Foreign Exchange Market Daily Update

Daily Forex Fundamentals | Written by Union Bank of California | Sep 11 08 15:02 GMT |

The US dollar is mixed against a basket of currencies after yesterday's trade deficit reporting and today's jobless claims report. The dollar weakened against the yen and the euro when US trade deficit widened much more than expected to a swelling $62.2 billion from the forecasted $58.0 billion in July, as a result of oil prices. However, some losses against the euro were trimmed after US jobless claims declined last week. The Labor Department reported that US workers filing claims for jobless benefits declined by 6,000 last week. The biggest dollar rally booster this morning is due from world equities falling by 1 %, as investors depressed their appetite for risk over global growth and financial concerns. The euro initially gained against the dollar after wider than expected US trade deficit, but erased any gains after world equities dropped by 1% to their lowest level in more than two years. Many investors speculate that the economic growth in Europe will be slower than the US, which would push the European Central Bank to lower their interest rates. The Pound Sterling weakened to a 2 ½ year low against the dollar. The fall in pound came after Bank of England policymaker David Blanchflower, the arch dove in the BoE's Monetary Policy Committee, signaled a deeper than anticipated decline in the UK economy and unemployment rates to rise in the near future. Blanchflower's comment to British Parliament's Treasury Committee that he expected several months of 60,000-plus rises in unemployment pushed traders and analysts to sell the already floundering pound. The Japanese yen strengthened against the dollar as the US trade deficit gap unexpectedly widened. As concerns over the health of the global economy continue to spook investors to unwind carry trade, the yen continues to rally against the dollar and the euro. The Canadian dollar initially weakened against the US dollar after reports for the nation's trade surplus was released, but soon erased any loss against the greenback as the US trade deficit was released. The Canadian trade surplus shrank in July to $4.9 billion Canadian dollars, down from the forecasted surplus of $5.6 billion Canadian dollars, as crude oil prices declined for the first time since March. The Australian and New Zealand dollar weakened against the US dollar as the Reserve Bank of New Zealand unexpectedly cut interest rates by 50 basis points. Many had expected a 25 basis point interest rate cut, but in a surprise move the RBNZ cut rates by 50 points, bringing the benchmark interest rate to 7.5 signaling further rate cuts to come. With the Kiwi's surprise move, the Aussie was dragged down. The Mexican peso weakened against the dollar amid concerns over the US credit crisis and its effects on emerging market nations like Mexico. The peso has been taking direction from recent trends in dollar. Union Bank of California The Bank of Tokyo-Mitsubishi Group http://www.uboc.com Disclaimer: This market comment is prepared by Union Bank of California's Global FX &amp Derivatives Department for the general information of its customers. It is based of the most accurate information currently available, but should not considered investment advise or a guarantee of future exchange rate or trends.

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Casual Causality

Daily Forex Fundamentals | Written by Foreign Exchange Analytics | Sep 11 08 15:01 GMT |

The financial press is only as good as its sources. Unfortunately too often the crowd is too quick to offer causality too casually, confusing motivations for trading with a llitany of at hand fundamentals. I am ready to pop over the utter nonsense that euro/dollar is down 20 cents in 8 weeks (GBP, NZD, JPY, BRL, TRY, ZAR, XAU, oil, equities) on evidence the global economy is slowing and the world economy has not decoupled after all. Gag me with a Blackberry. I am not claiming a monopoly on intelligent causality... I get things as wrong as the next person. But I do think there is a story on financial markets that is not being told that goes a long way in highlighting why fundamentals are not telling us much about currency and asset price movements. The global financial system runs on trust and there is a complete breakdown in trust - in the counterparties and policymakers that support and impact asset prices. What we are watching is 95% running from risk and 5% weak economic data from Germany and the Euro Zone in the last two months. This is still mainly a market where the credit crisis is still ruling the roost over asset prices and FX, not textbook macroeconomics... .we will need the econ 101 textbook in due course just not yet. Banks, non-bank financials and large international firms fund themselves in dollars. The credit crisis is eliminating dollar wealth creating a massive shortage of greenbacks... wealth destruction in structured products, real estate, commodities, carry trades and equities. Cash is king and yet cash is not in hand - much of it is locked up in illiquid assets in bank balance sheets and banks need dollars. Starting with the banks rushing to buy dollars, the rest of the world (corporations and real money accounts) is finding they too are in need of dollar cash balances. Add on top of the wealth destruction the broader rush from risk and low and behold the yen is soaring and EM FX plummeting. What weak data is Brazil reporting to explain why the BRL is tumbling? Copom hiked this week and firm GDP figures were printed for Q2. Foobah fundamentals. I get a lot of wisecracks from readers and non-readers about why being long dollars is so obvious and when I get bullish it is time to sell. Well folks the risk ahead is that as global supply of dollars shrinks at an unprecedented rate via asset deflation and the dollar rises the fastest since the Plaza Accord in 1985, this is not the sign of a strong currency or faith in the US economy (fundamentals). It is thoroughly defensive. When the US government balance sheets explode in the next 12 months behind bailouts, fiscal stimuli, housing support measures including Fannie and Freddie underwriting, and the unemployment rate reaches 8%, the dollar will be falling from helicopters and B-1 bombers as Ben takes to the air and the US inflates its way out of a deep recession and enormous debt burden. David Gilmore Foreign Exchange Analytics http://www.fxa.com Disclaimer: The opinions expressed herein are those of the author and not a recommendation to buy or sell specific securities.

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Mid-Day Report: Dollar Firm But Yen Even Stronger

Market Overview | Written by ActionForex.com | Sep 11 08 13:14 GMT |

A string of economic data are released in early US session but markets pay little attention to them. The greenback remains generally firm across the board, except versus the yen. EUR/USD breaches 1.39 level briefly just after taking out 1.4 yesterday. AUD/USD is staying comfortably below 0.8. More importantly, USD/JPY seems clearing the the mixed picture and dives to 106.37 in early US session on anticipation of lower open in the US equity markets. EUR/JPY dives further to below 148 level. Though, note that dollar's strength against sterling and canadian dollar is still not convincing yet and more consolidation might be seen there in near term. US jobless claims remain elevated at 445k, staying above the four week moving average which climbed from 439k to 440k. Trade deficit surged sharply to -62.2b in Jul, back above -60b level on stronger rise in imports by 3.9%. Export rose 3.3%. Import prices dropped much more than expected by -3.7% mom in Aug, dragging yoy rate to 16%. Canadian trade surplus came in narrow than expected at 4.9b in Jul. New housing price index rose 0.1% as expected. In the Treasury Committee Hearing, BoE Governor King said that prospect for growth has deteriorated and sharp reduction in money and credit is bearing down the UK economy. King stress that the bank "will not and cannot solve the shortage of funding in finance bank lending" over the long term. The know dove Blanchflower said that growth prospect have deteriorated in the past month and warn that there will be a large increase on unemployment. The 50 bps cut from RBNZ to bring OCR down to 7.5% was a surprise to the markets which expected a 25bps cut only. In the accompanying statement, RBNZ Governor Bollard said that "medium-term inflation pressures" is expected to "ease" and it's now appropriate to move to a less "restrictive stance". The cut is "warranted in light of tightness of credit conditions" and the time to take to "affect actual interest rates faced by households". Aussie was dragged down by Kiwi despite a strong employment report which saw 14.6k growth. More surprisingly, unemployment rate dropped from 4.3% to 4.1% in Aug. USD/JPY Mid-Day Outlook Daily Pivots: (S1) 106.86; (P) 107.40; (R1) 108.19; More. USD/JPY weakens further to as low as 106.21 in early US session and at this point, intraday bias remains mildly on the downside for testing 105.52 support. Break will confirm recent fall from 110.66 has resumed and reaffirm the bearish outlook. Deeper decline should then be seen towards 103.76 support first. On the upside, while above 108.18 will turn intraday outlook neural again, break of 109.18 is needed to invalidate prior bearish view, indicating firstly that correction from 110.66 has completed, secondly, whole medium term rally from 95.77 is still in progress despite the brief break of trend line support last week. Otherwise, further downside is still in favor. In the bigger picture, the break of medium term trend line support (95.77 to 103.76) indicates that whole medium term rebound from 95.77 should have completed with at 110.66 with bearish divergence condition in daily MACD. Further break of 103.76 support will confirm this case. Also, note the three wave structure of the rise from 95.77 to 110.66 argues that it's merely a correction in the larger down trend. Hence, in such case, deeper medium term decline should be seen to retest this 95.77 low. On the upside, however, above 109.18 will firstly suggest that fall from 110.66 is probably completed. Secondly it will dampen the bearish case and suggests that rise fro 95.77 is probably still in progress. Above 110.66 will encourage further rise to 61.8% retracement of 124.13 to 95.77 at 113.30.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
21:00	NZD	RBNZ rate decision Sep	7.50%	7.75%	8.00%
23:50	JPY	Japan Machine orders M/M Jul	-3.90%	-4.30%	-2.60%
23:50	JPY	Japan Machine tools orders Y/Y Jul	-4.70%	-4.50%	9.70%
01:30	AUD	Australia Unemployment rate Aug	4.10%	4.40%	4.30%
01:30	AUD	Australia Unemployment change Aug	14.6K	5.0K	10.9K	18.7K
06:00	EUR	Germany WPI M/M Aug	-1.80%	-0.60%	1.40%
06:00	EUR	Germany WPI Y/Y Aug	7.40%	8.80%	9.90%
08:45	GBP	MPC Treasury Committee Hearings
12:30	USD	U.S. Trade balance (usd) Jul	-62.2B	-58.0B	-56.8B
12:30	USD	U.S. Import price index M/M Aug	-3.70%	-1.80%	1.70%	0.20%
12:30	USD	U.S. Import price index Y/Y Aug	16.7%	20.20%	21.60%	20%
12:30	USD	U.S. Jobless claims	445K	440.0K	444.0K	451K
12:30	CAD	Canada Trade balance (cad) Jul	4.9B	5.6B	5.76B	5.64B
12:30	CAD	Canada Imports Jul	39.4B	N/A	37.40B	37.7B
12:30	CAD	Canada Exports Jul	44.3B	N/A	43.16B	43.3B
12:30	CAD	Canada New housing price index Jul	0.10%	0.10%	0.10%
14:35	USD	U.S. Natural Gas Storage		88B	90B
18:00	USD	U.S. Fed budget Aug		-106.2B	-117.0B

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U.S. Trade Deficit of $62.2 Billion Exceeds Forecast

By Timothy R. Homan

Sept. 11 (Bloomberg) -- The U.S. trade deficit widened more than forecast in July as oil imports soared to a record, overshadowing gains in exports.

The gap grew 5.7 percent to $62.2 billion, the largest in 16 months, from a revised $58.8 billion in June that was bigger than previously estimated, the Commerce Department said today in Washington. Total imports and exports were the highest ever.

Americans paid a record $124.66 a barrel for foreign crude oil, more than offsetting increases in shipments of automobiles, aircraft and machinery to buyers overseas. While a weak dollar has made U.S. goods more affordable, shrinking economies in Europe and Japan may stifle export growth in coming months.

The oil deficit ``is going to fade away,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. ``Exports will remain very strong for the near term'' as American companies fill existing orders.

Economists forecast the gap would widen to $58 billion from an initially reported $56.8 billion in June, according to the median of 75 estimates in a Bloomberg News survey. Projections ranged from deficits of $54.6 billion to $62.5 billion.

Imports climbed 3.9 percent to $230.3 billion in July, reflecting a record $42.6 billion in purchases of crude oil that swelled the deficit with the Organization of Petroleum Exporting Countries. Excluding oil, the trade gap shrank.

Oil Outlook

The imported-oil bill probably came down in August as prices retreated. A barrel of crude oil on the New York Mercantile Exchange cost an average $117.02 last month, down from $133.77 in July.

Exports increased 3.3 percent to $168.1 billion, led by a $1.4 billion jump in shipments of autos and parts.

In August, prices of goods imported into the U.S. fell by the most in almost two decades of record-keeping as the cost of oil and natural gas dropped, indicating slower economic growth may be starting to calm inflation, according to another report.

The import price index decreased 3.7 percent, more than forecast, after rising a revised 0.2 percent in July, the Labor Department said today in Washington. Outside of oil, costs fell 0.3 percent following a 0.7 percent increase the prior month.

Overseas shipments have received a boost from the 7 percent decline in the dollar against a trade-weighted basket of currencies of major trading partners in the 12 months ended in July. The dollar began to recover in April after dropping 27 percent from February 2002.

Final Data

After adjusting for inflation, the trade deficit grew to $41.2 billion from $40.1 billion in June that was larger than previously estimated. The figures, which are used to calculate gross domestic product, indicate the government may lower the second-quarter growth estimate when the final data is reported later this month.

July's price-adjusted deficit was smaller than the average for last quarter, indicating trade will again boost growth in the third quarter.

The smallest trade deficit in eight years was the biggest contributor to the 3.3 percent pace of economic expansion last quarter. The narrower gap added 3.1 percentage points to growth, the most since 1980, the Commerce Department said Aug. 28. Excluding trade, the economy would have expanded at a 0.2 percent pace after growing 0.1 percent in the first three months of the year.

Gap Widened

The trade gap with China widened to $24.9 billion from $21.4 billion in the prior month. The deficit with the OPEC jumped 34 percent to a record $24.2 billion.

Some U.S. manufacturers have taken advantage of the competitive dollar. Boeing Co., the world's second-biggest aircraft maker, received bookings for 70 new planes in July, up from 62 placed in June. Fifty of the Chicago-based company's July orders came from abroad.

A machinist's strike this month could prevent Boeing from filling those orders in coming months, further threatening U.S. export growth. In the past, work stoppages by members of the company's largest union, the International Association of Machinists and Aerospace Workers, have lasted four to 10 weeks.

As economies in Europe and Japan contract, the outlook for exports has softened. FedEx Corp., the world's largest air-cargo carrier, foresees weak demand both in the U.S. and abroad.

``While sustained declines in fuel prices could improve our full-year outlook, the slowing economic growth trends in the U.S. are now extending to other areas of the global economy,'' Alan Graf, chief financial officer of the Memphis, Tennessee-based company, said yesterday in a statement.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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Daily Technical Strategist

Daily Forex Technicals | Written by FXTechstrategy | Sep 11 08 12:10 GMT |

Today's Focus: EURUSD & GBPUSD EURUSD: Loss Of The 1.4015 Level Opens Up Risk Towards The 1.3852 Low GBPUSD: New Low To Trigger Declines Towards 1.7251. EURUSD EUR sold off sharply lower Wednesday breaking below its strong support at the 1.4015 level, its Oct'07 low and confirming further bearish momentum. This development has now opened up downside risk towards another key support cutting in at the 1.3852 level, its July'07 low where a break could bring additional downside pressure aiming at the 1.3361 level, its Aug'07 low. Decisively penetrating and negating the latter will set the stage for further declines towards the 1.3264 level, its Jun'07.The weekly and monthly studies continue to back this view. If corrective recovery is seen at this stage, its eroded support should reverse roles and provide resistance with further strength through there if seen paving the way for further upmove towards the 1.4197 level, its Sept 05'08 low ahead of the 1.4366/10 zone, its Jan'08/Dec'07 lows followed by another resistance residing at its Sept 08'08 high at 1.4429.On the whole, persistent downside weakness has left the pair targeting additional support at 1.3852 and a distant one at 1.3361. Support Comments 1.3852 July'07 high 1.3361 Aug'07 high 1.3264 July'07 low Resistance Comment 1.4015 Oct'07 low 1.4197 Sept 05'08 low 1.4366/10 Jan'08/Dec'07 lows 1.4429 Sept 08'08 GBPUSD Having weakened on Wednesday and seen declining to a 29-month low at 1.7447 in early morning trading today, cleanly breaking and closing below its Sept 08'08 low at 1.7471 will open the door for further weakness towards the 1.7251 level, its April'06 low. A turn below there should put the pair in position to head towards the 1.7130 level, its Dec'05 low and then its Nov'05 low at 1.7067.The weekly and monthly stochastics remain supportive of this scenario. On the upside, resistance levels are located at its Sept 05'08 low at 1.7535 and its Jan'06/Sept 08'08 highs at 1.7935/76 before the 1.8090 level, its Jun'06 low. All in all, bearish momentum remains entrenched in the pair and the vulnerability of further downside losses continues to mount. Support Comments 1.7251 April'06 low 1.7130 Dec'05 low 1.7049 Nov'05 low Resistance Comments 1.7744 Sept 05'08 high 1.7935/76 Jan'06 high/Sept 08'08 1.8090 Jun'06 low 1.8176 July 16'06 low Mohammed Isah Market Analyst www.fxtechstrategy.com This report is prepared solely for information and data purposes. Opinions, estimates and projections contained herein are the author's own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which the author incur any responsibility. The does not accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not construed as an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report

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India's Inflation Slows for a Third Consecutive Week

By Kartik Goyal

Sept. 11 (Bloomberg) -- India's inflation slowed for a third straight week, signaling that the central bank's three interest-rate increases since early June are beginning to work.

Wholesale prices rose 12.1 percent in the week to Aug. 30 from a year earlier, the commerce ministry said in New Delhi today. That compared with a 12.34 percent gain in the previous week and the median 12.01 percent forecast in a Bloomberg News survey of 22 economists.

Governor Duvvuri Subbarao, who took over the top job at the Reserve Bank of India last week, said Sept. 9 he would take ``appropriate'' action as it was not yet clear if the moderation in inflation was a ``discernible trend.'' Wholesale prices have risen at more than twice the central bank's targeted 5 percent pace since June.

``The present level of inflation is way above the comfort zone,'' said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor's. ``I expect the central bank will raise the repurchase rate by another 25 basis points at its October meeting.''

Subbarao's predecessor Yaga Venugopal Reddy, who retired Sept. 5, in July raised the benchmark interest rate by a half point to a seven-year high of 9 percent after raising it twice in June. Other central banks across Asia have also been increasing borrowing costs amid higher food and fuel prices.

Bonds Rise

India's 10-year bonds rose for a third day, pushing yields to a three-month low. The yield on the benchmark 8.24 percent note due April 2018 fell 9 basis points to 8.28 percent at the 5:30 p.m. close in Mumbai, according to the central bank's trading system.

Higher interest rates have slowed growth in India, Asia's third-largest economy, Subbarao said this week. The central bank expects the $912 billion economy to expand 8 percent in the 12 months ending March, the slowest pace in four years.

India's economy grew 7.9 percent in the three months to June 30 from a year earlier, the weakest pace since the last quarter of 2004. The central bank's next monetary policy statement is due Oct. 24.

Declining oil and commodity prices are helping cool inflation across Asia and easing pressure on the region's central banks to keep increasing interest rates. Consumer prices in China rose 4.9 percent in August from a year earlier, the smallest gain since June 2007. Japan's wholesale inflation rate fell for the first time in 11 months.

Crude Oil

Crude has fallen about 30 percent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduced demand for fuels.

India's inflation has eased since reaching a 16-year high of 12.63 percent in the week to Aug 9.

Prices of rice, corn, onions, potatoes, spices and edible oils declined in the week to Aug. 30, today's report showed. Manufactured-price inflation, with a 64 percent weight in the inflation basket, rose 11.07 percent, slower than the 11.28 percent gain in the previous week.

Elevated energy and commodity prices forced the central bank in July to raise its inflation forecast for the year to March 31 to 7 percent from a previous target of between 5 percent and 5.5 percent.

The government may revise today's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended July 5 to 12.19 percent from 11.91 percent.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

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U.S. Initial Jobless Claims Fall to 445,000 Last Week

By Bob Willis

Sept. 11 (Bloomberg) -- More Americans than forecast filed initial claims for unemployment insurance last week, while total benefit rolls rose to the highest level in almost five years, as companies cut staff to maintain profits in a slowing economy.

First-time jobless claims fell to 445,000 in the week ended Sept. 6 from a revised 451,000 the prior week that was more than initially reported. The number of people staying on rolls rose 122,000 to 3.525 million, the highest since October 2003.

The labor market is weakening as the biggest housing recession in a generation spills over to the broader economy, slowing demand and causing a surge in financial losses. Economists surveyed by Bloomberg News this month forecast consumer spending in the current quarter slowed to the weakest pace since 1992.

``The upward trend in initial jobless claims paints a bleak picture of the labor market,'' Ryan Sweet, a senior economist at Moody's Economy.com in West Chester, Pennsylvania, said before the report. ``Rising joblessness will hurt spending further and threatens to magnify the troubles in financial and housing markets.''

Treasuries, which had risen earlier in the day, stayed higher. Benchmark 10-year note yields were at 3.58 percent at 8:39 a.m. in New York, from 3.63 percent late yesterday. Futures on the Standard & Poor's 500 Stock Index dropped 1.5 percent to 1,214.70.

Economists' Forecasts

Economists had forecast claims would fall to 440,000 from a previously reported 444,000 in the prior week, according to the median projection in a Bloomberg News survey. Estimates ranged from 400,000 to 460,000.

The four-week moving average of initial claims, a less volatile measure than the weekly figure, rose to 440,000 from 439,750, today's report showed.

So far this year, weekly claims have averaged 380,000, compared with 321,000 for all of 2007, when the economy generated 91,000 new jobs each month on average. Monthly job losses have averaged 77,000 this year, according to Labor data. Monthly payrolls tend to fall as claims rise.

The surge in claims that began in the middle of July can be at least partly attributed to the government's extension of jobless benefits under legislation signed by President George W. Bush in June. The government hasn't been able to quantify the program's impact on initial claims.

``There is some uncertainly built into those weekly jobless numbers because of the extension of jobless benefits,'' said Ellen Zentner, U.S. macroeconomist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Insured Unemployment Rate

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, rose to 2.6 percent from 2.5 percent. Twenty-eight state and territories reported an increase in claims, while 25 had a decrease. These data are reported with a one-week lag.

The government last week reported the economy lost 84,000 jobs in August, and the jobless rate jumped to 6.1 percent, matching a high reached in September 2003. Job losses in the first eight months of the year have totaled 605,000.

Consumers, feeling less secure in their jobs and battling gasoline prices that topped $4 a gallon two months ago, are pulling back on the spending that makes up two thirds of the economy. Consumer spending in the July-to-September period may be flat, the weakest since 1992, according to economists surveyed by Bloomberg last week.

Auto Slump

Automakers and banks have been leading recent cutbacks in employment, and the weakness is spreading to other manufacturing and service companies.

Lehman Brothers Holdings Inc., which this week reported a $3.9 billion third-quarter loss, was poised to eliminate as many as 1,000 jobs, or about 4 percent of its workforce, in the fourth round of cuts at the fourth-biggest U.S. securities firm this year, people familiar with the matter said in late August.

New York Times Co., the third-largest U.S. newspaper publisher, will close its distribution operation in the New York metropolitan area and cut 550 jobs, or about 5.4 percent of its total staff, the company said Sept. 8. New York Times is firing workers as it copes with record industry declines in print advertising.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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ECB's Papademos Says Europe Likely to Avoid Recession

By Simone Meier and Gabi Thesing

Sept. 11 (Bloomberg) -- European Central Bank Vice President Lucas Papademos said the economy is likely to escape a recession and there are signs higher energy costs are driving up wages on a broad front.

``There are indications that broad-based second-round effects are materializing and we want to make sure that they don't become even broader and stronger,'' Papademos told reporters in Hamburg today. ``It's not considered likely'' that the euro-area economy will shrink in the third quarter ``but it can't be excluded, taking into account uncertainty and downside risks,'' he added.

The 15-nation economy contracted in the second quarter and is struggling to recover in the third. The ECB nevertheless raised interest rates to a seven-year high in July and said it will act to ensure that faster inflation doesn't become entrenched as workers seek compensation for higher food and energy costs.

``It's essential that broader-based second-round effects are avoided,'' Papademos said today. His comments were echoed by ECB council member Yves Mersch, who said slower economic growth and a drop in oil prices have not blunted inflation risks.

``While oil prices have declined, past increases could still trigger a wage-price spiral,'' Mersch said in the bi-annual economic bulletin of the Luxembourg central bank, which he heads. The inflation risks identified when the ECB raised its key interest rate to 4.25 percent in July ``remain today.''

Wage Demands

Inflation is running at 3.8 percent, almost twice the ECB's 2 percent limit.

IG Metall, Germany's biggest labor union representing 3.5 million workers, said Sept. 8 it will seek a pay increase of between 7 percent and 8 percent when wage negotiations start on Oct. 2. That would be the biggest wage increase in at least 16 years. Workers at Ireland's Electricity Supply Board are demanding an 11.25 percent raise.

``Papademos and Mersch are just pragmatic,'' said Kenneth Broux, an economist at Lloyds TSB Group Plc in London. ``The ECB is confident that growth will recover in the fourth quarter and unless they see data to the contrary, they will not ease policy.''

The euro-area economy shrank 0.2 percent in the three months through June. Manufacturing orders in Germany, Europe's largest economy, fell for an unprecedented eighth straight month in July and Europe's manufacturing and service industries contracted for a third month in August.

Recession Risk

A third-quarter decline in gross domestic product would put the 15-nation euro-region economy into its first recession since the launch of the single currency in 1999.

The European Commission yesterday predicted the economy will stagnate this quarter. The commission lowered its full-year growth forecast to 1.3 percent from 1.7 percent and signaled the 2009 outlook may also be cut.

Still, the price of oil has fallen almost 30 percent from a July 11 record of $147.27 a barrel and the euro has dropped 12 percent against the dollar in the past three months, which may provide some relief to consumers and exporters.

The economy ``should recover by the end of the year,'' Wolfgang Franz, President of Germany's ZEW economic research institute, said in a speech in Frankfurt last night. Then, ``rate increases could be put back on the table for discussion.''

ECB council member Axel Weber said in an interview published Aug. 27 that ``if the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we'll have to see if action is necessary.''

The ECB said in its monthly bulletin today that, while current rates should help it achieve price stability in the medium term, inflation risks remain on the ``upside.''

To contact the reporters on this story: Simone Meier in Frankfurt at smeier@bloomberg.net.

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King Wary of Long-Term BOE Bank Aid, Points to Brown (Update1)

By John Fraher and Brian Swint

Sept. 11 (Bloomberg) -- Mervyn King said the Bank of England's planned money-market reforms won't provide long-term assistance to banks to unfreeze lending and any decision on the matter should be left to Prime Minister Gordon Brown.

The central bank ``will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending'' over the long term, Governor King told lawmakers in London today. ``Only private savers or taxpayers via the government can provide such funds.''

King's central bank will next week unveil proposals to revamp its money-market operations to better cope with financial-market turmoil. With Brown under pressure to ease the U.K.'s housing slump, King is distancing the central bank from any plan to prop up the mortgage market with public funds.

Chancellor of the Exchequer Alistair Darling is scheduled to make a decision on how to help the market for home loans in coming weeks and King said today the minister still has an ``open mind'' on the matter. A Treasury-commissioned report said in July that Brown could consider guaranteeing mortgage-backed securities.

King today edged away from comments made last month opposing such a guarantee, saying he was just outlining what such a move would mean for taxpayers' funds. Still, he was forced to deny that he is giving too much advice to the finance minister.

``I am not giving the chancellor a public lecture,'' said King in testimony to Parliament's Treasury Select Committee. ``It is perfectly reasonable to explain what central banks can and can't do and that is what I am doing.''

`Stressed' Conditions

The Bank of England will publish proposals to change its money-market rules at the end of next week. King said in June they will be designed to cope with both ``normal'' and ``stressed'' conditions.

``The objective of the new facility will be to provide short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks,'' King said. It will only help banks trying to cope with ``temporary'' problems, he said.

The new system would succeed the Special Liquidity Scheme, which allows banks to swap securities damaged by the credit crisis for government bonds. King said today takeup of the program, announced in April, was ``significant'' and the central bank will provide further details when it expires next month.

Tighter Lending

U.K. banks are restricting lending as they cope with a yearlong credit rout, making it harder for potential homebuyers to find mortgages. That's exacerbating a slide in house prices and eroding support for Brown's government. Home values plunged 12.7 percent in August from a year earlier, HBOS Plc said on Sept. 4, in the biggest drop since at least 1983.

King said the ``financial sector is facing the worst situation since the 1930s.'' Deputy Governor Charles Bean said the crisis has some time to run yet.

The Bank of England's ability to cushion the housing market with interest-rate cuts is limited after inflation accelerated to more than double its 2 percent target. U.K. inflation expectations reached the highest since at least 1999 last month, a Bank of England survey showed today. Consumer prices rose 4.4 percent in July from a year ago and Bean said the weaker pound may add to inflation pressures.

``It would be most surprising if, next week, I were not required to write a further open letter to the chancellor explaining why inflation is more than a percentage point away from target,'' King said today. The Bank of England's mandate requires the governor to write to the chancellor if inflation exceeds its target by more than one percentage point and stays there.

While Bank of England policy maker David Blanchflower said that growth prospects have probably deteriorated in the past month, King said the economy may rebound in a year.

To contact the reporters on this story: John Fraher in London at jfraher1@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.

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Texas Ports May Stop Some Traffic at 11 A.M., Coast Guard Says

By Robert Tuttle

Sept. 11 (Bloomberg) -- Texas ports may close to inbound ship traffic beginning at 11 a.m. today in advance of Hurricane Ike, the U.S. Coast Guard said.

The decision would apply to ports in the Houston-Galveston, Corpus Christi and Port Arthur-Beaumont areas, Coast Guard Petty Officer Patrick D. Kelley said in a telephone interview. Ports normally would be closed to all traffic 12 hours before a storm.

The Port of Freeport, south of Galveston, Texas, closed to ship traffic yesterday.

Ike's eye was 620 miles (998 kilometers) east of Brownsville, Texas, and moving west-northwest at 9 miles per hour toward the Texas Coast, the National Hurricane Center said in an advisory at 4 a.m. Houston time today. The storm is a Category 2 hurricane, with sustained winds of 100 mph, and may strengthen further.

To contact the reporter on this story: Aaron Clark in New York at aclark27@bloomberg.net

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ConocoPhillips Shutting Houston Offices Before Hurricane Ike

By Jim Polson

Sept. 11 (Bloomberg) -- ConocoPhillips, the second-largest U.S. refiner, released its Houston-area employees and said offices there will close at noon local time in preparation for Hurricane Ike.

The shutdown of the Sweeny, Texas, refinery southwest of Houston continued and production operations in southern Louisiana halted in anticipation of high winds and tides from the storm, Houston-based ConocoPhillips said in a statement posted yesterday on its Web site.

``We are removing personnel from our operations that could potentially be in the storm's path,'' ConocoPhillips said.

Hurricane conditions are possible within 36 hours anywhere between Cameron, Louisiana, to Port Mansfield, Texas, the National Hurricane Center said in a forecast posted at 5 a.m. New York time today. The hurricane warning area includes Houston, the largest U.S. petroleum port.

Valero Energy Corp. is the largest U.S. refiner.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net

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Nymex Extends Trading Hours This Weekend Because of Hurricane

By Robert Tuttle

Sept. 11 (Bloomberg) -- CME Group Inc., the world's biggest futures exchange, said it's extending New York Mercantile Exchange electronic trading hours this weekend because of Hurricane Ike.

The decision applies to energy trades on its ClearPort and Globex trading platforms, CME said in a release today. Trading will begin on Sept. 14 at 10 a.m. New York time with the session closing on Sept. 15. Trading would normally open at 7 p.m.

Ike's eye was 620 miles (998 kilometers) east of Brownsville, Texas, and moving west-northwest at 9 miles per hour toward the Texas Coast, the National Hurricane Center said in an advisory at 4 a.m. Houston time today. The storm is a Category 2 hurricane, with sustained winds of 100 miles per hour, and may strengthen further.

To contact the reporter on this story: Robert Tuttle in New York at rtuttle@bloomberg.net

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U.S. Trade Deficit of $62.2 Billion Exceeds Forecast

By Timothy R. Homan

Sept. 11 (Bloomberg) -- The U.S. trade deficit widened more than forecast in July as oil imports soared to a record, overshadowing gains in exports.

The gap grew 5.7 percent to $62.2 billion, the largest in 16 months, from a revised $58.8 billion in June that was bigger than previously estimated, the Commerce Department said today in Washington. Total imports and exports were the highest ever.

Americans paid a record $124.66 a barrel for foreign crude oil, more than offsetting increases in shipments of automobiles, aircraft and machinery to buyers overseas. While a weak dollar has made U.S. goods more affordable, shrinking economies in Europe and Japan may stifle export growth in coming months.

The oil deficit ``is going to fade away,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. ``Exports will remain very strong for the near term'' as American companies fill existing orders.

Economists forecast the gap would widen to $58 billion from an initially reported $56.8 billion in June, according to the median of 75 estimates in a Bloomberg News survey. Projections ranged from deficits of $54.6 billion to $62.5 billion.

Imports climbed 3.9 percent to $230.3 billion in July, reflecting a record $42.6 billion in purchases of crude oil that swelled the deficit with the Organization of Petroleum Exporting Countries. Excluding oil, the trade gap shrank.

Oil Outlook

The imported-oil bill probably came down in August as prices retreated. A barrel of crude oil on the New York Mercantile Exchange cost an average $117.02 last month, down from $133.77 in July.

Exports increased 3.3 percent to $168.1 billion, led by a $1.4 billion jump in shipments of autos and parts.

In August, prices of goods imported into the U.S. fell by the most in almost two decades of record-keeping as the cost of oil and natural gas dropped, indicating slower economic growth may be starting to calm inflation, according to another report.

The import price index decreased 3.7 percent, more than forecast, after rising a revised 0.2 percent in July, the Labor Department said today in Washington. Outside of oil, costs fell 0.3 percent following a 0.7 percent increase the prior month.

Overseas shipments have received a boost from the 7 percent decline in the dollar against a trade-weighted basket of currencies of major trading partners in the 12 months ended in July. The dollar began to recover in April after dropping 27 percent from February 2002.

Final Data

After adjusting for inflation, the trade deficit grew to $41.2 billion from $40.1 billion in June that was larger than previously estimated. The figures, which are used to calculate gross domestic product, indicate the government may lower the second-quarter growth estimate when the final data is reported later this month.

July's price-adjusted deficit was smaller than the average for last quarter, indicating trade will again boost growth in the third quarter.

The smallest trade deficit in eight years was the biggest contributor to the 3.3 percent pace of economic expansion last quarter. The narrower gap added 3.1 percentage points to growth, the most since 1980, the Commerce Department said Aug. 28. Excluding trade, the economy would have expanded at a 0.2 percent pace after growing 0.1 percent in the first three months of the year.

Gap Widened

The trade gap with China widened to $24.9 billion from $21.4 billion in the prior month. The deficit with the OPEC jumped 34 percent to a record $24.2 billion.

Some U.S. manufacturers have taken advantage of the competitive dollar. Boeing Co., the world's second-biggest aircraft maker, received bookings for 70 new planes in July, up from 62 placed in June. Fifty of the Chicago-based company's July orders came from abroad.

A machinist's strike this month could prevent Boeing from filling those orders in coming months, further threatening U.S. export growth. In the past, work stoppages by members of the company's largest union, the International Association of Machinists and Aerospace Workers, have lasted four to 10 weeks.

As economies in Europe and Japan contract, the outlook for exports has softened. FedEx Corp., the world's largest air-cargo carrier, foresees weak demand both in the U.S. and abroad.

``While sustained declines in fuel prices could improve our full-year outlook, the slowing economic growth trends in the U.S. are now extending to other areas of the global economy,'' Alan Graf, chief financial officer of the Memphis, Tennessee-based company, said yesterday in a statement.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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Two Britons Among Expat Oil Workers Kidnapped in Nigeria

By Dulue Mbachu

Sept. 11 (Bloomberg) -- Two Britons were among five foreign oil workers abducted by unknown gunmen in Nigeria's southern oil region earlier this week.

``There were two Britons seized on Tuesday and we're in touch with the Nigerian authorities to press for their release,'' James McLaughlin, a spokesman for the British High Commission in Nigeria, said by phone today from Abuja.

The oil workers were seized by gunmen during an attack on their vessel on Sombreiro River, McLaughlin said, without giving any more details.

Two South Africans working in the oil region were also among those abducted, South Africa's Foreign Affairs Ministry said in an e-mailed statement yesterday. Agence France Presse reported yesterday that 13 people, including five foreigners and eight Nigerians, were taken hostage in the attack.

More than 200 foreign oil workers have been seized in attacks targeting Nigeria's oil industry since 2006, with most of them freed unharmed by kidnappers who often demanded ransoms. The attacks have cut more than 20 percent of Nigeria's oil exports.

To contact the reporter on this story: Dulue Mbachu in Lagos via Johannesburg at pmrichardson@bloomberg.net.

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Maurel & Prom Says Unauthorized Trading Positions `Not Unwound'

By Tara Patel

Sept. 11 (Bloomberg) -- Etablissements Maurel & Prom SA said positions from unauthorized trading in the foreign exchange market aren't unwound.

The positions, which may result in losses for the French oil company of as much as 35.8 million euros ($53 million), are ``protected but not unwound,'' Chief Executive Officer Jean- Francois Henin said at a press conference today.

Legal action hasn't been taken against the employee responsible for the trades or the bank through which they were conducted, he said.

Controls within the company have been increased to prevent a recurrence, he said, adding that he would personally oversee future trading positions. The incident wouldn't change the company's policy on dividends, Henin said.

``Our trust was broken,'' he said. ``This has hurt our reputation.''

Maurel had a 14.8 million euro loss from the transactions in the first half and may have a further shortfall of as much as 21 million euros once the positions are unwound, the company said Aug. 29.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

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Volatility Surge Gives `Hope' to Commodities: Chart of the Day

By Millie Munshi

Sept. 11 (Bloomberg) -- The bear market in commodities may be nearing a bottom as the most volatile trading conditions since 1973 signal a possible reversal.

The CHART OF THE DAY shows the weekly historical volatility for the Reuters/Jefferies CRB Index of 19 raw materials rose to 27 percent yesterday, on a 10-week basis. Surges in volatility are a ``very hopeful, contrary'' indicator against the current trend in prices, said Chip Hanlon, who helps manage $1.5 billion as president of Delta Global Advisors Inc.

The only other time the volatility measure has risen above 25 percent was in August 1973, after the CRB jumped 24 percent in the previous six weeks. After volatility peaked at 32 on Sept. 7, 1973, the index began a four-week decline of 12 percent and headed for a three-month low in November of that year.

``Extreme spikes in volatility have tended to coincide with lows or peaks,'' Hanlon, who correctly predicted in January that industrial metals would fall this year, said yesterday by telephone from Huntington Beach, California. ``Even the true believers in commodities have thrown the baby out with the bath water on this bleak economic outlook, and things moved too fast. This is an indication prices may start to turn around soon.''

This year has been the most volatile for commodities since 1973. Ospraie Management LLC, the New York-based investment firm run by Dwight Anderson, last week shut its biggest fund after losses in commodity companies. RK Capital Management LLP lost as much as 30 percent last month as metals dropped.

``We've seen volatility ratchet up in metals, oil -- across the board,'' Ron Goodis, an Equidex Brokerage Group Inc. futures trading director in Closter, New Jersey, said in a telephone interview. ``It puts traders in a different mindset. In some ways, money can be made faster, but it doesn't mean it's easier.''

To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net

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Hurricane Ike Churns Toward Texas as Houston Calls Evacuation

By Brian K. Sullivan and Camilla Hall

Sept. 11 (Bloomberg) -- Ike grew into a ``large'' hurricane as it churned across the Gulf of Mexico toward Texas, prompting coastal evacuations and the shutdown of oil platforms and refineries.

Galveston and parts of Houston south of the city and near the coast will be under a mandatory evacuation order starting at noon local time, city officials said at a press conference today. The area may see a storm surge of as much as 15 feet (4.6 meters).

``Ike is growing to a very large hurricane right now with a very large wind field,'' said Jim Rouiller, a meteorologist with Planalytics Inc. in Wayne, Pennsylvania. ``In the next 24 to 36 hours, as Ike makes his play for the Texas coast, he will intensify to a major hurricane.''

The center of Ike's hurricane-force winds has more than tripled in size since yesterday, according to the Miami-based National Hurricane Center. The system's strongest winds now extend outward as far as 115 miles (185 kilometers), up from 35 miles yesterday.

Ike was a Category 2 hurricane with sustained winds of 100 mph, up from 80 mph yesterday, the center said in an advisory at 7 a.m. Houston time.

The center's forecasters said Ike may strengthen to at least a major hurricane with Category 3 intensity, meaning sustained winds of at least 111 mph, in the next day or two. Other forecasters predict Ike may become a Category 4 storm, the second-strongest on the five-step Saffir-Simpson scale, packing winds from 131 to 155 mph.

Missing Oil Fields

The storm is forecast to sweep through the center of the Gulf, missing the offshore Louisiana oil and natural gas fields. The Gulf is home to about a quarter of U.S. oil production.

Still, about 96 percent of all oil production in the Gulf has been shut in along with 73.1 percent of natural gas facilities, according to the Minerals Management Service, a bureau of the U.S. Department of the Interior.

Rouiller said the storm surge may do some damage to Galveston, a coastal city near Houston.

``I am worried that Galveston Bay in particular will be in the right front quadrant of it,'' Rouiller said by telephone.

President George W. Bush declared an emergency for Texas, his home state, and Governor Rick Perry readied 1,350 buses to evacuate residents in preparation for Ike's landfall. As many as 7,500 Texas National Guard members are on standby. Ike may cross the central Texas coast southwest of Galveston Bay early Sept. 13, the National Hurricane Center said.

New Orleans Warning

The New Orleans area, including Lake Pontchartrain, was under a tropical-storm warning for Ike. That means such conditions, with sustained winds of 39 to 73 mph, are expected within 24 hours. The warning stretches along the coast from Cameron, Louisiana, east to the Mississippi-Alabama border.

New Orleans, which was devastated by Hurricane Katrina in 2005, was spared the worst of Hurricane Gustav when it struck the state last week. Gustav killed 25 people in Louisiana.

A hurricane watch was in place from Cameron, Louisiana, west to Port Mansfield, Texas. The watch means hurricane conditions, with sustained winds of at least 74 mph, are possible within 36 hours.

Officials in Corpus Christi, a city of about 277,000 people, yesterday advised people to evacuate.

Voluntary Evacuations

Voluntary evacuations are also in effect for San Patricio, Aransas and Victoria counties and parts of Jackson County. Officials have ordered mandatory evacuations for Brazoria and parts of Matagorda County, according to Perry's office.

The potential for destruction from Hurricane Ike has caused oil refiners to begin shutting plants near Houston and producers to evacuate platforms in the Gulf.

Along the Texas coast, major U.S. refineries are in the path of the storm. Exxon Mobil Corp.'s Baytown facility, 17 miles east of Houston, is the country's biggest, with a capacity of 586,000 barrels a day. In Texas City, BP Plc has a 475,000 barrel-a-day refinery. Royal Dutch Shell Plc, Total SA and Valero Energy Corp. also have refineries in the vicinity.

The Louisiana Offshore Oil Port, which is the biggest U.S. oil-import terminal and handles 13 percent of imports, said it closed marine operations because of Ike.

Crude oil for October fell 0.5 percent to $102.03 a barrel on the New York Mercantile Exchange.

To contact the reporters on this story: Brian K. Sullivan in Boston at bsullivan10@bloomberg.net; Camilla Hall in London at chall24@bloomberg.net

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Two Britons Among Expat Oil Workers Kidnapped in Nigeria

By Dulue Mbachu

Sept. 11 (Bloomberg) -- Two Britons were among five foreign oil workers abducted by unknown gunmen in Nigeria's southern oil region earlier this week.

``There were two Britons seized on Tuesday and we're in touch with the Nigerian authorities to press for their release,'' James McLaughlin, a spokesman for the British High Commission in Nigeria, said by phone today from Abuja.

The oil workers were seized by gunmen during an attack on their vessel on Sombreiro River, McLaughlin said, without giving any more details.

Two South Africans working in the oil region were also among those abducted, South Africa's Foreign Affairs Ministry said in an e-mailed statement yesterday. Agence France Presse reported yesterday that 13 people, including five foreigners and eight Nigerians, were taken hostage in the attack.

More than 200 foreign oil workers have been seized in attacks targeting Nigeria's oil industry since 2006, with most of them freed unharmed by kidnappers who often demanded ransoms. The attacks have cut more than 20 percent of Nigeria's oil exports.

To contact the reporter on this story: Dulue Mbachu in Lagos via Johannesburg at pmrichardson@bloomberg.net.

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Dollar Rises to One-Year High Against Euro on Growth Outlook

By Ye Xie and Agnes Lovasz

Sept. 11 (Bloomberg) -- The dollar rose to the highest level in a year against the euro on speculation economic growth in Europe will be slower than in the U.S., prompting the European Central Bank to lower interest rates.

New Zealand's currency dropped to two-year lows against the dollar and the yen as the Reserve Bank reduced borrowing costs more than most economists forecast. The yen advanced to the highest level against the euro since September 2006 on concern a global slowdown will lead investors to reduce holdings of higher-yielding assets and pay back loans in Japan's currency.

``Risk aversion is feeding into the dollar rally right now,'' said Mike Moran, a senior currency strategist at Standard Chartered in New York. ``Investors are increasingly concerned about the backdrop for the rest of the world in the next three, six months.''

The U.S. currency climbed 0.6 percent to $1.3917 per euro at 9:26 a.m. in New York, from $1.3998 yesterday. It touched $1.3893, the strongest level since Sept. 18, 2007. The yen advanced 1.9 percent to 147.85 per euro, from 150.75, after touching 147.71, the strongest in two years. The yen gained 1.4 percent to 106.24 per dollar, from 107.70.

The ICE's Dollar Index touched 80.375 today, the highest level since September 2007, when the Federal Reserve began cutting its target lending rate from 5.25 percent to 2 percent to stave off a recession. The index, a gauge measuring the dollar against the currencies of six U.S. trading partners, reached a low of 70.698 on March 17.

ECB Rate Outlook

The ECB will cut its main refinancing rate by a quarter- percentage point to 4 percent during the first three months of next year, according to Bloomberg surveys of economists.

The European Commission said yesterday the euro region's economy will probably stagnate this quarter after shrinking the previous three months for the first time since the currency's debut in 1999. It cut its 2008 growth forecast to 1.3 percent, from 1.7 percent. By contrast, the median in a Bloomberg News survey of economists was for U.S. growth of 1.7 percent.

The yen gained against all of the other major currencies on speculation investors will reduce carry trades, in which investors get funds in a country with low borrowing costs and buy assets where returns are higher. The yen rose 3.5 percent to 58.14 versus the Brazilian real and 2.7 percent to 12.77 against the South African rand. Japan's target lending rate of 0.5 percent compares with 13.75 percent in Brazil and 12 percent in South Africa.

`Risk-Aversion Mode'

``Investors in Japan are in risk-aversion mode, so they're buying the yen,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG.

The New Zealand dollar, known as the kiwi, fell as much as 2.7 percent to 64.38 U.S. cents, the lowest since September 2006, and 3.7 percent to 68.99 yen, the weakest since May 2006. The Reserve Bank cut its official cash rate by a half-percentage point to 7.5 percent, saying the economy is in a recession and inflation will slow.

The yen gained for a fourth day against the euro after implied volatility on one-month euro options versus the yen rose to 16.94 percent, the highest since March 18.

The Australian dollar dropped to the lowest against the U.S. currency since August 2007 on tumbling prices of raw materials, which account for about 60 percent of the nation's exports. The Aussie fell as much as 1.4 percent to 79.01 U.S. cents and dropped 2.2 percent to 84.44 against the yen.

Platinum for immediate delivery fell as much as 4.2 percent to $1,130.65 an ounce in London, the lowest since Jan. 12, 2007, while gold dropped 1.3 percent to $742.40 an ounce.

European Output

Industrial output in the 15 nations that use the euro probably fell 0.2 percent in July after a decline by the same amount in June, according to the median forecast of 31 economists surveyed by Bloomberg News. The report from the European Union's statistics office is due tomorrow.

``The euro is likely to extend its adjustment lower,'' said Saburo Matsumoto, senior manager of foreign-exchange sales in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest publicly traded bank by market value. ``The euro-zone economy is facing a recession, so a weaker currency could provide some relief to exports.''

Implied volatility on the dollar versus the most actively traded currencies was at 11.55 percent after touching 12 percent, the highest since April, according to the JPMorgan Volatility index. The gauge of perceived price fluctuation in the dollar reached 9.27 percent on Aug. 4, the lowest this year.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

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Aluminum Drops on Slowing Demand Amid Oversupply; Copper Climbs

By Claudia Carpenter

Sept. 11 (Bloomberg) -- Aluminum fell in London as rising stockpiles indicated weakening demand because of a global oversupply of the metal. Copper erased an earlier decline.

Inventories of aluminum in warehouses monitored by the London Metal Exchange jumped 14,250 metric tons, or 1.2 percent, to 1.18 million tons, the highest since April 2004, according to the exchange's daily warehouse report. Supplies will outpace demand through next year, according to Triland Metals Ltd., one of 12 companies that trade on the LME floor.

``I find it very hard to come up with a big deficit next year,'' said Michael Widmer, an analyst at Lehman Brothers Holdings Ltd. in London. ``You would need to create a shortage of aluminum by closing down a lot of capacity and demand is relatively weak at the moment.''

Aluminum for delivery in three months dropped $24 to $2,602 a ton as of 1:52 p.m. local time on the LME. Copper jumped $72 to $6,912 a ton after earlier falling as much as $40.

Producers of aluminum will cut the fee they charge buyers in Japan, Asia's biggest importer, by as much as 14 percent, the biggest drop in five years, as a slump in home and car sales slows demand. The premium will be $75 to $77 a ton on the LME cash price for the three months to Dec. 31, down from $87 in the current quarter, according to four executives involved in the talks. The drop is the first in a year.

Worst Month

September has been the worst month for aluminum prices since 1987, with the biggest gains in December, Credit Suisse said in a report today. Prices may rebound to $3,000 by the end of the year, according to the report.

Copper in London dropped 12 percent in the past two months, almost three times the decline in prices in Shanghai, leading to speculation of increased metal imports in China, the world's largest buyer of the metal.

``The copper market is weaker than a year ago,'' Widmer said. ``You have got a little bit of a rebound in part because of expectations Chinese buyers will have to come back in the market.''

Freeport McMoRan Copper & Gold Inc., the world's second- largest copper producer, said supply globally may be constrained because of a lack of new discoveries and declining output at ageing mines.

``We feel very optimistic about the markets,'' Chief Executive Officer Richard Adkerson said yesterday.

Tin gained $475 to $18,800 a ton as inventories fell 20 tons to 5,645 tons, the lowest since Aug. 21.

Lead rose $31 to $1,830 a ton, zinc fell $15 to $1,735 a ton and nickel gained $100 to $18,600 a ton.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net

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Crude Oil Falls as Stronger Dollar Dims Commodities' Appeal

By Alexander Kwiatkowski

Sept. 11 (Bloomberg) -- Crude oil fell for a third day as the dollar gained against the euro, reducing the appeal of commodities as a hedge.

Oil dropped after the dollar rose to a one-year high against the euro on speculation that growth in Europe will slow more than in the U.S. Investors looking to hedge against the dollar's decline helped lead crude oil and other commodities to records earlier this year. Hurricane Ike was set to miss platforms off the Louisiana coast as it passes through the U.S. Gulf.

``The sentiment in the market is very negative at the moment since demand for oil and commodities has declined sharply,'' said Thina Saltvedt, an analyst at Nordea Bank AB in Oslo. ``Quite a lot of investors are pulling out of commodities.''

Crude oil for October fell as much as $1.15, or 1.1 percent, to $101.43 a barrel in electronic trading on the New York Mercantile Exchange. The contract traded at $101.75 at 1:02 p.m. London time.

Crude has fallen about 30 percent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduce demand for fuels.

The International Energy Agency lowered its 2008 oil demand forecasts yesterday, citing an expectation of weakening fuel consumption in the U.S., the world's biggest gasoline consumer.

The dollar climbed to $1.3893 per euro, the strongest since Sept. 18, 2007, before trading at $1.3936 as of 1:03 p.m. in London from $1.3998 late yesterday in New York.

Hurricane's Eye

Hurricane Ike's eye was 620 miles (995 kilometers) east of Brownsville, Texas, and moving west-northwest at 9 miles per hour, the National Hurricane Center said in an advisory at 4 a.m. Houston time today.

Ike strengthened to a Category 2 hurricane with sustained winds of 100 mph, up from 80 mph yesterday. The storm is forecast to sweep through the center of the Gulf, missing the offshore Louisiana oil and natural gas fields.

Some rigs, refineries and platforms shut down by Hurricane Gustav last week are staying closed as Ike tracks across the region. Gulf operators have evacuated personnel from 63 percent of the production platforms, the Minerals Management Service said on its Web site yesterday.

The agency estimates that as much as 96 percent of Gulf of Mexico oil production, and 73.1 percent of natural gas output, is shut. That is about 1.25 million barrels a day of oil and 5.4 billion cubic feet a day of gas.

`Skirting Away'

``Ike appears to be skirting away from the oil and gas production fields and should make land around the Corpus Christi area,'' said Robert Laughlin, senior broker at MF Global Ltd. in London. ``The oil market may have escaped again.''

Brent crude oil for October settlement fell as much as $1.12, or 1.1 percent, to $97.85 a barrel on London's ICE Futures Europe exchange. It was at $98.25 at 1:03 p.m. London time.

Oil's decline led the Organization of Petroleum Exporting Countries to say this week it will try to limit production.

OPEC members, who supply about 40 percent of the world's oil, agreed at a meeting in Vienna to a total production limit for 11 members of 28.8 million barrels a day, unchanged from previous targets. OPEC Secretary-General Abdalla El-Badri said this means it will trim ``oversupply'' by about 500,000 barrels a day.

The decision is a signal that OPEC is ``entering price defense mode,'' Barclays Capital analysts led by Paul Horsnell said in a research note.

``Saudi Arabia would be perfectly happy with prices in the $90 to $100 range,'' the Barclays analysts said. ``It appears that other OPEC members wished to give a stronger signal.''

Barclays slashed its fourth-quarter oil price forecast by 21 percent on weakening demand. The bank expects West Texas Intermediate to average $97.50 a barrel in the fourth quarter, $26.40 less than a forecast of $123.90 in its previous weekly report. The bank's Brent crude forecast was reduced to $95.90, from $122.20, for the fourth quarter.

Natural gas for October delivery rose 0.8 percent to $7.454 per million British thermal units on Nymex, while gasoline futures rose 1.5 percent to $2.7005 a gallon.

To contact the reporter on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net

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Platinum Extends Drop to 20-Month Low on Outlook for Car Sales

By Stuart Wallace

Sept. 11 (Bloomberg) -- Platinum retreated to a 20-month low and palladium to its lowest since October 2005 on expectations flagging car sales will curb demand for the metals used in autocatalysts. Gold dropped to its weakest since October.

Ford Motor Co., the second-biggest U.S. automaker, yesterday said it would cut jobs in Canada as it reduces North American output by 30 percent in the second half. U.S. auto sales dropped to a 15-year low in July and Toyota Motor Corp., the world's second-largest carmaker, is cutting production in Europe.

``The autocatalyst makers are decreasing their stockpiles because the prognosis for car sales is very bad,'' Bayram Dincer, a commodity research analyst at Dresdner Bank AG in Zurich, said by phone. That's ``having a huge impact on the platinum price.''

Platinum for immediate delivery fell as much as $49.35, or 4.2 percent, to $1,130.65 an ounce in London, the lowest since Jan. 12, 2007. The metal traded down $25.25 at $1,154.75 as of 11:06 a.m. local time. Platinum has dropped 50 percent from a record $2,301.50 reached March 4.

Dincer said he expects a ``volatile consolidation phase'' in the next week or two, with prices trading at $1,125 to $1,200 and a year-end target of $1,300. ``I don't see this as a buying opportunity,'' he said.

Prices surged in the first quarter after South Africa restricted power supplies to mines to cope with an energy shortage. The country accounts for about three-quarters of world platinum supply, according to Johnson Matthey Plc.

About half of demand comes from carmakers, taking into account recycling from used autocatalysts. Jewelry and the chemical and electrical industries make up most of the rest of consumption.

Palladium Declines

Palladium for immediate delivery fell as much as $11, or 4.8 percent, to $216.75 an ounce, the lowest since Oct. 26, 2005. The metal last traded down $5 at $222.75. Palladium rose as high as $595 on March 4, compared with a record $1,125 in January 2001.

Platinum futures sank to a 30-month low on the Tokyo Commodity Exchange, while palladium slumped to its lowest in almost three years.

Gold for immediate delivery in London fell $10.05, or 1.3 percent, to $742.40 an ounce, after earlier trading at $739.05, the lowest since Oct. 10, 2007. The metal declined as the dollar strengthened against currencies including the euro, diminishing the appeal of gold as a hedge against a weaker U.S. currency.

``With the bears still in the driving seat and investors continuing to free up cash in their most liquid assets, gold looks set to remain under pressure,'' James Moore, an analyst at TheBullionDesk.com in London, wrote in a report.

Assets in the SPDR Gold Trust, the largest exchange-traded fund backed by bullion, fell 2.7 percent to 614.35 metric tons yesterday, according to figures on the company's Web site.

Silver fell 0.49 cent, or 0.1 percent, to $10.68 an ounce. It earlier traded at $10.61, the lowest since October 2006.

To contact the reporter on this story: Stuart Wallace in London at swallace6@bloomberg.net

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