against the yen after a Commerce Department report today showed U.S. durable goods orders rose. Orders rose 0.3 percent, after a 1.1 percent drop in January. Excluding transportation, orders fell 0.2 percent.
``The dollar rally may have a little more legs but I'd be surprised if we break through the yearly low'' in the euro, of about $1.2730, reached last month, said John McCarthy, a director of currency trading in New York at ING Financial Markets LLC. ``People are still reluctant to say the dollar's turned and it's going to rally.'' Levels of $1.2750-to-$1.2850 per euro ``will represent good value for selling dollars.''
Dollar Rally
The dollar has gained versus the yen and euro this week after the Federal Reserve signaled inflation may accelerate. The statement fueled speculation the Fed will abandon its policy of increasing its benchmark interest rate in gradual steps.
``The Fed has a lot more room for raising interest rates, increasing the appeal of the dollar,'' said Tetsu Aikawa, a currency sales manager in Tokyo at UFJ Bank Ltd., a unit of Japan's fourth-largest lender. ``We're looking for the durable goods report to underscore the strength of the U.S. economy.''
The dollar's advance may be limited as some traders pare bets on a rally in the U.S. currency before the Easter holiday, said Osamu Takashima, chief analyst of the foreign exchange and treasury division in Tokyo at Bank of Tokyo-Mitsubishi Ltd., a unit of Japan's second-biggest lender.
``The dollar has risen at a fast pace recently and the only risk is that people who hold dollars will cancel their positions before the long weekend in Europe and the U.S.,'' said Takashima.
Relative Strength
A technical indicator used to predict swings in prices also pointed to a slowing in the dollar's rally. The dollar's 14-day relative strength index, which is a gauge of the currency's momentum, stood at 37.1 against the euro. Readings below 30 suggest a change in direction.
``The move we've had in euro-dollar has been a little excessive,'' said Armin Mekelburg, a currency strategist in Munich at HVB Group. ``We'll see some people unwinding their positions before the Easter holiday.''
The Fed on March 22 raised its benchmark rate to 2.75 percent, exceeding the European Central Bank's key rate by three quarters of a point, the biggest gap since March 2001. The next policy-setting meeting of the U.S. central bank is on May 3.
Traders are increasing bets on the extent rates will rise. The yield on the September Eurodollar futures contract was 4.01 percent today, up from 3.745 percent a month ago. The contract settles at a three-month lending rate that has averaged about 0.21 percentage point higher than the Fed's target rate in the past 10 years.
The European Central Bank has kept its main refinancing rate at 2 percent since June 2003. Japan has kept borrowing costs near zero since 2001. Italian business confidence fell to the lowest in almost two years in March, the Isae institute in Rome said today.

To contact the reporter on this story:
Mark Tannenbaum in New York at at mtannen@bloomberg.net

Fed's 'Mixed' Message Suggests In-House Debate, Economists Say

2005-03-23T00:39:00.000-08:00

(Bloomberg) -- The Federal Reserve's two-edged message -- that while inflation risks are rising, it needn't yet step up the pace of interest-rate increases -- may reflect disagreements among policy makers that will be clarified in coming weeks, economists and former Fed officials said.
``The language is mixed,'' Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said in an interview. ``They have told us that their margin for error on inflation has gone down; we don't know by how much.''
The Federal Open Market Committee raised its benchmark rate a quarter-point to 2.75 percent yesterday, the seventh increase in a row. The accompanying policy statement said that while the FOMC still expects ``measured'' rate increases, inflation pressures have picked up. The statement said the committee ``should be'' able to balance economic risks through ``appropriate'' changes in monetary policy.
U.S. stocks and bonds fell on concern the central bank was using the language to lay the groundwork for bigger rate increases, perhaps a 50-basis point boost as soon as June, based on fed funds futures trading. The reverberations were felt globally; in Asia, stocks fell on concern that rate increases will reduce growth in the world's biggest economy.
Two former Fed officials said that the open market committee's qualified word choices are evidence of a collegial split. ``I'm sure there was a debate today over whether they should keep `measured,' and those who wanted to keep it won that debate,'' said Robert McTeer, chancellor of Texas A&M University System and former president of the Fed Bank of Dallas.
Beginning to Worry
``What this statement shows to me is that there is a division within the committee,'' said former Federal Reserve Governor Lyle Gramley, now a consulting economist at the Stanford Washington Research Group in Washington. ``There are some who are beginning to worry about the inflation problem. There are others who aren't convinced yet.''
Policy makers' concerns will be more evident when minutes of yesterday's meeting are released April 12. Other clues may come in speeches they will make between now and the next meeting on May 3.
The statement was ``tough language to negotiate,'' said Stephen Cecchetti, former research director at the New York Fed bank and now a professor at Brandeis University in Waltham, Massachusetts. ``My guess is that there were people who wanted to remove `measured,' and I would think that this is a first step in doing that. We'll have to listen carefully before the next meeting to see whether committee members are leaning in that direction.''
`Measured'
The ``measured'' language is almost certain to leave the statement within the next two meetings, investors said, raising the possibility of a half-point rate increase if prices continue to rise.
``I expect to see the `measured' statement go at the next meeting,'' said John Roberts, managing director and head of government bond trading at Barclays Capital Inc. in New York.
Economists expect a government report today to show that U.S. consumer prices minus food and energy rose 0.2 percent in February for a fifth consecutive month, according to the median estimate in a Bloomberg economist survey.
``They are setting us up for the possibility that they may need to accelerate if they think that the pace of inflation is picking up,'' said Edgar Peters, chief investment officer at PanAgora Asset Management Inc. in Boston. ``They are just getting prepared for that.''
Policy Strategy
Since August 2003, the U.S. central bank has engaged in a self-described ``non-conventional'' policy of using language to set expectations by traders and investors about the path of interest rates. The strategy has supporters among the board of governors, including Fed Chairman Alan Greenspan and Governor Ben Bernanke, while some regional Fed bank presidents remain critical.
Among those opposing the language is William Poole, the St. Louis Fed Bank president, who said in a speech last October that unexpected changes in the economy could cause the Fed to move against the very expectations it was trying to create.
Economists said the central bank may now be less certain about its own inflation forecasts, which predicted the personal consumption expenditures price index, minus food and energy, would rise 1.5 percent to 1.75 percent this year. The reference to inflation in the statement changed from ``relatively low,'' the term used in the February statement, to a more conditional ``contained.''
Inflation Concerns
Since the last Fed meeting, Feb. 1 and 2, crude oil prices surged to an unprecedented $57.60 a barrel, gasoline costs reached a record and the Reuters-CRB index of 17 commodities hit a 24-year high March 16 as copper prices rose to the highest since 1989.
``The Fed has become more concerned about inflation, has raised its core inflation forecast, and is preparing the ground for the possibility of a significant tightening process ahead,'' said Bruce Kasman, head of economic research at J.P. Morgan Securities Inc. in New York.
More aggressive rate increases would also come with a risk for the Fed. Consumers have borrowed heavily against their homes to finance consumption at a time when hourly wages are only keeping pace with inflation. Households are using more of their incomes to fill their gas tanks.
``I would be concerned if I were a floating-rate borrower,'' said Mitchell Hersh, president and chief executive officer of Mack-Cali Realty Corp., a Cranford, New Jersey commercial property company. So far, he said, rate increases have been ``modest, but the trends are clear.''
Passing on Costs
The Fed's so-called beige book regional survey found more manufacturers were able to pass on cost increases to customers, though with only limited effect on consumer prices. The rate and breadth of such pass-through inflation is likely to determine the pace of rate changes going forward, economists said.
By incorporating the term ``measured,'' the Fed may still be betting that the process will proceed slowly.
``People are passing through some price increases because we have been squeezed for so long,'' said William Zadrozny, chief executive officer of Siemens Financial Services, the Iselin, New Jersey, lending unit of Germany's Siemens AG.

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net;
Alison Fitzgerald in Washington at afitzgerald@blooomberg.net;

Dollar Near Two-Week High as Fed May Increase Rates, Suggest Further Gains

2005-03-21T23:28:00.000-08:00

(Bloomberg) -- The dollar held near its highest in more than two weeks versus the euro in Europe on speculation the Federal Reserve will today lift its benchmark interest rate and indicate that it will keep doing so.
The U.S. currency has gained 3 percent this year against the euro with the Fed expected to raise borrowing costs for a seventh time since June. The dollar may extend its rally should the Fed suggest faster rate increases by ending a pledge for ``measured'' policy action, said Minoru Shioiri at Mitsubishi Securities Co.
``Any omission of the `measured' language would be a signal for more dynamic rate increases,'' said Shioiri, senior manager of the treasury and foreign-exchange division in Tokyo at Mitsubishi Securities. ``That will feed into the dollar's strength on the back of a growing U.S. rate advantage.''
Against the euro, the dollar traded at $1.3175 at 7:04 a.m. in London from $1.3157 late yesterday in New York, according to EBS, an electronic foreign-exchange dealing system. The U.S. currency rose as high as $1.3141 yesterday, the strongest since March 4. It was at 105.02 yen from 105.19. The dollar may gain to $1.31 per euro and 105.50 today, Shioiri said.
Higher U.S. interest rates relative to Europe are helping the dollar to its first quarterly gain in three versus the euro.
The Fed will today raise its benchmark rate a quarter point to 2.75 percent, according to 98 of 105 economists in a Bloomberg News poll. The European Central Bank has kept its rate at 2 percent since 2003, and the Bank of Japan at zero since 2001.
`Measured'
Economists from 14 of the 22 primary dealers that trade government debt directly with the Fed say policy makers will by June remove the ``measured'' reference from the statement accompanying rate decisions, based on a Bloomberg News survey last week. Three economists in the survey said the Fed may omit the phrase today.
The dollar's rally from a two-month low of $1.3482 on March 11 may stall should the Fed suggest it will keep to the same pace of rate increases.
``If we don't see a change in the wording, the dollar's rise is over,'' said Richard Yetsenga, a currency strategist in Hong Kong at HSBC Holdings Plc. ``We don't see the Fed dropping the language.''
The dollar may fall to $1.34 per euro this week, he said.
Rising oil prices have fueled speculation the Fed may lift rates more quickly.
U.S. wholesale prices probably rose 0.3 percent in February, the second month of gains, led by higher crude oil costs, according to a survey of 72 economists before a Labor Department report today. Prices also increased 0.3 percent in January.
`Supportive'
A government report tomorrow is expected to show consumer prices climbed 0.3 percent last month, faster than the 0.1 percent increase in January, according to the median estimate of 75 economists in a Bloomberg poll.
``I'm looking for inflation to continue its gradual pace of a pickup, prompting the Fed to extend rate increases well into this year,'' said Tsutomu Soma, a trader of derivatives and currencies in Tokyo at Okasan Securities Co. ``That's supportive of the dollar.''
The U.S. currency's advance may accelerate should it breach $1.3080 per euro, a level where preset orders to buy may have been clustered, Soma said. Traders place such orders to limit losses in case their bets go the wrong way.
The producer price index, a gauge of what factories, farmers and other suppliers receive for their goods, probably rose 0.3 percent, the same as January's increase, according to the median estimate of 72 economists surveyed by Bloomberg News. The report is scheduled for release at 8:30 a.m. in Washington.

To contact the reporter on this story:
Taizo Hirose in Tokyo at Hirose2@bloomberg.net.

Economists Raise First Quarter U.S. Growth Forecast To 4% Rate

2005-03-08T22:36:00.000-08:00

(Bloomberg) -- Higher company spending on plants and equipment led economists to raise their first-quarter U.S. growth forecasts, a Bloomberg News survey found.
The economy is projected to expand at a 4 percent annual pace from January through March, according to the median estimate of the survey, which was conducted March 1-8 among 66 economists. Last month, economists forecast 3.6 percent growth for the current quarter.
The economy expanded at a 3.8 percent rate during 2004's fourth quarter. Reports have suggested business investment expanded in the first months of 2005 after growing at the fastest pace in more than a year during the final quarter of 2004. Companies are hiring more people to fill orders for machinery and equipment, giving workers money to spend on consumer goods such as appliances, clothing, and music players.
``There was some concern that we might see a slowdown in business spending early this year, but what we've seen so far is that there hasn't been any pullback,'' said Nigel Gault, director of U.S. research at Global Insight Inc. in Lexington, Massachusetts, who forecast 4 percent for the current quarter. ``In fact, it looks like it's increasing.''
The economists in the survey also raised the median forecast for all of 2005 to 3.8 percent from 3.6 percent in the previous survey. The economy grew an average 4.4 percent last year, the most since 1999.
The growth forecast was raised for the current quarter at the same time the estimate for consumer spending was lowered to 3.1 percent from a previously forecast 3.3 percent. Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh, attributed the lowered figure to a slower pace of auto sales.
Consumer Spending
The forecast for consumer spending for all of 2005 was unchanged at 3.5 percent. The forecast compares with last year's 3.8 percent, which was the most since 2000, and 3.3 percent in 2003.
Consumer prices are forecast to rise an average of 2.5 percent this year, the same as projected last month. Prices rose 3.3 percent in 2004, the biggest annual gain in four years, as the cost of oil surged.
Economists also said Federal Reserve policy makers would maintain the pace at which they raise the target rate for overnight bank loans. The rate will rise to 3.25 percent by the end of June, the same as expected last month, the survey showed. The target is now 2.5 percent.
Tax Breaks
Gault said economists were comfortable changing their growth forecasts after factory orders increased in January. That suggested the expiration of tax incentives in December hadn't slowed demand for capital goods.
``People weren't sure how much of the strength in spending last year was because of buying ahead of the expiration,'' he said. ``It looks like there was underlying strength in demand, and so everybody has marked up their forecasts.''
A provision in the tax law that President George W. Bush signed in May 2003 gave an added incentive to buy equipment last year. Large companies could write off 50 percent of qualified investments as long as the equipment was delivered by December.
Orders at U.S. factories for capital goods excluding aircraft, a proxy for future business investment, rose 2.9 percent in January, a report March 4 from the Commerce Department showed. Shipments of such goods, which the government uses to help calculate gross domestic product, jumped 3.7 percent after rising 3.1 percent the previous month.
Business Spending
Recent surveys by the National Association of Manufacturers and the Business Roundtable also point to increased spending. Business spending on equipment and software grew at an annual rate of 18 percent in the fourth quarter, the fastest since the third quarter of 2003, figures from the Commerce Department show.
``We do expect to continue to see strong growth,'' John N. Hanson, chief executive of Joy Global Inc., said in an interview. The Milwaukee company makes coal-mining equipment. Mining companies have been ``spending a lot of funds getting the existing equipment up and running and the existing mines operating at peak capacity,'' Hanson said yesterday.
A rise in construction spending may also help boost first- quarter growth, said Robert Mellman, an economist at J.P. Morgan Securities Inc. in New York. The value of residential, commercial and public construction increased to a record in January, the Commerce Department reported earlier this month.
Employment
U.S. employers added 262,000 workers in February, the most since October, and manufacturing jobs increased for the first time since August, the Labor Department said March 4. Job gains may help underpin consumer spending and the expansion.
``The economy here in the U.S. looks good to me,'' Chief Executive Officer Jim Skinner of McDonald's Corp., the world's largest restaurant chain, said yesterday. ``I feel very good about it, and I think that's been corroborated by most CEOs you talk to right now.''
Still, rising oil prices may pose a risk to growth forecasts, economists including Gault said. Crude oil for April delivery touched a four-month high of $55.20 a barrel March 3.
``Oil prices so far haven't had a big effect on economic growth, but most people probably didn't assume they'd see oil at $55 a barrel,'' Gault said. ``It would dampen some of the optimism, but it wouldn't overturn it.''

To contact the reporters on this story:
Joe Richter in Washington at Jrichter1@bloomberg.net;
Kristy McKeaney in Washington at kmckeaney@bloomberg.net

China's Economy May Overshoot 8% Growth Target

2005-03-07T21:29:00.000-08:00

(Bloomberg) -- Chinese policy makers are being overly sanguine in expecting they will be able to steer the economy to a ``soft landing'' in 2005 without having to adjust either the currency value or interest rates.
``I don't see the necessity to raise interest rates again,'' Guo Shuqing, director of China's State Administration of Foreign Exchange, told reporters in Beijing last week. The foreign- exchange regulator also ruled out a large-scale appreciation in the yuan, which has been pegged at 8.3 to the U.S. dollar for a decade.
A freely traded yuan ``will bring serious consequences,'' Guo said March 5. That same day Premier Wen Jiabao presented his annual work report to parliament, predicting that the economy will grow 8 percent this year, slowing from 9.5 percent in 2004.
Inflation will ease to 4 percent or less, from a seven-year high of 5.3 percent in July and August. Fixed-asset investment will expand 16 percent in 2005, decelerating from last year's scorching 25.8 percent pace, Wen told the National People's Congress.
How will this slowdown be accomplished, if not by raising interest rates, or by allowing the currency to appreciate?
Wen indicated that economic controls, like the credit curbs that were imposed last year on overheated industries like steel, cement and property, ``cannot be loosened.'' If anything, land use will be more strictly regulated to stop illegal construction, the government said yesterday.
In placing their trust on blunt tools like administrative controls on land and capital use, Chinese policy makers may be underestimating the overheating challenge.
Inflation Isn't Dead
Chinese consumer prices rose only 1.9 percent in January, yet it's too early for Wen's government to claim victory on inflation.
Crude oil, if it continues to trade at $53.5 a barrel, will hit the Chinese consumer sooner or later, even though the most- populous nation controls utility and retail gasoline prices.
``There's a circuit-breaker between the global oil price and the consumer in China,'' says Stephen Green, an economist at Standard Chartered Bank in Shanghai. ``However, wholesale prices for oil products in China are set at global levels, so the feed- through will still likely occur, but only more slowly.''
Even if oil prices slide from current levels, China may need to raise interest rates to prick the speculative property bubble in cities like Shanghai, where prices increased 16 percent last year.
The 27 basis-point increase in the benchmark one-year lending rate in October, the first in nine years, was too small. Property prices in China may extend gains this year, after climbing an average 13 percent nationwide last year, Morgan Stanley wrote in a report on Feb. 22.
Speculators Bet
``Interest rates are way too low,'' says Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong. Xie expects energy, transportation and water prices to increase this year in China.
At the same time, China's rising current-account surplus may be an invitation to speculators to increase their bets on a possible appreciation in the yuan. The surplus rose to $70 billion last year, from $46 billion in 2003.
If the trend continues, the Chinese central bank may have to add as much as $30 billion a month to its foreign-exchange reserves in the first half of 2005, double its 2004 average, estimates Jonathan Anderson, chief Asia-Pacific economist at UBS AG.
``This would mean increased pressure on monetary policy at home,'' Anderson wrote in a Feb. 28 research note, ``as the central bank would be forced to sterilize much larger amounts of domestic liquidity.'' The People's Bank of China spent 1.6 trillion yuan ($193 billion) buying foreign currency last year, a 41 percent increase from 2003.
No Landing?
Chinese policy makers' comments seem to be more supportive of a ``no landing'' scenario in 2005 than a ``soft landing'' outcome.
Dong Tao, a Credit Suisse First Boston economist in Hong Kong, expects the economy to accelerate again in the first half of 2005, followed by more tightening measures when inflation returns.
It's worth nothing that with all the administrative controls on investment, the $1.4 trillion economy grew at its fastest pace in eight years in 2004.
Why should more of the same make 2005 any different?

To contact the writer of this column:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net.

Dollar Declines As U.S. Jobless Rate Rises, January Job Growth Is Reduced

2005-03-05T09:06:00.000-08:00

(Bloomberg) -- The dollar fell a third straight week against the yen after a U.S. government report showed the unemployment rate rose last month, damping optimism for the country's economic outlook.
The dollar also erased a weekly gain against the euro after the report was released March 4. It had rallied on speculation the economy added 300,000 or more jobs last month. Some traders were then disappointed as the Labor Department said the economy created 262,000 jobs, quelling speculation the Federal Reserve will speed up interest rate increases, some economists said.
``The market was behaving as if they were looking for a number quite a bit stronger,'' said Ram Bhagavatula, chief economist in New York at Royal Bank of Scotland Plc. Speculation ``about the pace of Fed tightening has diminished quite a bit.''
Against the yen, the dollar lost 0.4 percent this week to 104.78, as of 5:07 p.m. yesterday in New York, according to electronic currency-dealing system EBS. The dollar ended the week little changed at $1.3237 per euro, after reaching as strong as $1.3085 earlier in the day.
The dollar fell yesterday against 14 of 16 major currencies tracked by Bloomberg, except the Taiwan dollar and South Korean won. A slower pace of Fed rate increases may diminish demand for the dollar from foreign investors.
The U.S. jobless rate rose to 5.4 percent from 5.2 percent in January. Economists had predicted U.S. employers created 225,000 jobs last month, according to the median of 70 forecasts in a Bloomberg survey.
Bulls Are Tamed
Optimism for quicker job growth rose this week after the Institute for Supply Management said its index of employment in service industries climbed to the highest since the survey began in 1997. The optimism was tempered by February's unemployment rate, the first increase in the U.S. jobless rate since October.
``The numbers were not strong enough to support dollar bulls' wildest desires,'' said Jason Bonanca, a currency strategist at Credit Suisse First Boston in New York. ``We are still improving and 262,000 is a good number, but details in the report were not so supportive.''
The dollar is still 2.4 percent higher against the euro this year and 2.1 percent versus the yen on expectations growth in the U.S. economy will outpace Europe and Japan for a fourth year. The European Central Bank this week cut its growth forecasts and Japan's economy shrank for a third quarter between October and December.
Fed Moves
The Fed has raised its target rate for overnight loans between banks six times since June, in quarter point steps, to 2.5 percent. The ECB this week kept its main rate at 2 percent, where it's stood since 2003, and the Bank of Japan has held borrowing costs near zero for four years.
Yesterday's figures ``reduced any chance of the Fed dropping its measured pace of rate increases and accelerating the pace and that is why the dollar is down,'' said Monica Fan, head of global currency research at RBC Capital Markets in London.
U.S. factory orders rose 0.2 percent in January, a government report showed yesterday. Economists expected a 0.1 percent decline.
Jeremy Fand, senior proprietary currency trader in New York at WestLB AG, said euro gains may be short-lived, and would short the currency, meaning bet on declines, at the $1.33 level.
``The U.S. economy is simply outperforming that of Europe,'' he said. ``I'm not allergic to the dollar.''
Support for Yen
The yen received support from speculation Japan's economy is pulling out of a recession, luring overseas investors to stocks. Reports this week showed gains in retail sales and industrial output, after the government said on Feb. 16 the economy had contracted in each of the past three quarters.
Japan's Nikkei 225 Stock Average had its best week this year, rising 1.8 percent to an eight-month high. Overseas investors were net buyers of Japanese shares for a 19th straight week during the seven days ended Feb. 25.
``We'll probably see more foreign money moving into Japanese assets, mostly Japanese equities,'' said Michael Preiss, senior investment adviser at Coutts Bank (Schweiz) AG in Singapore. That will ``help the yen rise.''

To contact the reporter on this story:
Mark Tannenbaum in New York at mtannen@bloomberg.net

Sealord, Sanford Raise Prices On N.Z. Dollar's Surge

2005-03-02T17:32:00.000-08:00

(Bloomberg) -- Sealord Group Ltd. and Sanford Ltd., New Zealand's two-largest exporters of fish, say their currency's 73 percent gain against the U.S. dollar since 2002 has spurred them to reduce spending and raise prices.
``The local dollar is at an unsustainable level for an exporter,'' Eric Barratt, chief executive officer of Sanford, the nation's second-largest fishing company, said in an interview from Auckland. Sanford sends 90 percent of its catch overseas, he said.
The currency's gain may damp economic growth for the South- Pacific nation, whose dairy, meat, lumber and fish exports make up 30 percent of the $82 billion economy. Finance Minister Michael Cullen said on Feb. 23 that the gain in the currency was a ``major concern'' because it makes the country's goods more expensive overseas and reduces the value of sales in the U.S.
The government said annual gross domestic product growth will slow to 2.2 percent by the first quarter of 2006 from 3.3 percent in the first quarter of 2005.
``The lagged effect of the high exchange rate is expected to affect export growth in the future,'' Cullen said in a Feb. 23 speech to the Auckland Chamber of Commerce.
New Zealand's dollar appreciated to a record 73.04 U.S. cents on Feb. 22, the highest since it was allowed to trade freely in the foreign-exchange market in March 1985. The last time the New Zealand dollar dipped below 60 cents was on May 19, 2004.
The currency was the fourth-best performer among the world's 17 most-traded currencies in 2004, according to data compiled by Bloomberg. Its three-year appreciation against the U.S. dollar was second only to South Africa's rand. The currency bought 72.53 U.S. cents at 8:15 a.m. in London.
Currency's Gain
``We all thought at 60 cents it was getting high,'' Douglas McKay, 49, chief executive of Sealord, said in an interview from Nelson, New Zealand on Feb. 28.
``We are doing a whole raft of things,'' such as reducing reliance on exports to the U.S., and cutting staff because of the currency's gains, he said. Firing 100 people from Sealord's Dunedin, New Zealand factory when fishing quotas changed was ``fortuitous,'' McKay said. ``Maybe it is better to leave the fish in the sea to grow when the exchange rate is so high.''
Sealord is half owned by Nippon Suisan Kaisha Ltd., Japan's second-largest seafood company, and by indigenous Maori interests. The company has about 30 percent of New Zealand's quota to catch hoki, the nation's largest commercial catch, which is sent to Europe for processing. ``We will seek to move more of our cost base into the currencies that we are exposed to,'' McKay said.
Profit Outlook
Sanford's first-quarter sales rose 8 percent, Chairman Douglas Goodfellow told shareholders at their annual meeting in Auckland on Feb. 3, on higher prices and increased catches. He didn't give a value for sales. Full-year net income is forecast to drop 22 percent to NZ$42 million ($30 million), according to the average forecast of three analysts surveyed by Thomson Financial.
Shares of Sanford have slid 4.6 percent in the past 12 months, the fourth-worst performance on the nation's NZSX 50 Index. Sealord doesn't publish its results. Its 2003 earnings before interest and tax rose 42 percent to NZ$57 million, according to figures from the Treaty of Waitangi Fisheries Commission.
Sanford's Barratt said his company is raising prices to counter the strength of the currency. The New Zealand dollar would have to fall to below 60 U.S. cents in 2006 for his company ``to achieve an adequate return to shareholders,'' he said. The currency is 20 percent over-valued, Ulf Schoefisch, chief economist at Deutsche Bank AG in Auckland, wrote in a research report Feb. 23.
Airline Earnings
Air New Zealand, the nation's biggest airline, reported on Feb. 24 a 2.9 percent drop in profit for the six months ended Dec. 31 after the currency's gain made its engineering unit less competitive. Chief Executive Officer Ralph Norris cut costs by encouraging Internet bookings, automated check-ins, and in October raised prices for a third time.
The engineering group lost orders for aircraft maintenance, engine reconditioning and refits to rivals such as China's Taikoo Aircraft Engineering Ltd. and Singapore Technologies Aerospace Ltd., the company said.
Earnings at the engineering business were ``reduced by the increase in the New Zealand dollar, which has impacted on its international competitiveness,'' Chairman John Palmer said at a news conference in Auckland on Feb. 25.
The rally in the currency was fueled in part by the extra yield that New Zealand government bonds offer international investors compared with similar debt in the U.S. and Germany.
Bond Yields
Two-year New Zealand government bonds yield 2.79 percentage points more than U.S. notes with the same maturity and 3.89 percentage points more than German bunds, according to Bloomberg data. The difference in yield, or spread, has averaged 3.51 percentage points and 2.95 percentage points, respectively, in the three-year period.
``New Zealand stands head and shoulders above the rest of the world in the yield that it offers in its assets,'' said Alex Schuman, manager of foreign-exchange strategy at Commonwealth Bank of Australia in Sydney on Feb. 22, the day the currency rose to its record. ``The risk is to the upside for the New Zealand dollar.''
Overseas investors held more than 60 percent of outstanding New Zealand government bonds for a sixth month in January, central bank figures on Feb. 16 showed. Holdings were 53.4 percent in January 2004.
The strength in the New Zealand dollar benefited companies such as Auckland International Airport Ltd., the country's busiest. The airport's first-half profit rose a better-than- expected 20 percent as New Zealanders traveled overseas, taking advantage of their extra spending power from the rising currency, the Auckland-based company said in a statement on Feb. 24.
Airport Benefits
Net income rose to NZ$54.3 million, or 17.8 cents a share, in the six months ended Dec. 31, from NZ$45.2 million, or 14.8 cents, a year earlier, the company said. Full-year profit forecasts had been for a range of NZ$102.6 million to NZ$110.3 million, according to a Thomson Financial survey of nine analysts.
Chairman Wayne Boyd said in Auckland Feb. 24 that the company will meet its full-year profit forecast of NZ$105 million as more New Zealanders vacation abroad.
``New Zealanders traveling was the major contributor to growth during the period,'' Boyd said in the statement. ``The continuing strength of the New Zealand dollar has been a further travel stimulant.''
Slowing economic growth and a narrower interest-rate advantage over U.S. bonds will send the local dollar down to 63 U.S. cents by year-end and 57 cents by the end of 2006, according to Bank of New Zealand Ltd.
`Near Its Peak'
``The currency is at or near its peak and the next move will be down,'' Stephen Toplis, head of market economics at Bank of New Zealand in Wellington, said in a Feb. 23 research note.
A Bloomberg survey forecast that the New Zealand dollar will fall for the first year in four on speculation the economy will slow, leading the central bank to cut rates. The currency may drop to 67 U.S. cents, the lowest since October, based on the median forecast of 31 analysts polled between Jan. 4 and Feb. 1.
As the currency gained, New Zealand firms hedged their losses by buying contracts that give them the option to lock in their exchange rates in anticipation of further strength.
The appreciating New Zealand dollar ``will continue to hit as'' those hedges come off, said Craig Brown, who manages about $157 million of stocks at Walker Capital Management Ltd. in Auckland. ``Companies are getting exposed to a higher currency and are cutting costs from their business to adjust for the loss of income,'' he said.
Currency Hedges
Sanford's currency hedges run out at the end of the current financial year, exposing the company to the higher local dollar, which may crimp export profits, Chief Executive Barrett said.
``It's a disaster for exporters when overseas prices haven't kept pace with the rise in the dollar,'' said Michael Dossor, managing director of Auckland-based Turners & Growers Ltd., whose Enza Ltd. unit accounts for about 90 percent of New Zealand's apple exports.
``About the only costs we can take out now are staff costs,'' he said. ``The currency cost growers NZ$2.50 a carton last year, everything else being equal, that's their profit.''

To contact the reporters on this story:
Tracy Withers in Wellington, New Zealand at
2214 or twithers@bloomberg.net,
Sineva Toevai at stoevai@bloomberg.net

Greenspan Says Current Budget policy "Unsustainable"

2005-03-02T17:17:00.000-08:00

(Bloomberg) -- Federal Reserve Chairman Alan Greenspan told Congress the record U.S. budget deficit is ``unsustainable'' and that spending cuts are needed before costs balloon for Social Security and other benefit programs.
The U.S. may have made promises it can't keep to baby-boomers who are getting ready to retire starting in 2008 and any changes to government programs should be made ``sooner rather than later,'' Greenspan told the House Budget Committee.
``Our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken,'' the chairman said.
Greenspan used his third trip to Capitol Hill in less than three weeks to reiterate his support for creating private investment accounts in Social Security, a keystone of President George W. Bush's plan to alter the retirement system, even as polls show waning public support. He also urged Congress to restore restraints on budget spending, after a record $412 billion budget deficit in fiscal 2004.
Greenspan is saying ``that there needs to be some very substantial restraints on the use of fiscal resources unless we're willing to get ourselves in a real mess years from now,'' said Lyle Gramley, a former Fed governor and now adviser at the Stanford Washington Research Group in Washington.
House Majority Leader Tom DeLay today told Republican members he is committed to passing a Social Security bill this year. Senate Majority Leader Bill Frist, a Tennessee Republican, said yesterday he can't promise a vote this year and urged supporters to do a better job of explaining it to the public. The Bush administration is pressing for a vote.
Economy `Reasonably Good'
The Fed chairman made only brief reference to the economy in the text of his remarks, telling committee members the expansion is proceeding at a ``reasonably good pace'' this year. He did not discuss monetary policy. Greenspan, who turns 79 on March 6, joined the Fed in 1987 and his term expires Jan. 31, 2006.
The benchmark 4 percent 10-year note maturing in February 2015 fell 3/32 at 4 p.m. in New York, pushing the yield up 1 basis point to 4.38 percent. Against the euro, the dollar traded at $1.3136 in New York from $1.3098 before Greenspan's testimony was released at 10 a.m. The dollar was at 104.68 yen from 104.39.
The Fed raised its benchmark overnight bank-lending rate six times since June, to 2.5 percent, to head off faster inflation.
``I would conclude the Fed for now is not prepared in any way to change its pace of rate hikes coming,'' Stephen Gallagher, chief U.S. economist at Societe Generale in New York, said in an in interview after Greenspan concluded his speech and question and answer session. Gallagher expects the Fed to keep raising the rate by a quarter point at the next three meetings through June.
Focus on Spending
Congress should focus on reducing spending, Greenspan said.
``The government's own imbalances will require scrutiny of both spending and taxes,'' he said. ``However, tax increases of sufficient dimension to deal with our looming fiscal problems, arguably pose significant risk to economic growth and the revenue base.''
Budget Committee Chairman Jim Nussle, an Iowa Republican, said Congress ``must begin to propose slowing the rate of growth in the largest, most rapidly growing part of our budget if we even want to think about reducing the deficit.''
``We have been able to accomplish in the last week to 10 days is a recognition that we can't wait until next year to begin the discussion of reform proposals,'' Nussle said.
Pay-Go Rules
Greenspan called for Congress to offset any spending increases or tax cuts by reducing spending elsewhere in the budget, a so-called pay-go rule. Reinstating such a rule, which had been allowed to lapse in 2002, ``would signal a renewed commitment to fiscal restraint and help restore discipline to the annual budgeting process,'' he said.
Greenspan said that ``containing budget expansion is the over- riding principle'' in his view. ``That we have some form of pay-go system, which is agreed upon by the Congress, is the over-riding consideration,'' he said.
Regarding programs such as Social Security and Medicare, Greenspan said he's concerned ``that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver.''
``If existing promises need to be changed, those changes should be made sooner rather than later,'' Greenspan said.
Private Accounts
Greenspan also reiterated his support for private accounts within Social Security, calling a ``a more credible means of ensuring that the program actually adds to overall savings.''
Fiscal 2004 outlays for Social Security, Medicare and Medicaid totaled about 8 percent of gross domestic product, Greenspan said. Government projections show those outlays will rise to 9.5 percent by 2015, and will be around 13 percent by 2030, when the number of people receiving old-age benefits will have roughly doubled.
``The pressures on the budget from this dramatic demographic change will be exacerbated by those stemming from the anticipated steep upward trend in spending for Medicare beneficiaries,'' he said. ``So long as health-care costs continue to grow faster than the economy as a whole, the additional resources needed for such programs will exert pressure on the federal budget that seems increasingly likely to make current fiscal policy unsustainable.''
Bush last month sent Congress a $2.57 trillion budget that would cut spending on agriculture, housing and other domestic programs while allowing defense spending to grow. The budget projects a deficit of $390 billion in the fiscal year beginning Oct. 1, and the Congressional Budget Office has estimated that the transition to the president's personal accounts may cost as much as $2 trillion more.
Bush Proposals
Bush also is seeking to make permanent the $1.85 trillion in tax cuts from 2001 and 2003, which begin to expire in 2008.
Representative Chet Edwards, a Democrat of who represents Bush's hometown of Crawford, Texas, said Democrats may resist cutting entitlements to pay for tax cuts. ``I see no way out of this impasse right now,'' Edwards said during the hearing. Democrats might cooperate but not if ``we're going to ask veterans to make sacrifices on health care, seniors to lose access to nursing homes, and students to lose access to college student loans.''
A Gallup Organization poll for USA Today and Cable News Network conducted late last week showed Bush's approval rating on his handling of Social Security fell to 35 percent from 43 percent earlier in February.
Congressional Democrats yesterday said they found little support among voters for the private accounts at town hall meetings last week. ``Social Security privatization is not selling well in the heartland,'' Edwards said yesterday.
Greenspan stressed in his text the need for Congress to move quickly, or ``the consequences to the U.S. economy of doing nothing could be severe.''

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net;
Alison Fitzgerald in Washington at afitzgerald2@bloomberg.net

Yen May Strengthen As Spending Rises, Jobless Rate Stays At Six-Year Low In Japan

2005-02-28T18:05:00.000-08:00

(Bloomberg) -- The yen may strengthen in Asia for the third day after government reports showed Japan's household spending rose and the jobless rate held at a six-year low.
Japan's currency yesterday gained as government reports showed industrial production increased more than expected and retail sales had the biggest jump in more than six years, providing further evidence the economy will pull out of recession. Prime Minister Junichiro Koizumi said the economic recovery is starting to show signs of spreading to households.
``The Japanese economy has turned the corner, and that should help the yen,'' said Thomas O'Malley, global head of currency portfolio management in San Francisco at Barclays Global Investors. ``Perceptions of a recession were overdone.''
Against the dollar, the yen traded at 104.56 at 10:37 a.m. in Tokyo from 104.62 late yesterday in New York, according to electronic currency trading system EBS. It was also at 138.21 per euro, from 138.38. The yen is up 2.2 percent against the dollar since trading at a three-month low of 106.88 on Feb. 10, and may rise above 100 per dollar this year, O'Malley said.
Spending by households headed by a salaried worker rose 8.2 percent from December, Japan's statistics bureau said. Consumer spending makes up half the economy. The jobless rate last month stayed at 4.5 percent, the lowest since January 1999.
``The labor market continues to improve, and employees' compensation also rose in the fourth quarter,'' Koizumi said in parliament in Tokyo. ``The economic recovery is starting to show signs of spreading to households.''
`Solid Growth'
Any decline in the dollar may be limited by expectations an industry report today will show U.S. manufacturing growth accelerated in February. The euro also may fall ahead of a government report today that may show German unemployment rose to a postwar record in February.
The European Central Bank will lower its growth forecast for the year at a meeting on March 3, the Financial Times Deutschland reported yesterday, citing unidentified ``financial sources.'' The ECB is currently predicting about 1.9 percent growth this year, the newspaper said.
``We're getting good, solid growth in the U.S. and we're not getting it from Europe,'' said Robert Rennie, a currency strategist in Sydney at Westpac Banking Corp. ``The ISM number should be robust and that's another dollar supportive factor. There's rising downside risk for the euro.''
The dollar was at $1.3222 against the euro, from $1.3227 yesterday. It may rise to $1.28 per euro in the next few weeks, Rennie said.
The Institute for Supply Management's factory index rose to 56.9, according to the median of 56 forecasts in a Bloomberg News survey of economists, from 56.4 in January. Readings higher than 50 indicate growth.
German Unemployment
Germany's Federal Labor Agency will say that the number of people out of work in Europe's largest economy rose to 4.79 million, based on the median forecast of 23 economists surveyed by Bloomberg. The adjusted jobless rate probably increased to 11.6 percent from 11.4 percent. The agency releases its report at 9:55 a.m. in Berlin.
Japan's industrial output rose 2.1 percent last month, beating the 1.5 percent forecast. Retail sales rose 5.7 percent from December, suggesting Japan is pulling out of its fourth recession in 13 years. The Nikkei 225 Stock Average traded near an eight-month high, with overseas investors having been net buyers for the past 18 weeks.
``Japan's economy is doing very well,'' said Chris Melendez, president of Tempest Asset Management in Newport Beach, California. The hedge fund is buying yen, he said.
In other trading, the dollar hovered at 1.1631 Swiss francs. The British pound was at $1.9197, from $1.9210.

To contact the reporter on this story:
John Brinsley in Tokyo at jbrinsley@bloomberg.net.

A Layman's Guide To A Q&A With Alan Greenspan

2005-02-23T17:45:00.000-08:00

(Bloomberg) -- Over the years, we've all become experts on parsing Federal Reserve Chairman Alan Greenspan's words, inferring his intent and determining what it all means for interest rates.
How many of us can claim the same level of expertise with Congress? When members of the Senate and House banking committees confront Greenspan twice a year on the occasion of the Fed's monetary policy report to Congress, can you interpret what they are saying?
What follows is a guide for the uninitiated. With a little self-study, you should be up to speed by the time Greenspan goes to Capitol Hill in July for the last time as chairman to deliver his report on monetary policy and the economy.
The opening statements follow a pretty standard format.
1. Greet the chairman, flatter him, tell him you are eagerly awaiting his testimony.
``It's a pleasure to welcome Chairman Greenspan, a long-time friend of this committee.'' (Translation: The folks back home love it when they see me go one-on-one with the second most powerful man in the world.)
``I look forward to your testimony on the economy and monetary policy.'' (Job growth is lousy in my home district, so spare me the BS about how good things are.) ``I look forward to getting your views on other key issues.'' (I'm more interested in airing my views on other key issues.)
Self-Interest
2. Quickly segue to your own interests. For the Democrats, this involves dredging up that infamous $5.6 trillion anticipated 10-year surplus as of January 2001. Remind the audience that this was when George W. Bush took office and really screwed things up.
``I'm very concerned about the soaring deficit. The federal budget went from a $5.6 trillion 10-year surplus in 2001 to a record deficit now.'' (That $5.6 trillion number was pretty flaky at the time, given the government's propensity to spend whatever it has, but it sure comes in handy now.)
Don't move on too quickly. Savor the moment. Hammer home the swing from record surplus to record deficit, with no end in sight.
``In the 1990s, we eliminated the deficit and started to pay down the debt.'' (The Democrats are the party of Clinton and Rubin.)
3. Stroke Greenspan by reiterating your confidence in him as a deficit hawk. Tell him how concerned you are that all this borrowing and spending will be bad for the economy. (Don't mention your ``aye'' vote on the appropriation for a new National Rodent Museum in your district.)
Agenda
Just so Greenspan's words don't carry too much weight, wrap up your opening statement with the insinuation that today's deficits are all his fault because he backed the 2001 tax cut.
``Did you realize that when you were supporting the tax cuts of '01, '02 and '03, that you were substantially reducing the revenues of the U.S. government?'' (If he was wrong about the tax cuts, his support for private retirement accounts may be equally ill-advised.)
If the House members listen to or read Greenspan's testimony, it's not evident from the Q&A that follows. This is where the differences between the two parties manifest themselves. Ever since George W. Bush became president, the Democrats have been trying to get Greenspan to admit the Bush tax cuts were a bad idea. He won't; they keep trying. The Republicans are no less transparent about using Greenspan for their own purposes.
Manipulation
``Do you support making the tax cuts permanent, as the president requests, even though it will reduce the revenue of the U.S. government?'' (Cue footage of homeless children on overhead projector.)
``If the Congress doesn't make offsetting expenditure cuts, wouldn't you oppose making the tax cuts permanent?'' (PAYGO, Schmaygo. He must know cutting spending is a non-starter.)
``What evidence is there that the revenue base has expanded because of these tax cuts?'' (I'm skating on thin ice here. My pathetic staff can barely add, let alone solve algorithmic equations.)
``The new jobs being created are low-wage jobs. We're losing our good-paying jobs.'' (John Kerry didn't get a lot of mileage out of this one, but maybe I'll give it another whirl.)
Dummies' Guide
Social Security reform was the hot issue last week. Once again, there was no evidence our elected representatives did much to prepare.
``Does the $1.5 trillion in the Social Security trust fund include the amount that's invested in government-backed securities?'' (By the look on your face, maybe I should have read my briefing book.)
``Do you agree that Social Security is a `crisis?''' (I'm going to ask this question, and keep on asking, until I get a ``no.'')
The semi-annual monetary policy testimony has an aura of seriousness on the Senate side. Not that the questions are any less political or self-serving, but the members appear to have done their homework.
The House is a different matter. The members manifest such a fundamental lack of understanding of the subject matter that their real political agenda and shameless self-promotion are immediately apparent. The whole thing takes on a circus atmosphere.
Saint Alan
Greenspan displays the patience of a saint. He listens calmly to their lashings, including regular abuse from Vermont congressman Bernie Sanders, a Socialist, for whom Greenspan represents the evils of capitalism. The Fed chief endures endless repetitions of the same question, many of them stupid the first time, without losing his temper.
After listening to the entire hearing last week, in the Senate and in the House, from the committee's opening statements to Alan Greenspan's prepared text to the Q&A that followed, I realized the hearings have outlived their purpose.
As long as the Federal Reserve chairman is no longer required by law to report to Congress twice a year on monetary policy and the state of the economy -- dictated by the expired Full Employment and Balanced Growth Act of 1978 (aka the Humphrey- Hawkins Act) -- the Capitol Hill appearance should be canceled.
Death Be Not Proud
Sure, I'll miss what's always been the premiere event for the fixed-income market, complete with a fireworks display. But the original intent of the hearings -- to inform Congress, which has oversight responsibility for the Fed, about economic conditions and provide targets for growth and inflation -- has been distorted beyond recognition and has devolved into a political forum.
My advice to the Fed: Just post the report on the Web. That way, neither the Fed chairman nor the real audience (investors), will have to endure congressional grandstanding disguised as a Q&A.

To contact the writer of this column:
Caroline Baum in New York at cabaum@bloomberg.net.

Fed Deemed Rates Too Low To Ensure Stable Prices, February Minutes Show

2005-02-23T17:38:00.000-08:00

(Bloomberg) -- The Federal Reserve's Open Market Committee considered interest rates too low to ensure stable prices, according to minutes of the panel's February meeting.
``The real federal funds rate was generally seen as remaining below levels that might reasonably be associated with maintaining a stable inflation rate over the medium run,'' according minutes released today in Washington for the two-day meeting that concluded Feb. 2. ``The pace of policy moves at upcoming meetings however, would depend on incoming data.''
The FOMC raised the benchmark U.S. interest rate a quarter point to 2.5 percent at the meeting and restated a plan to make future increases at a ``measured'' pace. The rate increase was the sixth straight since June. The central bank is trying to steer the overnight bank-lending rate to a level that will keep the world's largest economy growing without speeding inflation.
``Participants thought the rate of core inflation likely would remain low and stable, assuming further removal of policy accommodation,'' the minutes said.
After the minutes were released, Treasury securities erased some of the gains made today after the Labor Department said consumer prices rose 0.1 percent in January. The inflation report eased some concern that surging commodities costs would spur inflation. The benchmark 10-year note rose 3/16 point, pushing the yield down 3 basis points to 4.26 percent at 2:31 p.m.
Still Accommodative
Jack Guynn, president of the Federal Reserve Bank of Atlanta, said in a speech today that he considers the fed funds rate to still be ``accommodative.''
``With an economic expansion that now seems to be well established, I believe the FOMC still has a ways to go in recalibrating monetary policy,'' Guynn said in the text of a speech to the Birmingham, Alabama, Rotary Club.
St. Louis Fed Bank President William Poole said this week in an interview with USA Today that the so-called neutral rate that neither speeds up nor slows the economy is probably about 3 percent or 4 percent, adjusted for inflation.
``What they're saying is, `Unless we see the economy show significant signs of slowing in the next few months, we are going to continue raising the fed funds rate a quarter percent in most if not all the meetings this year,''' said former Atlanta Fed bank president William Ford, chairman of the finance department at Middle Tennessee State University's Jones College of Business. Ford said he thinks the FOMC will stop raising rates between 3.5 percent or 4 percent.
Inflation Pressure
The minutes show FOMC members were concerned that the falling dollar and increases in unit labor costs could put pressure on prices to rise. Policy makers were also unsure about the level of unused labor and other resources in the economy.
``Participants noted considerable uncertainty about the sustainable rate of resource utilization and about structural productivity growth,'' the minutes read. ``One participant suggested that, given the range of uncertainty, output might already be at or close to potential.''
``While participants generally felt that the pace of underlying productivity growth remained robust, careful attention would need to be paid to developments regarding unit labor costs and profit margins,'' the minutes said.
The current round of rate increases is the longest since November 1988 to February 1989, when the rate peaked at 9.75 percent, the highest since Alan Greenspan became chairman.
Greenspan last week told Congress that the economy is growing ``at a reasonably good pace'' and that inflation and inflation expectations are ``well anchored.'' He said the fed funds rate remains ``fairly low.''
The minutes of the FOMC meeting showed that some members thought the record U.S. current account and budget deficits were a risk to future economic growth.
Inflation Targeting
The FOMC also discussed the potential benefits of moving to an inflation-targeting regime to help guide interest-rate policy. Governor Ben Bernanke and regional bank Presidents Gary Stern of Minneapolis, Janet Yellen of San Francisco and Anthony Santomero of Philadelphia back the idea.
Those who backed the idea thought it would help anchor inflation expectations, clarify committee deliberations and improve Fed communication. Those opposed said it may be inconsistent with the Fed's dual mandate from Congress to maintain stable prices and promote maximum sustainable employment.
The FOMC agreed to defer further discussion on the issue.
This is the second time the committee has released minutes of an FOMC meeting before the subsequent meeting. These minutes noted the market reaction on Jan. 4 when the Fed released minutes to the December policy meeting. However there was no mention of committee members' discussion of that reaction.

To contact the reporter on this story:
Alison Fitzgerald in Washington at afitzgerald2@bloomberg.net

Dollar Near One-Week Low; Demand For U.S. Assets Probably Fell In December

2005-02-14T18:27:00.000-08:00

(Bloomberg) -- The dollar traded near a one-week low versus the yen and the euro in Asia on speculation a government report today will show international investors cut their purchases of U.S. securities in December.
Investors bought a net $60 billion, down from a five-month high of $81 billion in November, the Treasury Department will say in its monthly report, according to the median forecast of five economists surveyed by Bloomberg News. A drop in demand for U.S. assets may rekindle concern the U.S. will struggle to attract enough overseas capital to offset a record current- account deficit and maintain the value of the dollar.
The figures may show ``the U.S. is facing a little trouble in funding the current-account deficit,'' said Sue Trinh, a foreign-exchange strategist at Bank of New Zealand Ltd. in Wellington. ``That could be potentially U.S. dollar negative.''
Against the yen, the dollar traded at 105.16 at 9:52 a.m. in Tokyo from 105.08 late yesterday in New York, according to EBS, an electronic foreign-exchange dealing system. The U.S. currency yesterday fell as far as 104.66, the lowest since Feb. 7. It was at $1.2969 per euro from $1.2977, after weakening as low as $1.2990 yesterday, the lowest since Feb. 4.
The dollar dropped 34 percent against the euro and fell 22 percent versus the yen over the three years to Dec. 31, before gaining this year, partly on concern about the deficit in the current account.
`A Trigger'
The gap was a record $164.7 billion in the third quarter. The U.S. needs to attract about $1.8 billion every day to fund the shortfall and maintain the dollar's value, according to Bloomberg calculations. The current account is a measure of trade, services, tourism and some investments.
The Treasury will release the monthly figures on foreign investment at 9 a.m. in Washington. The average daily move in the dollar against the euro on the day of the report was almost three quarters of a cent in 2004, based on Bloomberg calculations.
``Sooner or later, the dollar will resume its declining trend,'' said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan and a former senior dealer at the Bank of Japan's foreign-exchange division. The Treasury data ``may pull a trigger for it. The dollar looks vulnerable on its downside.''
JPMorgan forecasts the dollar will weaken to 96 yen and $1.37 per euro by March 31.
Losses in the dollar may be limited in advance of Federal Reserve Chairman Alan Greenspan's appearances before Congress. He is scheduled to present the Fed's semiannual forecasts for inflation and economic growth to Congress Feb. 16 and 17.
`Upbeat Assessment'
Greenspan may say expansion in the U.S. economy will pick up, suggesting the central bank will continue to raise interest rates, said Kenichiro Ikezawa at Daiwa SB Investments. The dollar is up 4.4 percent versus the euro and 2.5 percent against the yen this year.
``He'll most likely maintain his upbeat assessment of the economy,'' said Tokyo-based Ikezawa, who manages the equivalent of $1 billion. ``That's a signal U.S. rate advantages will further increase, boosting the appeal of the dollar.'' The U.S. currency may gain to $1.25 per euro and 107 yen in a month, he said.
The U.S. central bank on Feb. 2 lifted its overnight target lending rate between banks for the sixth time since June, to 2.5 percent. The European Central Bank has kept its benchmark at 2 percent since June 2003 and the Bank of Japan has kept rates near zero since 2001.

To contact the reporter on this story:
Taizo Hirose in Tokyo at Hirose2@bloomberg.net.

Greenspan Not Really Optimistic On Account Gap

2005-02-10T17:52:00.000-08:00

(Bloomberg) -- Federal Reserve Chairman Alan Greenspan, speaking in London last week, put the best face he could on the outlook for the burgeoning U.S. current account deficit.
Currency markets, perhaps misled by the seemingly hopeful tone of Greenspan's remarks, responded by bidding up the value of the dollar. They should have listened more closely to all his carefully worded caveats and conditional phrases.
Perhaps the Fed chairman was wary about triggering another sell-off of the dollar similar to that which followed his speech last November. His statements then were interpreted by some market participants as an effort to talk down the dollar to aid in reducing the current account deficit.
Meanwhile, at a conference at the San Francisco Federal Reserve Bank the same day as his London speech, numerous economists predicted that the current account deficit is likely to worsen until foreign investors become unwilling to finance it.
For example, economists Nouriel Roubini of the Stern School of Business at New York University and Brad Setser of University College, Oxford, argued, ``The U.S. is currently financing itself by selling low-yielding dollar debt which offers foreign investors little protection against a future fall in the dollar.
``Yet the United States' large trade deficit and rapidly rising external debt to GDP ratio imply that a large future fall in the dollar will be needed to reduce the U.S. trade deficit to more sustainable levels,'' Roubini and Setser said. Eventually the prospect of such losses will cause investors to shy away from dollar assets, they argued.
Trade Deficit
In his Feb. 4 speech, Greenspan ticked off several major reasons why the U.S trade deficit isn't likely to shrink anytime soon. His suggestions regarding why the trade and current account balances might improve were all highly problematic.
The first negative, a very big one, was the fact that U.S. imports are so much greater than exports that ``exports must grow half again as quickly as imports just to keep the trade deficit from widening -- a benchmark that has yet to be met,'' Greenspan said.
Imports and Exports
In the first 11 months of last year, imports totaled $1.6 trillion, 65 percent more than exports of $1.04 trillion. Exports rose 12 percent, compared with the same period in 2003, and the trade deficit would have stabilized if the increase in imports could have been held to only 8 percent. In reality, imports jumped by 16 percent.
A second negative he cited is the U.S. tendency to import more than its trading partners do when their respective growth rates are the same. On top of that, of course, is the fact that the U.S. economy lately has been growing much faster than its industrial nation partners, he said.
A third negative from Greenspan was that the surge in world oil prices has also helped deepen the trade deficit.
So what seemed upbeat in the speech?
Well, the selling prices of European exports to this country have gone up hardly at all, compared with the big rise in the value of the euro against the dollar. That's because European exporters have been willing to see their profit margins shrink rather than raise their prices and lose market share in the U.S., though that may be coming to an end.
`May Be'
``We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins,'' the Fed chairman said.
Note the ``may be.'' And note the further cautionary sentence, ``Increases in import prices lower the quantity of imports but leave the resulting value of imports uncertain.'' That is, even if the real value of imports were to fall, their nominal values might not. If the nominal trade deficit did not fall, the need for foreign financing would not either.
In the case of Europe, which was the focus of this part of Greenspan's speech, his point could be moot because profit margins of exports may be expanding again. Late yesterday, the value of the euro had dropped to $1.2767, about 6.4 percent from its peak of $1.3537 on Dec. 30. The Fed's raising its target for the overnight rate by a quarter-percentage point to 2.5 percent last week also lent support to the dollar, of course.
Budget Deficit
As positive developments, Greenspan also mentioned the possibility that the federal budget deficit may be about to decline and that household saving may turn up again as the huge wave of home mortgage refinancing begins to ebb.
Actually, any noticeable reduction in the federal budget deficit appears to be a remote possibility for either fiscal 2005, which ends Sept. 30, or fiscal 2006, given the negative reaction in Congress to many of the spending cuts proposed this week by President George W. Bush in his 2006 budget.
Certainly equity extraction by homeowners when they have refinanced mortgages to take advantage of lower interest rates has given households more cash to spend. And since that cash, the result of capital gains or past payments to mortgage principal rather than part of current income, isn't part of current income, the spending reduces saving as a share of disposable personal income.
The implication of Greenspan's analysis on this point is that such spending will fall as refinancing ebbs. He doesn't venture to suggest by how much.
Predictions Difficult
The whole speech stresses the large number of uncertainties in any analysis regarding trade and current account deficits.
``The interaction of a wide range of economic forces, which adjust at national borders to create what we call the current account balance, has proved difficult to predict with any precision, primarily because of the difficulty of forecasting exchange rates,'' he said. ``These same forces have lessened our ability to anticipate the consequences of a buildup of either a surplus or a deficit.''
``Numerous issues that have arisen with respect to the adjustment of the U.S. current account remain unresolved,'' Greenspan concluded. ``One is the effect of Asian official purchases of dollars in support of their currencies. Such intervention may be supporting the dollar and U.S. Treasury bond prices somewhat, but the effect is difficult to pin down.''
Pin it down or not, Chinese authorities have shown no willingness to stop interventions to keep their currency tightly pegged to the dollar.
Over the weekend, Zhou Xiaochuan, governor of the People's Bank of China, said in Hong Kong, ``We are doing the preparation work to reform our currency regime. Of course the preparation work is subject to evaluation and the right time.''
That ``right time'' isn't likely to come this year, and maybe not in 2006 either. In any event, it's not going to help reduce the U.S. trade or current account deficit anytime soon.

To contact the writer of this column:
John M. Berry in Washington at jberry5@bloomberg.net.

Dollar May Drop; U.S. Trade Deficit Was Probably Second-Highest On Record

2005-02-09T19:10:00.000-08:00

(Bloomberg) -- The dollar may fall against the euro in Asia, extending its drop from a three-month high reached on Feb. 7, on expectations a government report will show the U.S. trade gap was the second-highest on record in December.
The U.S. currency may also decline from the highest since Dec. 10 versus the yen as the figures today underscore concern about funding the twin U.S. deficits. The dollar rallied earlier this week after Federal Reserve Chairman Alan Greenspan said on Feb. 4 the trade and budget shortfalls may shrink.
``Before we confirm the deficit situation is actually on the mend, it will be difficult to buy more dollars,'' said Tetsu Aikawa, a currency sales manager in Tokyo at UFJ Bank Ltd., a unit of Japan's fourth-largest lender. ``The dollar faces the burden of proof after a nice rally.''
Against the euro, the dollar traded at $1.2812 at 11:36 a.m. in Tokyo from $1.2805 late yesterday in New York, according to electronic currency-trading system EBS. It has fallen from $1.2732 on Feb. 7, the strongest since Nov. 3. The U.S. currency was also at 105.55 yen from 105.63, after rallying to 105.98 yesterday.
The dollar may weaken to $1.2850 per euro and 105.20 yen before today's report at 8:30 a.m. Washington time, Aikawa said.
The U.S. trade gap was probably $57 billion in December, according to the median estimate of 70 economists surveyed by Bloomberg News. The projected deficit in goods and services would be the second-highest after November's $60.3 billion.
`Yen's Rescue'
The November figure may be adjusted lower because U.S. exports probably increased after Canada said last month it underreported November imports from the U.S. by C$1.31 billion ($1.06 billion), economists said.
Demand for the yen may wane on speculation a Japanese government report at 2 p.m. local time will show machinery orders fell for a third month in four in December.
Orders probably dropped 10 percent from November, seasonally adjusted, according to the median forecast of 33 economists surveyed by Bloomberg. Japan may say next week the world's second- largest economy barely grew in the fourth quarter, economists said.
``I see little reason to buy the yen given the shape of the Japanese economy,'' said Shimpei Uike, an overseas debt investor at Asahi Life Asset Management, which manages the equivalent of $10.5 billion. ``Japanese data will fail to come to the yen's rescue.'' The yen may drop to 106 per dollar this week, he said.
Japan's economy expanded at a 0.1 percent annual pace in the fourth quarter, the same as the previous three months, according to the median forecast of 27 economists surveyed by Bloomberg News before the Feb. 16 release of the figures.
U.S. Financing
Greenspan said on Feb. 4 in London that ``market pressures'' may help ``decrease the U.S. current-account deficit and its attendant financing requirements.''
Fed Bank of New York President Timothy Geithner also called for a reduction in the budget deficit to a more ``sustainable'' level, after President George W. Bush proposed a ``lean'' budget to help reduce the shortfall.
``We now face a substantial and unsustainable gap between our fiscal commitments and our resources,'' Geithner said, speaking late yesterday at the Economic Club of Washington. ``Reducing this gap to a more sustainable level is vital.''
Using Bush's proposal, the budget deficit for fiscal 2006 beginning Oct. 1 would fall 8.6 percent to $390 billion, excluding Iraq costs, the White House said on Feb. 7. That compares with a record shortfall of $427 billion projected for this year.
`Critical' for Dollar
The dollar is up 5.8 percent against the euro and 2.9 percent versus the yen this year, after falling 34 percent and 22 percent respectively from 2001-2004.
The dollar may resume its weakening unless the shortfall in the current account, the broadest measure of trade, narrows by a ``significant'' amount, according to Goldman Sachs Group Inc., the third-biggest securities firm by capital.
The U.S. must attract about $1.8 billion of investment a day from overseas to fill the current-account gap and maintain the value of the dollar, based on Bloomberg calculations. The gap widened to a record $164.7 billion in the third quarter.
``The trade data is critical for the dollar's fortunes, and it's fair to say that the risks are skewed against it,'' said Sabrina Jacobs, a currency strategist in Singapore at Dresdner Kleinwort Wasserstein. ``A weak number has potentially a more negative effect than a strong number has a positive one. After rising so much, we may be coming to the end of the dollar's rally.'' The dollar may fall to $1.2850 today, she said.

To contact the reporter on this story:
Taizo Hirose in Tokyo at Hirose2@bloomberg.net.

BOE's King Wants Boredom; So Does China's Zhou?

2005-02-07T19:09:00.000-08:00

(Bloomberg) -- Bank of England Governor Mervyn King, a self-professed practitioner of ``boring'' monetary policy, now wants the world's key central banks to make a combined attempt at global dullness for the sake of stable currencies.
``The aim of central banks to make monetary policy less exciting and more boring needs to be complemented by a collective effort to bring boredom to the international monetary stage,'' King said in a speech preceding a meeting of policy makers from the Group of Seven industrialized nations in London last week.
By agreeing that the ``recent melodrama'' of volatile currencies is a risk to global monetary stability, Europe, Asia and the U.S. may be able to find a ``cooperative outcome that's an improvement for all, not just for some'', King said.
Stable currencies will provide a setting for world trade to prosper, though achieving it would require the support of the Chinese, whose currency's decade-old peg at 8.3 to the dollar is seen by many analysts as the main hurdle to an orderly adjustment of global current-account imbalances and the key reason why flexible European currencies have had to bear almost the entire burden of the dollar's decline in the past three years.
The King plan rests on the viability of ``a common analysis'' of the problem by the key players, including China. That, at the moment, looks like an elusive goal because People's Bank of China Governor Zhou Xiaochuan, while himself aspiring for a certain tediousness in the global exchange rate regime, appears to have a very different opinion about what level of monotony will be ideal for his country.
Optimal `Boredom'
On the surface, it does look like that Zhou's optimal state of ``boredom'' is the bargain that he obtains at present. The current arrangement, in which the Chinese central bank finances a seemingly insatiable U.S. appetite for cheap China-made goods, helps the Asian country's export-led growth model.
Any other dispensation will demand some flexibility in China's currency policy, and that may further stress the country's weak banking system. ``Now is not the time'' to change China's policy of pegging the yuan to the dollar, Zhou told Bloomberg News in London, where he was a guest of the G-7.
If now isn't the right time, when is? ``We commit to the exchange rate at a reasonably balanced and stable level, and to work on achieving full convertibility of the yuan,'' Zhou told reporters. ``We are working hard in this direction, but it may take years to achieve the target.''
Failure of Diplomacy
China has already demonstrated that it won't kowtow to diplomatic arm-twisting. U.S. Treasury Secretary John Snow's incessant preaching of the gospel of flexible currencies has ceased to make headlines. Even the language adopted by the G-7 in Boca Raton, Florida a year ago -- ``more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility'' -- is no longer a big deal in the non- deliverable yuan forwards market.
All that China now needs to make the current situation thoroughly boring to their advantage is to make sure that speculators who are pouring money into China betting on a revaluation get tired of the game and go home. That's proving to be a tough challenge, as is evident from the surge last year in China's foreign exchange reserves. Whatever may be the public stance of Chinese policy makers, privately they must know that speculators' expectation for a stronger yuan is hardly irrational.
Ambitious But Credible
By giving up the dollar peg, Chinese policy makers will be able to combat over-investment, stamp out speculative asset bubbles and prevent ``real appreciation via socially dangerous higher inflation,'' as Nouriel Roubini, an economist at New York University's Stern School of Business, puts it.
What makes the King plan the most ambitious as well as the most credible of all proposals to rebalance the global economy is that it provides for a referee by envisaging a larger role for the International Monetary Fund.
``I'm not convinced that the future of the Fund is primarily as an occasional lender of last resort for middle-income countries suffering financial crises,'' King said.
Without an umpire, there may be perverse incentives for any of the players to end the game in non-optimal ways. ``Ideally, the U.S. would want to fool China twice,'' says Roubini, ``have them appreciate once now and take a big capital loss and then keep on accumulating more reserves and get more losses down the line as lack of U.S. adjustment means further need for foreign accumulation of, by now junk, U.S. treasury bonds.''
An agreement that's fair, equitable and leads to sustainable boredom in the currency markets is the best resolution of the imbalance anyone can hope for. And that includes Zhou.

To contact the writer of this column:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net.

Are Commodity Prices Headed For Switch To Euros?

2005-02-06T00:21:00.000-08:00

(Bloomberg) -- Oil, metals and even aircraft may one day be priced in euros, not dollars. Dream on?
As the dollar stays weak on foreign-exchange markets, with little sign of a sustained recovery, there is speculation that at some point commodity prices will drop the U.S. currency. If that happens, it would herald a wider realignment of the global financial system -- and would indicate that the dollar's reign as the world's reserve currency was coming to a close.
It is too early to conclude the dollar is finished. Yet the challenge is real and growing. The world may well be set for a period during which the dollar and the euro compete for reserve status -- hardly a promising situation for global stability.
The dollar is being shunned for obvious reasons. The trade deficit grew to a record $609 billion last year, and George W. Bush's administration expects the budget shortfall to reach a record $427 billion in the year ending in September. The New York Board of Trade's Dollar Index, which measures the dollar against a basket of six currencies, has dropped 18 percent since the end of 2001.
There are three key responses to the changing status of the dollar in the global financial system. Central banks may shift their reserves out of dollars. The Asian currencies could end their pegs to the U.S. currency. And lastly, we could witness a breakdown in the pricing of commodities in dollars.
Central banks are already slowly raising the proportion of their reserves in euros, and reducing their dependency on dollars. That is likely to continue. Yet it will be a slow process -- not least because no central bank will want to dump dollars into an already fragile market.
Asian Pegs
Asian nations may or may not end their dollar pegs. Politics as much as economics will play the main role in those decisions.
That leaves commodity prices. If the dollar's unique status is indeed coming to an end, that is where we will see it first.
``It is crucial to the dollar's dominant role as a reserve currency that dollar pricing of oil should continue,'' noted Stephen Lewis, economist at Monument Securities Ltd. in London, in a recent analysis of the currency.
Is there a realistic chance of oil or any other major commodity switching its pricing into euros?
Last month, Hamad al-Sayari, the governor of the Saudi Arabian Monetary Agency, caused a ripple in the market with comments that he thought the role of euros in central-bank reserves would increase in the future, according to the Jeddah, Saudi Arabia-based English-language daily Arab News. More pertinently, he said it didn't matter much whether oil was priced in dollars or euros.
A Bookkeeping Matter
It might not matter to him, yet it does to everyone else.
Take a look at the issue from the perspective of an oil producer -- or a producer of any other major commodity.
At one level, which currency you price your products in is largely a matter of bookkeeping. The Saudis can price their oil in dollars, or the South Africans their gold, or the French all those new Airbus SAS aircraft, without it making much difference to their actual income. As soon as the dollars come in, they can sell them for whatever currency they want. If you are uncertain about the future price that your product is likely to command, then you can buy and sell currencies in the futures market.
Just because you price a product in a currency, you aren't compelled to hold that currency.
In the medium term it does matter. The producers of any product are looking for high and stable prices. If your product is priced in a permanently weak currency, then you have to keep raising the prices. That is far from satisfactory. At some point, the temptation to switch to a stronger currency will become irresistible.
Who Will Break Ranks?
Next, commodity pricing matters to the currency markets. The fact that commodities are priced in dollars is one of the key sources of that currency's strength. Everyone buying big-ticket items such as oil, metals or aircraft must buy dollars for their purchases. That is a major source of demand for the currency.
Who will be the first to break ranks? Right now, that is no more than speculation. Russian oil must be one candidate -- most of it is sold in Europe anyway. Airbus aircraft must be another candidate -- the bulk of its costs are in euros, and it has the luxury of now being the dominant producer in its industry.
Nobody should hold their breath. ``Maybe one day,'' says Airbus spokeswoman Barbara Kracht in an e-mailed response to questions. ``The point is that it is the customers who decide, and for the time being they are asking for quotations in dollars.''
Decline or Rout?
True enough. You need to hold a very strong market position to impose a new currency on your industry.
Much depends on the future path of the dollar. It has been weak for about three years now. So far, producers have responded with higher prices. Two more years of dollar weakness, and they may well decide to take more radical action.
It will only take one commodity producer to break ranks, and the move will be widely imitated. At that point, the dollar's decline could well turn into a rout. Commodity pricing is now the weakest line of defense for the dollar.

To contact the writer of this column:
Matthew Lynn in London at matthewlynn@bloomberg.net.

The Fed's Trip To Neutrality Could Use A Roadmap

2005-02-06T00:16:00.000-08:00

(Bloomberg) -- We're not sure what the exact destination is, or how we'll recognize it when we get there. We don't know how long it will take, or how fast we'll have to go. All we know is, we're on the right road.
So sayeth the Federal Reserve on Wednesday, when it raised the overnight benchmark rate by a quarter point to 2.5 percent and said policy was still ``accommodative.''
Policy has been ``accommodative'' ever since the Fed started making it less so in June. The central bank has raised the federal funds rate from 1 percent to 2.5 percent in six equal steps.
Economists assess the stance of monetary policy by calculating the real interest rate, or the real cost of borrowing adjusted for inflation. Depending on the choice of inflation measure, the real funds rate is either still negative (the CPI) or slightly positive (the core PCE price index).
For the record, inflation is running at an annual rate of either: 3.3 percent (CPI); 2.9 percent (final sales to domestic purchasers' price index); 2.2 percent (core CPI); 2.4 percent (PCE price index); 1.7 percent (market-based PCE price index); or 1.5 percent (core PCE price index).
It's no surprise that the Fed's preferred inflation measure is the one that portrays inflation in the best possible light.
The argument for choosing any of the PCE measures allowing for substitution (cheaper apples for more expensive pears) is that they capture actual spending patterns. In other words, they're consumer cost-of-living indexes.
Specious Logic
If you accept that logic, what's the justification for excluding food and energy, which are considered non-discretionary items? Ever since Doug Lee, president of Economics from Washington in Potomac, Maryland, pointed out to me that food prices haven't declined in at least 40 years, the Fed's choice of the core PCE price index started to seem like a ruse. It doesn't measure inflation, and it doesn't represent the true cost of living.
If you want to measure the cost of living, you can't exclude food and energy. If you want to measure the underlying trend inflation, which is defined as a general rise in the price level, it makes sense to eliminate the volatile monthly swings in food and energy.
And forget the so-called market-based PCE price index. As long as owners' equivalent rents are imputed, not measured, market-based is a misnomer.
Spring Forward
But back to our main story line.
Fed officials are searching for neutrality, an elusive concept if there ever was one. In theory, the neutral rate is a setting that would keep the economy growing at its non- inflationary potential forever. Not too much gas, not too much braking action. It's the equivalent of cruise control.
Given the lags with which policy operates -- Fed officials usually say it's nine to 18 months -- how will the Fed know when it's entered the Promised Land? Inflation is a lagging indicator, and employment growth has been a poor proxy for the economy's strength. Most statistics are reported with a lag and subject to significant revision.
How about forward-looking indicators? To listen to Fed officials tell it, the money supply is irrelevant, sensitive materials prices aren't a big enough part of finished goods prices to matter, inflation expectations as implied by the spread between nominal and inflation-indexed Treasuries have a structural bias that overstates inflation, and the dollar is the Treasury's concern.
Proprietary Indicators
That leaves what as a guidepost?
Probably a combination of Chairman Alan Greenspan's gut feel for the economy, outside intelligence from his ``sources'' (the CEOs of America's biggest corporations), and a constant stream of published and unpublished data to take the economy's current pulse.
As to anticipating the effects of today's actions on tomorrow's economy, don't count on it, says Ram Bhagavatula, chief economist for North American at the Royal Bank of Scotland in New York.
``What happens today drives policy decisions,'' Bhagavatula says. ``If you put Fed officials in a windowless room, they'll acknowledge the lags. Otherwise, they look out the window (to decide what to do) at each meeting.''
Given policy lags, the problem with searching for neutrality with that kind of M.O. is ``that it won't be obvious until a year after they've passed it,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
Fast Lane
Shepherdson expects the Fed to proceed with caution -- 25 basis-point moves -- until the funds rate gets to 3.5 to 4 percent. That ``stopping point'' is based purely on ``long-run averages of real rates and growth,'' he says.
With trend productivity growth shifting up in the late 1990s, ``I'd expect the neutral growth rate to be higher,'' Shepherdson says.
What the Fed does with the short rate affects a whole host of financial variables. Even though the relationships are inexact, ``financial variables lead GDP,'' says Henry Willmore, chief U.S. economist at Barclays Capital Group.
Things like the slope of the yield curve, stock and housing prices, the dollar, credit spreads: ``All of these variables became more stimulative last year'' as the Fed raised short-term rates, Willmore says.
The yield on the 10-year Treasury note ended 2004 at 4.22 percent, about where it began. Bond yields and other financial variables ``can diverge from the funds rate for a while, but eventually they come into line,'' Willmore says. ``When they turn, it may not be gradual. The actual tightening of financial conditions can be abrupt,'' as it was when the stock market bubble burst in 2000.
At that point, the Fed might have to get in the fast lane on the road to neutrality.

To contact the writer of this column:
Caroline Baum in New York at cabaum@bloomberg.net.

Forget The Euro. 2005 Is The Year Of The Yen

2005-02-06T00:12:00.000-08:00

(Bloomberg) -- In currency circles, 2004 was the year of the euro. Europe's grand experiment with monetary integration silenced the skeptics once and for all as its single currency gained 7.61 percent versus the dollar.
Five years ago, the euro's weakness had Europeans biting their nails. Today, it's the euro's strength that's inspiring angst. And for the first time in decades, traders buzz about whether they now have a credible alternative to the world's reserve currency.
Yet if 2004 was the euro's year, the current one may belong to the yen.
Here in Tokyo, tensions are rising over the yen's brawn. While Japan hasn't sold yen since March 2004, traders who dismiss the risk may regret it. Even so, it's hard to see how Japan can stop the yen from building on its 4.48 percent rise.
Whether Japan likes it or not, its currency may strengthen to 90 yen versus the dollar or even more from today's 104 level. Here are three reasons why.
First, if investors are to believe that Japan's 15-year malaise is over, the yen should be rising. It's only natural for investors to try to ride Japan's recovery by putting capital into Nikkei 225 Stock Average shares, which rose 7.6 percent in 2004.
Buy Dollars?
Second, the determination to run a trade surplus will continue pushing up the yen. Exporting more than it imports has always been Japan's security blanket -- a sign its economic model still works. Yet more money flowing into the economy than out on a consistent basis increases pressure on the currency to rise.
Third, record U.S. current account and budget deficits make the dollar increasingly vulnerable. The trade deficit swelled to a record $609 billion last year, and the White House expects the budget shortfall to reach an all-time high of $427 billion in the year ending in September.
Of course, the opposite could be true. ``It sounds like time to buy the dollar,'' says Ken Courtis, Goldman Sachs Group Inc.'s vice chairman in Asia. Why? ``The best time to buy is when there are only sellers.''
Yet even Federal Reserve Chairman Alan Greenspan, not a man known for criticizing the Bush administration, has grown antsy. On Nov. 19, his comments on the current account gap pushed the dollar down 1 percent against the yen.
Devaluing the Dollar
Greenspan's concerns that ``international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit and rendering it increasingly less tenable'' raised eyebrows the world over.
The U.S. Treasury has yet to scrap its strong-dollar policy; it doesn't want to trigger a crash or appear to pursue a beggar- thy-neighbor policy. Yet here in Asia, Treasury Secretary John Snow's campaign to force countries to let their currencies trade freely is often seen as a veiled attempt to devalue the dollar.
Efforts to strong-arm China into letting the yuan rise have become particularly ridiculous. Case in point: Legislation is being introduced in the U.S. Senate threatening a 27.5 percent tariff on exports to the U.S. if China doesn't ease controls on its currency within six months.
U.S. Farm Subsidies
China should call the U.S.'s bluff here. It would be a real scream to see officials in Beijing say to the U.S.: In the spirit of fair trade, sure, we will let the yuan the rise -- just as soon as you scrap the massive farm subsidies keeping so many developing-world people in poverty.
A fragile financial system gives China a good argument for not altering its currency policy -- one Japan can't make. In fact, a stronger yen is no longer the problem it once was for the world's second-biggest economy.
For one thing, Japanese deflation since 1998 means that the inflation-adjusted dollar/yen exchange rate has depreciated, says Ashraf Laidi, New York-based chief currency strategist at MG Financial Group. He argues that in today's terms, a yen at 100 to the dollar is nearly equivalent to 110 about seven years ago.
For another, there's the China factor. Considering the surge in Japanese foreign direct investment into China's manufacturing sector, companies here have grown increasingly hedged against a rising yen. Rising Chinese demand means Japan is growing more dependent on trade with its own continent, and less on the U.S.
A rising yen also is a sign of confidence that attracts more foreign capital, boosting stocks and holding down bond yields. Letting exchange rates rise puts more pressure on governments to implement reforms to increase domestic growth and on executives to innovate.
Getting that point across here in mercantilist Japan is easier said than done, and renewed efforts to weaken the yen can't be ruled out. Not that it will do much good in 2005, the year of the yen.

To contact the writer of this column:
William Pesek Jr. can be contacted through the Tokyo newsroom at
wpesek@bloomberg.net.

Greenspan Says U.S. Twin Deficits May Shrink

2005-02-06T00:06:00.000-08:00

(Bloomberg) -- The dollar's decline and fiscal restraint by the U.S. government may soon begin to reduce the U.S. current account deficit, which stood at a record in the third quarter, Federal Reserve Chairman Alan Greenspan said.
``We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins,'' Greenspan told the Advancing Enterprise 2005 conference in London today.
``Besides market pressures, which appear poised to stabilize and over the longer run possibly to decrease the U.S. current account deficit and its attendant financing requirements, some forces in the domestic U.S. economy seem about to head in the same direction,'' he said.
One of those forces is increased pressure to cut the U.S. federal budget deficit, which would lower pressure to borrow from abroad, he said. ``The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume.''
Greenspan's comments suggest the dollar's 16 percent drop since February 2002 against a basket of currencies from its 30 largest trading partners is beginning to have an effect on the U.S. current account, the widest measure of trade in goods, services and financial transfers.
Market Reaction
The current account deficit widened another $17.5 billion to a record $164.7 billion in the third quarter of last year from $147.16 billion in the first quarter.
The dollar rose after Greenspan's speech, gaining to $1.2944 per euro at 9:25 a.m. in New York, from as low as $1.3045 earlier. The U.S. currency was also at 103.79 yen, from 104.
``From early 2002 to early 2004, the dollar's exchange rate against the euro and sterling, on average, declined about 30 percent, yet dollar prices of imported manufactured goods from the European Union rose only 9 percent, slight more than dollar prices of U.S. manufactured goods during the same two years,'' Greenspan, 78, said.
That willingness of exporters to the U.S. to accept lower margins to preserve market share, along with strong American consumer spending financed in part by mortgage debt and faster growth in the U.S. than its trading partners ``offset'' the effects of the dollar's decline.
The squeeze on profit margins ``absorbed'' about three- quarters of the dollar's decline relative to the euro and the British pound, he said.
Changing Outlook
At the same time, Americans financed greater spending on imports in part by refinancing mortgages or selling homes to spend the equity. ``Interestingly, the change in U.S. home mortgage debt over the past half-century correlates significantly with our current account deficit,'' he said. Consumers in the countries of U.S. trading partners don't readily available mortgage financing ``to finance consumption expenditures,'' he added.
Those forces leading the U.S. current account deficit to expand are changing, he suggested. While foreign companies may have hedged their exposure to the falling dollar, many of those contracts likely will expire, he said. And now, although slowly, ``the lower dollar has undoubtedly boosted the competitiveness of U.S. exports and the profitability of U.S. exporters,'' Greenspan said.
``Given the dollar's depreciation since 2002, U.S. exporters' profit margins appear to be increasing, which bodes well for future U.S. exports and the adjustment process.''
Asian Dollar Buying
Last year, Greenspan also called on reduction in federal spending as a way of slowing demand and growth in the trade deficit. He hasn't called for increases in taxes, which would also lower demand.
Asian governments have been buying dollars to support their own currencies, Greenspan said. ``Such intervention may be supporting the dollar and U.S. Treasury bond prices somewhat, but the effect is difficult to pin down.''
At the same conference today, Bank of England Governor Mervyn King suggested the mounting U.S. current account deficit and hoarding of dollar assets by Asian central banks might threaten the stability of the world economy.
King urged members of the Group of Seven industrial nations to agree ``on the nature of the risk'' and collaborate with China and India to rebalance currency reserves. He called on the International Monetary Fund to propose a series of changes. Greenspan is in London for a meeting of G-7 finance ministers and central bankers.
``There is likely to be a limit to the amount of debt that one country can issue as a result of persistent deficits before investors start to worry about its ability or willingness to repay,'' King said in his speech. Asia's accumulation of dollar reserves ``contributes to the potential instability of the international monetary system.''

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net

Dollar Rises For Third Week: Greenspan Says Deficit May Narrow

2005-02-05T23:53:00.000-08:00

(Bloomberg) -- The dollar rose for the third straight week against the euro after Federal Reserve raised its interest- rate target and central bank Chairman Alan Greenspan said the record U.S. current-account deficit may narrow.
Greenspan's remarks spurred traders to buy back the dollar yesterday after the U.S. currency slumped following a government report that showed job creation fell short of forecasts. On Nov. 19, he warned that a widening current-account gap may cause foreigners to slow investment in the U.S.
Greenspan ``eliminated most of the items he mentioned in the last speech, as far as the risks'' to the currency are concerned, said Jason Daw, a currency strategist in New York at Merrill Lynch & Co., the world's largest securities firm. ``He chose to focus on the possibility of improvement. In that case, it's dollar-bullish.''
Against the euro, the dollar gained 1.3 percent this week to $1.2867, near the strongest since Nov. 11, at 5 p.m. in New York, according to electronic foreign exchange trading system EBS. It fell as low as $1.3045 after the jobs report yesterday. The U.S. currency also appreciated 0.8 percent versus the yen to 104.07, the third straight weekly advance.
The dollar rose against the euro on Feb. 2 after the Fed boosted its benchmark rate a quarter percentage point to 2.5 percent, the sixth increase since June. The Fed's target rate now exceeds the European Central Bank's rate by a half a percentage point, the most since March 2001.
Convergence of Forces
``Besides market pressures, which appear poised to stabilize and over the longer run possibly to decrease the U.S. current- account deficit and its attendant financing requirements, some forces in the domestic U.S. economy seem about to head in the same direction,'' Greenspan said at a conference yesterday in London.
The Fed chairman is in the U.K. to attend the meeting of finance ministers and central bankers from the Group of Seven industrialized countries.
The G-7 is scheduled to release a joint statement today in which they will reiterate a call for exchange rates to be flexible and avoid ``excess volatility,'' government officials said on condition they not be named.
Greenspan helped send the dollar down 1 percent against the yen and 0.5 percent against the euro on Nov. 19, when he said ``given the size of the U.S. current-account deficit, a diminished appetite for adding to dollar balances must occur at some point.'' Greenspan made his comments at the European Banking Congress in Frankfurt.
The deficit in the U.S. current account, the broadest measure of trade, was a record $164.7 billion in the third quarter. The gap means the U.S. must attract about $1.8 billion of foreign funds every day to offset the gap and maintain the dollar's value, according to Bloomberg calculations. The dollar fell 7.1 percent against the euro and 4.3 percent versus the yen last year.
Lowered Forecasts
Six of the 10 biggest currency-trading banks lowered their forecasts for the dollar within 10 days of Greenspan's Nov. 19 speech. UBS AG, Deutsche Bank AG, JPMorgan Chase & Co., Barclays Plc, Merrill Lynch and Credit Suisse First Boston all cut their projections.
The dollar fell against the euro yesterday and was down more than half a yen after the Labor Department said the U.S. created 146,000 jobs last month, fewer than the median forecast of 200,000 in a Bloomberg survey of economists.
Disappointing job growth may cause investors to trim expectations for the number of Fed interest-rate increases still ahead this year, diminishing the appeal of some dollar- denominated assets.
`Clearly Weaker'
``This was more than a little bit disappointing,'' said Daniel Tenengauzer, a currency strategist in New York at Lehman Brothers Holdings Inc. ``Everyone was revising their forecasts up toward 200,000 yesterday, so this is clearly weaker than expected.''
Asian governments have been buying dollars to weaken their own currencies, Greenspan said. ``Such intervention may be supporting the dollar and U.S. Treasury bond prices somewhat, but the effect is difficult to pin down,'' he said today.
U.S. Treasury Undersecretary John Taylor said in an interview yesterday the U.S. Treasury market ``is broad, deep and resilient'' and ``we see flows of funds coming into the United States.'' Taylor is leading the U.S. Treasury delegation to the G- 7 meeting because Secretary John Snow is ill.
The yen declined this week on speculation the G-7 statement will ignore French and German calls for Asian countries to strengthen their currencies. Policy makers are not likely to say anything new on currencies, Japanese Finance Minister Sadakazu Tanigaki told reporters in Tokyo yesterday.
Sharing the Burden
``Most people expect the statement to be very similar to last time,'' said Adrian Schmidt, head of currency strategy in London at Royal Bank of Scotland Group Plc. Since a meeting on Feb. 7, 2004, in Boca Raton, Florida, the G-7 has said in statements that ``excess volatility and disorderly movements in exchange rates are undesirable.''
European officials, including French Finance Minister Herve Gaymard and his German counterpart, Hans Eichel, called last month for Asian countries to let their currencies gain to help share the burden of the dollar's slide. The U.S. currency fell for a third straight year in 2004 against a basket of currencies.
Chinese central bank Governor Zhou Xiaochuan, said China isn't yet ready to abandon its currency peg. ``Now is not the time'' to change China's decade-old policy of tying the yuan to the dollar, Zhou said in an interview published yesterday in London. China has been invited to attend the G-7 meeting.
``We would like them to move as quickly as possible to a flexible exchange rate,'' Taylor, the Treasury undersecretary, told reporters in London.
``With respect to flexible exchange rates, this is an area where there will be some repetition'' in the G-7's statement, Taylor said in the separate interview.

To contact the reporters on this story:
Joshua Krongold in New York at at jkrongold2@bloomberg.net.

U.S. January Payrolls Probably Rose By 200,000: Survey Shows

2005-02-04T01:52:00.000-08:00

(Bloomberg) -- U.S. employers probably added 200,000 workers to their payrolls in January, the best start for hiring of any year since 1998, according to economists surveyed ahead of a government report today.
The forecast is based on the median estimate of 78 economists in a Bloomberg News survey and follows a December gain of 157,000. The unemployment rate probably held at 5.4 percent for a third month, based on the forecast.
The U.S. economy last year grew the most since 1999 as business investment and consumer spending accelerated. Gains in efficiency slowed as the year ended, suggesting companies were having trouble squeezing more efficiency from their current workforces. A growing economy is likely to promote hiring this year as confidence builds that the expansion is here to stay.
``Job growth remains healthy,'' said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. ``That bodes well for the economic outlook.''
The Labor Department is scheduled to release the jobs report at 8:30 a.m. in Washington. Forecasts ranged from gains of 100,000 to 250,000. The projected payrolls gain would be the biggest for any January since 268,000 jobs were created at the start of 1998.
More jobs are expected to bolster consumer sentiment in the U.S. The University of Michigan's final measure of confidence in January is forecast to rise to 96 from a preliminary reading of 95.8, according to the median forecast of economists surveyed ahead of the report due at about 9:45 a.m. Washington time.
The Labor Department will also issue revisions to its payroll figures going back five years with today's report.
Revisions
About 236,000 more jobs were created in the 12 months ended March 2004 than previously estimated, according to a preliminary forecast issued in October. The revisions reflect more complete data obtained from state unemployment insurance programs that were not available earlier.
Last year, similar revisions, plus the government's annual benchmark updates using changes in the way it adjusts the data for seasonal variations for the last five years added about 400,000 jobs to the payroll count.
The projected January increase and revisions may be enough to bring employment above the level seen in March 2001, when the world's largest economy drifted into an eight-month recession, marking the end of the longest employment slump since the Great Depression. The 46 months it took to regain all the jobs lost would surpass by more than a year the so-called ``jobless'' recovery after the 1990-1991 recession.
Hoover's Losses
The labor data may also keep George W. Bush from becoming the first president since Herbert Hoover to preside over a loss of jobs in his first term. To date, the country has lost 122,000 jobs since Bush took office in January 2001. Employment is down 241,000 from the high of 132.5 million reached two months later.
It took a decade to recover all the jobs lost during the Great Depression that started in 1929 when Hoover was President. Then, the government only kept yearly statistics.
The unemployment report comes two days after Federal Reserve policy makers raised their interest-rate target by a quarter percentage point to 2.5 percent. With their sixth increase since June, central bankers aim to prevent inflation from flaring as the economy expands and employment grows.
The economy is forecast to grow 3.6 percent this year after expanding 4.4 percent in 2004, based on the median estimate of economists surveyed by Bloomberg News from Jan. 3 to Jan. 7. During the past 30 years, the economy grew an average of about 3 percent a year. The unemployment rate may fall to 5.2 percent by the end of this year, according to the survey.
Challenger, Monster
Other gauges of employment are pointing to a pick up this month. Job cut announcements by U.S. employers in January fell 21 percent from the same month a year earlier, according to a survey released earlier this week by Challenger, Gray & Christmas Inc.
Monster Worldwide Inc.'s index of online help-wanted advertising rose to a record last month propelled by greater demand from management companies and retailers. The Monster Employment Index climbed to 120 from 113 in December, the New York-based operator of the biggest Internet job service said yesterday. In January 2004, the index stood at 93, 27 points lower.
``Employers are hiring more and more people,'' said Michael Sileck, chief financial officer at Monster Worldwide Inc., in a Feb. 2 interview. ``The momentum we saw finishing the year has certainly continued into the new year.
Consumer confidence rose in January to a six-month high, according to a report from the Conference Board, a New York-based research firm, last month. The percentage of consumers who saw jobs as hard to get decreased to the lowest in over two years.
Hiring is improving as productivity, or how much one worker can produce per hour, slows. Productivity rose at a 0.8 percent annual rate in the last three months of 2004, the slowest pace in almost four years, the Labor Department reported yesterday.

Bloomberg Survey
FIRM Unemploy Avg Hrly Nonfarm
Rate Earnings Payroll
-----------------------------------------------------
Number of replies 75 56 78
MEDIAN 5.4% 0.2% 200
AVERAGE 5.4% 0.2% 193
High Forecast 5.4% 0.3% 250
Low Forecast 5.3% 0.1% 100
Previous 5.4% 0.1% 157
-----------------------------------------------------
ABN Amro 5.3% n/a 175
4CAST Ltd. 5.4% 0.3% 210
Action Economics 5.4% 0.2% 200
AIG Global Invest. 5.4% 0.3% 240
AIB Global Treasury 5.4% 0.2% 180
Alleti Gestielle 5.4% n/a 170
Argus Research Corp. 5.4% 0.3% 130
BNP Paribas 5.4% 0.2% 170
B of A Capital 5.4% 0.2% 200
B of A Securities 5.4% 0.2% 200
Bantleon Bank AG 5.4% n/a 160
Barclays Capital 5.3% 0.3% 200
Bayerische Landesbank 5.4% 0.2% 180
Bear Stearns 5.4% 0.3% 225
Bank of Tokyo- Mitsub. 5.4% n/a 180
Briefing.com 5.4% 0.3% 215
CantorViewpoint 5.4% 0.3% 247
CFC Group 5.4% 0.2% 210
CIBC World Markets 5.4% 0.3% 175
Citigroup 5.3% 0.3% 225
ClearView Economics 5.3% 0.2% 225
Commerzbank 5.4% 0.2% 170
Commonwealth Bank n/a n/a 150
Credit Agricole 5.3% 0.3% 180
Credit Suisse FB 5.4% 0.2% 200
Daiwa Securities 5.4% n/a 170
Danske Bank 5.3% n/a 235
DekaBank 5.3% 0.2% 210
Desjardins Group 5.4% 0.1% 205
Deutsche Bank Research 5.3% 0.2% 160
Dresdner Kleinwort 5.4% 0.3% 132
FTN Financial 5.4% 0.2% 250
Fortis Bank NV 5.4% n/a 200
Global Insight 5.4% 0.2% 190
Griffin, Kubik, Stephens 5.4% 0.2% 205
High Frequency Economics 5.4% 0.2% 175
HBOS Treasury 5.4% 0.2% 200
HSBC Markets 5.4% 0.1% 240
HypoVereinsbank 5.4% 0.1% 200
I.D.E.A. n/a n/a 200
ING Financial Markets 5.4% 0.3% 210
Informa Global Markets 5.4% 0.2% 210
Insight Economics 5.4% 0.3% 225
IntesaBci 5.3% n/a 250
IXIS-CIB 5.3% 0.2% 175
J.P. Morgan 5.4% 0.2% 225
JPMorgan Fleming 5.4% 0.2% 185
Landesbank BW 5.4% n/a 170
Lehman Brothers 5.4% 0.2% 180
Maria Fiorini Ramirez 5.4% 0.2% 200
Merrill Lynch 5.4% 0.1% 175
Mizuho Securities 5.4% 0.2% 210
Morgan Stanley 5.4% 0.2% 200
National Bank Financial 5.4% 0.2% 230
National City Bank 5.3% 0.2% 167
Nesbitt Burns BMO 5.4% 0.2% 200
Nomura 5.4% 0.2% 185
Nord/LB 5.4% n/a 200
Nykredit n/a n/a 190
PNC Bank 5.4% 0.2% 170
Prebon Marshall 5.4% 0.2% 175
RBS Greenwich Capital 5.3% n/a 190
Rasbank 5.4% n/a n/a
Regions Financial 5.4% n/a 215
Ried, Thunberg & Co. 5.4% 0.3% 200
Siemens Financial 5.3% n/a 200
Scotiabank Group 5.4% n/a 200
Societe Generale 5.3% 0.3% 220
Stone & McCarthy 5.4% 0.2% 165
ThinkEquity Partners 5.4% 0.3% 150
Thomson/IFR 5.4% 0.3% 190
UBS Securities LLC 5.4% 0.3% 170
UFJ Bank 5.4% 0.2% 100
Ulpia 5.3% n/a 220
Unicredit Banca Mobilare 5.3% n/a 185
Wachovia n/a n/a 155
Wells Fargo 5.4% n/a 200
Westpac Banking 5.3% n/a 200
Wrightson 5.4% 0.3% 200

To contact the reporter on this story:
Joe Richter in Washington at Jrichter1@bloomberg.net.

China Won't Be Swayed On Yuan By U.S. Bill, Economist Says

2005-02-03T01:20:00.000-08:00

(Bloomberg) -- China won't be swayed into changing its currency policy by proposed U.S. legislation that would impose tariffs on the nation's exports unless the yuan is allowed to appreciate, a Chinese government economist said.
``This kind of bill comes up every year and will keep being raised in the future,'' said Zhu Baoliang, chief economist at the State Information Center, a research group under China's top economic planning agency. ``I don't think Chinese government officials will change their stance'' on the currency.
China's central bank declined to comment on the bill, sponsored by 12 U.S. senators, which would impose tariffs of 27.5 percent unless controls on the yuan are relaxed within six months. Chinese officials, under pressure from the U.S. and other countries to ease the yuan's decade-old peg to the dollar, will discuss the exchange rate at a Group of Seven nations meeting in London this weekend.
``I don't think the proposed legislation put forward by a few senators representing certain interest groups will find support from the majority of Congress and certainly not from the Bush administration,'' said Jun Ma, an economist at Deutsche Bank AG in Hong Kong. ``China will retaliate if trade sanctions are imposed.''
U.S. lawmakers, manufacturers and unions say the yuan's fixed exchange rate artificially depresses the currency, holding down the value of Chinese exports and stoking U.S. job losses. The U.S. trade deficit with China reached a record $148 billion in the first 11 months of last year.
``We have yet to hear this information, and on various voices raised recently from the U.S putting pressure on China's currency issue, we will not comment,'' Bai Li, spokesman for the People's Bank of China, said in a telephone interview in Beijing.
Stable Policy
The yuan's value has been fixed at 8.277 to the dollar since 1995. China's government has said it plans to move to a more flexible currency eventually, without giving a timetable. China wants a ``stable'' exchange rate, Vice Premier Huang Ju and deputy central bank governor Li Ruogu said Jan. 28 in Davos, Switzerland.
``China will be very careful choosing the right time if there will be any change on the yuan,'' said the State Information Center's Zhu. ``The government will mainly consider the impact on its domestic economy, especially the fluctuation a revaluation could cause to its fragile financial system.''
The Chinese government has said it needs to shore up the country's banking system, burdened with more than $500 billion of bad loans, before allowing the currency to fluctuate.
The bill to be introduced in the U.S. senate tomorrow is sponsored by Senator Lindsey Graham, a South Carolina Republican, Charles Schumer, a New York Democrat, and 10 other senators. Schumer, Graham and four other senators sponsored a similar bill last year.
Yuan Forwards
China's Finance Minister Jin Renqing will hold a ``deep dialogue'' on issues including the yuan with U.K. counterpart Gordon Brown at this weekend's G-7 meeting, Zhu Guangyao, head of the Chinese finance ministry's international department, said last week.
China's currency would rise to 7.887 in a year if freely traded, forward contracts showed at 1:02 p.m. in Hong Kong, unchanged from late yesterday in Asia. The contracts allow investors to bet on the future value of a currency that's not convertible or hedge investments denominated in it.
Yuan forwards gained on Jan. 28 after Yu Yongding, an academic adviser who sits on the central bank's monetary policy committee, told journalists at Davos that ``now is the time'' to revalue, fuelling speculation that the G-7 meeting may presage a change in policy. The implied rate retreated after Vice Premier Huang and central banker Li reaffirmed the government's support for the peg.

To contact the reporter on this story:
Li Yanping in Beijing yli16@bloomberg.net

Dollar Advances Against Euro As Fed Lifts Rate, Keeps "Measured" Wording

2005-02-02T14:39:00.000-08:00

(Bloomberg) -- The dollar gained versus the euro as the Federal Reserve raised its interest-rate target to 2.5 percent and signaled further increases this year.
The Fed lifted the rate today by a quarter point, the sixth such move since June, and retained a commitment to keep doing so at a ``measured'' pace. The prospect of additional boosts will help support the dollar, which is up 4.9 percent since reaching a record low versus the euro on Dec. 30, said Jeremy Fand, a senior proprietary currency trader in New York at WestLB AG.
``The Fed is doing a good job of not varying from the idea that rates are going to keep going higher,'' Fand said. ``That is good news for the dollar.''
Against the euro, the dollar appreciated to $1.3027 at 5 p.m. in New York from $1.3046 yesterday, according to electronic currency-trading system EBS. It earlier strengthened to $1.3010. The dollar was at 103.59 yen from 103.70. The dollar may rise as high as $1.28 per euro and 102 yen this quarter, Fand said.
The Fed's rate now exceeds the European Central Bank's benchmark rate by a half point, the most since March 2001. The ECB has kept its main refinancing rate at 2 percent since June 2003. In Japan, the central bank has kept borrowing costs near zero since 2001 in an effort to combat deflation.
The difference in yield between the 10-year Treasury note and the German government bond with a similar maturity has widened to 59 basis points from no difference in September. The spread reached a four-year high of 68 basis points on Dec. 27. A basis point is 0.01 percentage point.
`Inflows' to U.S.
``The interest-rate spread is widening in favor of the dollar,'' said Todd Elmer, a currency strategist in London at Barclays Capital Inc., a unit of Britain's third-largest bank. ``This is going to support inflows'' to the U.S., he said. Barclays expects the dollar will rise to $1.28 per euro in a year.
December Eurodollar futures contracts yielded 3.75 percent after the central bank's decision, up from 3.56 percent at the end of last year. The contract settles at a three-month lending rate that has averaged 0.21 percentage point above the Fed's target for the past decade.
Today's increase in the Fed's target rate was predicted by all 87 economists surveyed by Bloomberg News. ``They didn't even freshen the statement up; they just changed the date and sent it out again,'' said WestLB's Fand.
Lehman's Call
Lehman Brothers Holdings Inc. economist Drew Matus said today the target will likely rise to 3.5 percent by August. As recently as Jan. 21, the firm was expecting the target rate to rise only to 3.25 percent. The firm is one of the 22 primary U.S. government securities dealers, which trade with the Fed's New York branch.
The dollar rose 3.9 percent against the euro in January, the biggest gain since May 2001, after economic reports showed rising consumer confidence and personal income. A Labor Department report on Feb. 4 may show U.S. employers added 200,000 jobs last month, the most since October, according to the median forecast of analysts surveyed by Bloomberg.
Demand for the euro may rise on speculation a Group of Seven statement later this week will omit French and German calls for urging Asian countries to strengthen their currencies. A Japanese finance ministry official yesterday suggested the G-7 on Feb. 4-5 won't diverge from last year's statement, which opposed ``excess volatility.''
Pressure on Asia
``Nothing is going to change at the G-7,'' said Callum Henderson, head of currency strategy at Standard Chartered Plc in Singapore. ``There's been a lot of pressure on Asia, but now the baton will be passed back to Europe.'' The euro may gain to $1.32 in the next week, he said.
The European currency has risen 51 percent against the dollar in the past three years, about double the 27 percent gain in the yen. It reached a record high of $1.3666 on Dec. 30. Japan's record currency sales through March 2004 helped limit the yen's climb.
Hedge funds have turned less positive on the dollar this month, according to a survey by Van Hedge Fund Advisors International Inc. The Nashville-based company is an adviser to hedge funds that manage $30 billion in assets.
Forty-eight percent of hedge fund managers surveyed said they were ``bullish'' on the U.S. currency, down from 61 percent last month, the firm said in a statement dated yesterday and posted on its Web site.
``There's certainly nothing in there to suggest any idea of dollar strength,'' said John Rothfield, a currency strategist in San Francisco at Banc of America Securities LLC, referring to the Fed statement. The central bank's decision to keep the ``measured'' language ``may actually be a disappointment,'' he said.

To contact the reporters on this story:
Joshua Krongold in New York at at jkrongold2@bloomberg.net;
Mark Tannenbaum in New York at mtannen@bloomberg.net.

Fed Lifts Overnight Lending Rate To 2.5 Percent, Keeps "Measured" Language

2005-02-02T14:13:00.000-08:00

(Bloomberg) -- Federal Reserve policy makers raised the benchmark U.S. interest rate a quarter-point to 2.5 percent and restated a plan to make future increases at a ``measured'' pace to keep inflation in check.
``The stance of monetary policy remains accommodative,'' the Federal Open Market Committee said in a statement released after today's meeting in Washington. ``With underlying inflation expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.''
The rate boost is the sixth straight since June and was predicted by all 87 economists in a Bloomberg News survey. Some FOMC members at December's meeting were concerned rates were still too low ``to keep inflation stable,'' according to minutes of that meeting released last month.
``Output appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions continue to improve gradually,'' today's statement said. The FOMC pledged to react to changes in the economy as needed to keep prices stable.
Policy makers are trying to steer the overnight bank lending rate to a level that will keep the world's largest economy growing without causing faster inflation. Today's increase may still leave the central bank short of that goal, economists said.
``They are signaling they are happy with what they have done and so far seems to be working, and they will probably stick with it,'' said Chris Varvares, president of Macroeconomic Advisers LLC in St. Louis, in an interview.
The benchmark 10-year U.S. Treasury note fell 1/16 point, pushing its yield up 1 basis point to 4.15 percent at 2:24 p.m.
Greenspan Legacy
The vote to raise the rate was unanimous. Today's increase marks the longest string of consecutive rate boosts since November 1988 to February 1989, when the rate peaked at 9.75 percent, the high since Alan Greenspan became chairman 17 years ago.
This week's meeting is the first in Greenspan's final year at the Fed before his non-renewable term as governor expires on Jan. 31, 2006. Greenspan, who turns 79 next month, is aiming to extend a three-year expansion by guiding rates to a level that will neither continue to stimulate nor restrain it.
Fed officials including Vice Chairman Roger Ferguson say this so-called neutral level changes as economic conditions evolve, and most decline to quantify a target.
The overnight bank-lending rate is the highest since October 2001, a month before the economy emerged from an eight-month recession. Even so, the Fed's target rate is still less than overall consumer price inflation, meaning the real interest rate is negative.
Consumer Rates
``Nobody thinks the Fed is out to kill the economy,'' said Larry Kantor, managing director and head of economics at Barclays Capital Inc., whose firm predicts the overnight lending rate will stand at 4 percent by year end. ``They just want to normalize rates from a very low level.''
While the Fed's action may encourage savings as deposit rates rise and damp borrowing as consumer borrowing costs tied to benchmarks such as the prime lending rate also increase, so far there has been little effect from the tightening cycle. For example, the average rate on a benchmark 30-year fixed mortgage last week was 5.61 percent compared with 6.21 percent in late June, according to the Mortgage Bankers Association.
``Interest rates rising are positive for our business because the fact that rates rise creates a better economic value for renting versus owning,'' Rick Campo, chief executive officer of Camden Property Trust, the fifth-largest owner of apartment buildings, said in an interview today.
Bond Yields
Bond investors, confident the Fed has inflation under control, also have kept yields low on government debt. The yield on the benchmark 10-year Treasury note was 4.14 percent yesterday, after peaking at 4.87 percent in June.
Consumer prices rose at 3.3 percent last year and 2.2 percent excluding food and energy. In 2003 core consumer prices rose 1.1 percent, the lowest since 1960. The Fed's preferred barometer, the core personal consumption expenditures price index, was 1.5 percent last year, still within a range of price stability for those Fed officials who have stated their own inflation goal.
``One and a half, for me, is price stability,'' Sandra Pianalto, president of the Cleveland Fed bank, said on Jan. 18.
FOMC officials used the two-day meeting that ended today to prepare a semi-annual forecast Greenspan will present to Congress on Feb. 16. The U.S. economy expanded 4.4 percent last year, the fastest since 1999, and may grow 3.6 percent this year, based on the median estimates of 69 economists in a Bloomberg poll. The economy added 2.2 million jobs last year, the most since 1999.
Economic Growth
President George W. Bush won a second term in November in part by saying his tax cuts helped stimulate the economy. Bush is scheduled to deliver his State of the Union Address tonight, focusing on plans to reshape Social Security.
The minutes of the Fed's Dec. 14 meeting showed some Fed members were concerned that interest rates are too low and that rising prices could jeopardize growth. ``The current level of the real funds rate target remained below the level it most likely would need to reach to keep inflation stable and output at its potential,'' the minutes said.
Rising unit labor costs and raw materials prices may encourage companies to raise prices.
For example, Caterpillar Inc., the world's largest maker of earthmoving equipment, last week said it had $412 million in higher fourth-quarter costs from steel-price increases and materials needed to quickly boost production. Caterpillar expects material costs to continue to weigh on earnings for the first half of 2005, with some relief in the second half.
Price Pressures
``Obviously there's a stronger sense that they are paying closer attention'' to inflation, said Mark Spindel, chief investment officer at International Finance Corp., the investment arm of the World Bank in Washington. ``The minutes make that clear.''
The Dec. 14 minutes showed some members believed the economy may already be operating at close to its full potential. Fed officials say they need to bring the benchmark rate to a level that will contain price pressures that will build as the economy uses up spare capacity.
``When we talk about `measured,' that's what we mean,'' said Thomas Hoenig, president of the Kansas City Fed bank, said last week. ``How the economy does through the course of the year of course affects how we react to it.''
The 19-member FOMC has 12 members who vote each year, including four positions that rotate annually between regional Fed bank presidents. Joining the voters this year are Michael Moskow of the Chicago Fed bank, Gary Stern of Minneapolis and Anthony Santomero of Philadelphia. Jack Guynn of Atlanta is voting at this year's first two meetings until Richard W. Fisher takes office as president of the Dallas bank.
With today's action, the U.S. policy rate is 0.5 percentage points above the European Central Bank's refinancing rate, the same as the Bank of Canada's overnight rate, and 2.25 percentage points below the Bank of England's base lending rate.
Today the U.S. central bank also raised the discount rate on direct loans to commercial banks to 3.5 percent.

To contact the reporter on this story:
Alison Fitzgerald in Washington at afitzgerald@blooomberg.net;
Craig Torres in Washington at ctorres3@bloomberg.net

Gates, Buffett and China Gang Up On Dollar

2005-02-01T20:08:00.000-08:00

(Bloomberg) -- The dollar can add the world's two richest men to its list of detractors, something that's raising eyebrows here in Asia.
Bill Gates, chairman of Microsoft Corp., left no doubt of that, telling television host Charlie Rose ``I'm short the dollar.'' The world's wealthiest man called the record $7.62 trillion federal debt ``a bit scary'' and lamented that the U.S. is in ``uncharted territory'' fiscally.
And he's right. Just ask Warren Buffett, the world's No. 2 moneyman, who has been buying foreign currencies since 2002, citing concerns about the U.S. deficit. The bet is paying off, too. Buffett's Berkshire Hathaway Inc. reaped a $412 million pretax gain on the trade in the third quarter of 2004.
Gates and Buffett may not be reading from the same playbook as George Soros, though their investments bear some similarities. Financier Soros has long since given up on the world's reserve currency, and U.S. President George W. Bush's competence on economic matters.
Yet the U.S. is managing to run afoul of an even more powerful force than wealthy individuals: the world's fastest growing major economy. China, it seems, has had just about enough of the U.S.'s bickering about its currency policy.
`Reasonable Level'
``Please leave it to us,'' Li Ruogu, deputy governor of the People's Bank of China, said in Davos, Switzerland, when it was suggested a stronger yuan would help China. ``We are happy and willing to listen, but don't ask us to practice what you say,'' he said.
Huang Ju, who directs China's finance policy as deputy prime minister, threw even more cold water on speculation the yuan will rise. ``We have to maintain the exchange rate at a reasonable level,'' said Huang, who also was attending the World Economic Forum in Davos.
Yet it's Chinese officials further down the political food chain that seem to sympathize most with Gates and Buffett. ``The U.S. should take the lead in putting its own house in order,'' said Chinese central bank adviser Yu Yongding.
It's breathtaking, really, to see the U.S. being chastised by Chinese policy makers. Perhaps it's payback for all the lecturing Treasury secretaries from Robert Rubin in the 1990s to John Snow today have done here in Asia. More likely, though, Chinese officials are getting antsy about their own U.S. dollar holdings.
Group of Seven
If Gates sunk his entire $46.6 billion fortune into U.S. debt, it would only amount to about a quarter of China's holdings. Officials in Beijing buy U.S. Treasuries to maintain their 8.3 peg to the dollar. And its U.S. debt holdings are on the losing end of the dollar's 26 percent drop against a basket of six major currencies since the start of 2002.
A lower dollar increases China's competitiveness, yet it may have too much of a good thing on its hands. While China won't free the yuan for fear of losing control over its economy, a lower exchange rate makes it harder to cool inflation and avoid overheating this year.
The issue is coming to a head days before Group of Seven officials meet in London. There's little doubt the dollar's weakness, and the euro's resulting strength, which will be the center of attention. European Central Bank President Jean-Claude Trichet has voiced concern about the dollar.
The Risk
Until now, the U.S. has been able to dazzle currency traders with its deficits-don't-matter poker face. Yet it's clearly losing its ability to keep investors -- and central banks -- in check. Once central banks here in Asia turn on the dollar, the U.S. is in for some very turbulent times as bond yields surge.
The risk can be seen in China's evolving incentives to alter its dollar peg. The U.S. has been using its strength to push China to boost the yuan, thereby reducing its trade advantage. Yet it's the risk of instability and big losses on dollar holdings that may ultimately force China's hand. So it's U.S. weakness, not strength, that's turning heads in Beijing.
Amid all this, Gates and Buffett are warming up to China. It's a risky proposition, perhaps, given its fragile financial system, inadequate transparency, lack of democracy and failure to halt the piracy of goods. In Davos, Gates described China as a ``change agent'' for the next two decades.
In September, Gates's $27 billion foundation received approval from China's foreign-currency regulator to invest as much as $100 million in yuan shares and bonds. Buffett, who visited China with Gates in 1995, made his first investment there in 2003, buying a stake in PetroChina Co.
Still, the U.S.'s biggest challenge isn't keeping Gates or Buffett happy; it's persuading the central banks of China and the rest of Asia not to dump their roughly $1.1 trillion of U.S. Treasury holdings. If they do, the world's two richest men also may be two of its most prescient currency speculators.

To contact the writer of this column:
William Pesek Jr. can be reached through the Tokyo newsroom at
at wpesek@bloomberg.net.

Dollar Near One-Week High Versus Yen; Fed To Lift Rates On Faster Growth

2005-01-31T20:11:00.000-08:00

(Bloomberg) -- The dollar traded near its highest in almost a week versus the yen in Asia on expectations U.S. policy makers will signal the economy will grow fast enough for the Federal Reserve to keep raising interest rates this year.
Fed officials today begin a two-day meeting, the first of eight this year, at which they are expected to lift the key rate to 2.5 percent from 2.25 percent. The dollar in January had its first monthly gain in four versus the yen on expectations of faster economic growth. Manufacturing output probably rose for a 20th month in January, according to economists surveyed by Bloomberg News.
``Right now, we don't want to go against the trend of a stronger U.S. economy and rising rates,'' said Minoru Shioiri, a currency trader at Mitsubishi Securities Co. in Tokyo. ``The dollar will stay on solid ground.''
The dollar traded at 103.62 yen at 12:30 p.m. in Tokyo from 103.70 late yesterday in New York, according to electronic foreign-exchange trading system EBS. The U.S. currency yesterday rose as high as 103.79, the highest since 104.07 on Jan. 26. It was also at $1.3048 per euro from $1.3038. The dollar may gain to 104.30 yen and $1.29 per euro this week, Shioiri said.
The Fed's overnight lending rate between banks in December exceeded the European Central Bank's benchmark rate for the first time since 2001. The Bank of Japan has kept rates near zero since March 2001.
Rates `Below Level'
The U.S. currency strengthened 3.9 percent last month versus the euro, the biggest rally since May 2001, and gained 0.6 percent against the yen. The rally was stoked after minutes from the Fed's Dec. 14 meeting, released on Jan. 4, said the key interest rate is still ``below the level'' needed to slow inflation, fueling speculation of faster rate increases.
Fed policy makers will unlikely drop a pledge to raise interest rates at a ``measured'' pace. The Fed has increased its benchmark rate five times by 0.25 percentage point at each of its meetings since June.
``The U.S. economy is in good shape, but probably not so strong for the Fed to drop out of its commitment to gradual rate increases,'' said Shimpei Uike, an investor of overseas debt at Asahi Life Asset Management, which manages the equivalent of $10.5 billion. ``The dollar's gain may be limited.'' The U.S. currency may drop to 102 yen and $1.315 per euro this week, he said.
`Psychological Level'
Demand for the dollar may wane after the U.S. currency failed to stay above $1.30 per euro and 104 yen -- levels where the U.S. currency's advance fizzled last month.
The dollar never ended New York trading stronger than $1.3 for two consecutive days in January.
``Against the euro, the dollar's gained beyond $1.30 almost every day only to be bounced back at the end of the day,'' said Tsutomu Soma, a currencies and derivatives trader at Okasan Securities Co.
``Repeated failures to break through that technical, psychological level may well discourage people to buy dollars,'' Tokyo-based Soma said. ``The same is said for the yen trading near 104 yen.'' The dollar may drop to $1.3070 per euro and 103.30 yen today, he said.
The Institute for Supply Management's factory index probably stood at 57 in January, according to the median forecast of 69 economists surveyed by Bloomberg News, from 57.3 in December. Numbers exceeding 50 signal growth. The Tempe, Arizona-based institute is due to release its report at about 10 a.m. Washington time.
The yen is down 1.9 percent versus the dollar since reaching a five-year high of 101.69 on Jan. 17.
Group of Seven
The Group of Seven nations won't press Japan to allow the yen to gain further when they meet later this week in London, Makoto Utsumi, a former top currency official at the Japanese Ministry of Finance, said in an interview.
The Japanese currency earlier this month rose on speculation European policy makers would call on Asian nations to accept stronger currencies and share the burden of the dollar's drop. The euro rose 52 percent versus the dollar during the three years to Dec. 31, more than the yen's 28 percent rally.
``There will be no chance at all to see such a development'' when G-7 finance ministers and central bankers meet on Feb. 4-5, Utsumi, who headed Japan's currency policy between 1989 and 1991 as vice finance minister, said in an interview in Tokyo.
The dollar may gain as high as 110 yen this year on the back of the strength of the U.S. economy, Utsumi said.

To contact the reporter on this story:
Taizo Hirose in Tokyo at Hirose2@bloomberg.net.

Dollar Gains; Taylor Joins Watanabe In Predicting No G-7 Currency Changes

2005-01-28T14:30:00.000-08:00

(Bloomberg) -- The dollar rose for a second straight week against the yen after John Taylor, Treasury undersecretary for international affairs, said the Group of Seven nations won't change their statement about currencies when they meet next week.
``Language that was worked out last year at this time and was reaffirmed in the meeting since is the way to go,'' Taylor said in an interview in Davos, Switzerland. Hiroshi Watanabe, the official in charge of Japan's currency policy, said yesterday the G-7's view on exchange rates ``hasn't changed.''
The dollar appreciated to 103.28 yen at 5:01 p.m. in New York, from 102.71 late yesterday, according to electronic currency-trading system EBS, up 0.6 percent on the week. It was little changed at $1.3038 per euro. Taylor's comments may dim speculation the G-7 will call for Asian countries to let their currencies appreciate.
``It's increasingly likely we're going to get a carbon copy of the last one,'' said David Mann, a currency strategist at Standard Chartered Plc in London. ``This is something not good for the dollar bears, so we're seeing buying back of dollars.''
The yen's decline began in Asian trading after government reports showed Japan's industrial production and household spending fell. Japan's currency is down 1.1 percent since reaching a five-year high of 101.69 per dollar on Jan. 17 on concern economic growth is slowing.
Japan's currency extended its drop after a Chinese central bank official said comments from an adviser that it's time to revalue the yuan don't reflect policy. A stronger yuan may make Japanese exports more competitive.
`Soft' Data
``The data was soft and is not going to support a stronger yen,'' said Niels Christensen, a currency strategist in Paris at Societe Generale SA. At the same time, ``the major focus for the yen this week is news about what China may do.''
Societe Generale, France's third-biggest bank, predicts the yen will weaken to 105 per dollar by March 31.
Japan's production last month fell 1.2 percent. Spending by households headed by a salaried worker declined 3.8 percent from November, seasonally adjusted. The median forecast of economists polled by Bloomberg was for a decline of 0.6 percent.
The Bank of Japan last week said growth in the fiscal year beginning April 1 won't reach October's forecast of 1.5 percent. Exports in December rose at the slowest pace in a year as demand cooled in the U.S. and China.
`Lost Momentum'
``There is no doubt the Japanese economy has lost momentum, which should be negative for the yen,'' said Harvinder Kalirai, chief market analyst at State Street Corp. in Sydney. Concerning a change in China's currency peg, ``the implications are significant, since all Asian currencies would appreciate.''
A stronger yuan would help the yen strengthen past 100 to the dollar, Kalirai said. State Street, the world's largest custodian of assets, manages more than $1.2 trillion.
U.S. gross domestic product, the value of all goods and services produced, rose 3.1 percent in the fourth quarter, from 4 percent in the previous period, the Commerce Department said in Washington. Economists expected a 3.5 percent rate in the final quarter of 2004, based on the median estimate. Still, the annual growth rate of 4.4 percent was the fastest since 1999.
``There's very little in the GDP report that would support buying dollars versus the euro,'' said Jason Daw, a senior currency strategist in New York at Merrill Lynch & Co.
`Good Shape'
The GDP data came after reports this week showed U.S. durable-goods orders rose for a second month and the Conference Board's consumer-confidence index jumped to a six-month high. The Federal Reserve next week is expected to raise the benchmark interest rate to 2.5 percent, according to a Bloomberg survey.
``The U.S. economy is in good shape, setting the Fed up to extend its rate hikes,'' said Kenichiro Ikezawa, who manages the equivalent of $1 billion in overseas bonds at Daiwa SB Investments, a unit of Japan's second-largest brokerage. ``The data are supportive of the dollar, in contrast to what we've seen from Japan and Europe.''
Lehman Brothers Holdings Inc. said investors should exit bets on a dollar drop against the euro in advance of next week's Fed rate decision, according to the firm's weekly strategy report. The firm still predicts the dollar will weaken to $1.42 per euro in three months.
Japan's currency earlier rose to the highest in a week on speculation a stronger yuan will reduce China's trade advantage.
`Now Is the Time'
``Now is the time'' for a yuan move, adviser Yu Yongding told Reuters at the World Economic Forum in Davos, Switzerland, adding that it was his personal view. Yu told Bloomberg News that ``there are more reasons to consider a revaluation.''
The comments aren't official policy and there are no plans to revalue the currency, a central bank spokesman said, speaking on condition of anonymity.
``I don't think that China will revalue in the next six to 18 months,'' Zhu Min, executive assistant president of the Bank of China, the country's second-biggest commercial bank, at the World Economic Forum meeting in Davos, Switzerland.
Taylor, the U.S. Treasury undersecretary, said the G-7 nations are united on the need for countries to allow flexible currencies. ``There is full agreement about currency flexibility,'' Taylor said in Davos.
The last meeting of G-7 finance ministers in Washington on Oct. 1 said that exchange rates should reflect economic fundamentals and that excess volatility in currencies is ``undesirable.'' The G-7 also urged nations that peg their currencies to introduce more flexibility.
Japan's currency has risen 3.3 percent versus the euro this year as some traders bet that the G-7 nations will call for Asian currencies to appreciate.
Yen Held 'Hostage'
The yuan, which has been fixed to the dollar for a decade, would appreciate by about 5 percent should China ease the peg, forward contracts show. The yen on Jan. 26 rebounded from a two- week low after a Chinese official said Finance Minister Jin Renqing will discuss the yuan's fixed exchange rate at the G-7 meeting in London.
Until China's decision is known, the yen ``is a hostage to the Chinese currency,'' said Steve Barrow, a foreign-exchange strategist in London at Bear Stearns. ``The market is rife with speculation about what China may do and the yen is just following that.''
The G-7 is made up of the U.S., Japan, Germany, Italy, Canada, France and the U.K. Officials from China and Russia will also attend its talks, which will take place Feb. 4 and Feb. 5.

To contact the reporter on this story:
Richard Blackden in London rblackden@bloomberg.net;
Vivianne C. Rodrigues in New York at at vrodrigues@bloomberg.net