U.S. August Industrial Production: Statistical Summary (Table)

By Alex Tanzi

Sept. 15 (Bloomberg) -- Following is a summary of the U.S. industrial production and capacity utilization report for Aug. released by the Federal Reserve.

===============================================================================
                             Aug.   July   June   May   April  March   Aug.
                     Weight  2008   2008   2008   2008   2008   2008   YOY%
===============================================================================
Industrial production 100.0%  -1.1%   0.1%   0.2%  -0.1%  -0.5%  -0.2%  -1.5%
  Prev. estimates      n/a    n/a    0.2%   0.4%  -0.2%  -0.6%  -0.2%   n/a
Ex high-tech         95.69%  -1.2%   0.0%   0.2%  -0.2%  -0.7%  -0.4%  -2.4%
Ex vehicles          94.88%  -0.6%  -0.1%   0.0%  -0.2%  -0.2%   0.0%  -0.4%
Ex tech & vehicles   90.57%  -0.7%  -0.1%   0.0%  -0.2%  -0.3%  -0.1%  -1.4%
                             -----------------Industry Groups-----------------
Manufacturing         78.70%  -1.0%   0.1%   0.0%   0.1%  -0.9%   0.1%  -1.9%
Motor vehicle, parts  5.12% -11.9%   2.5%   4.8%   0.5%  -6.6%  -4.8% -20.7%
ex. motor veh/parts  73.58%  -0.3%  -0.1%  -0.3%   0.1%  -0.5%   0.4%  -0.6%
Machinery             4.89%   0.3%   0.0%   0.3%  -0.1%  -3.2%   1.7%  -3.0%
Computer, electronics 6.85%   0.0%   0.4%   0.5%   0.4%   1.5%   2.0%  13.8%
===============================================================================
                             Aug.   July   June   May   April  March   Aug.
                     Weight  2008   2008   2008   2008   2008   2008   YOY%
===============================================================================
Utilities              9.68%  -3.2%  -1.6%   1.8%  -2.2%   1.6%  -3.4%  -4.2%
Electric              7.98%  -4.0%  -2.3%   3.2%  -2.7%   1.3%  -2.8%  -5.1%
Natural Gas           1.70%   0.0%   1.5%  -4.3%   0.0%   2.9%  -6.3%  -0.1%
Mining                11.62%  -0.4%   1.1%   0.2%   0.0%   0.0%   0.3%   3.5%
                             -----------------Market Groups-------------------
Products              56.13%  -1.5%   0.1%   0.6%  -0.1%  -0.7%  -0.5%  -1.8%
Consumer goods       29.33%  -2.0%   0.2%   0.7%  -0.2%  -0.6%  -1.1%  -3.0%
 Home electronics     0.31%  -0.3%  -0.5%  -2.0%   2.5%   4.7%   1.0%  16.0%
Business equipment    9.38%  -0.6%   0.2%   0.3%   0.3%  -1.7%   0.9%   0.7%
 Info processing      2.72%   0.2%  -0.3%   0.6%   0.6%   1.3%   1.4%  10.3%
Defense and space     1.73%  -0.7%  -1.0%   1.1%  -0.5%  -0.1%   0.0%   0.4%
Construction supply   4.21%  -1.0%   0.4%  -0.3%   0.5%  -1.0%   0.1%  -5.8%
Business supplies    10.64%  -0.6%  -0.6%  -0.2%  -0.6%   0.1%  -0.6%  -2.0%
Materials             43.87%  -0.9%   0.1%   0.0%  -0.2%  -0.4%   0.2%  -0.6%
Energy               14.58%  -1.1%   0.5%  -0.2%  -0.3%  -0.1%  -0.1%   0.8%
                             ----------------------Indexes------------Yr. Ago-
Total production      100.0%  110.3  111.6  111.5  111.3  111.4  112.0  112.0
===============================================================================
                             Aug.   July   June   May   April  March   Year
                     Weight  2008   2008   2008   2008   2008   2008   Ago
===============================================================================
Manufacturing        78.70%  111.4  112.5  112.4  112.4  112.3  113.3  113.6
Mining               11.62%  104.8  105.2  104.1  103.9  103.9  103.9  101.2
Utilities             9.68%  104.7  108.2  110.0  108.0  110.5  108.7  109.3
                             -------------Capacity Utilization----------------
Total industry        100.0%  78.7%  79.7%  79.7%  79.7%  79.9%  80.4%  81.2%
  Prev. estimates    100.0%   n/a   79.9%  79.8%  79.6%  79.8%  80.5%   n/a
Ex high-tech         95.07%  78.6%  79.6%  79.7%  79.6%  79.8%  80.4%  81.3%
 Computers            1.13%  80.6%  80.6%  81.0%  81.5%  81.6%  81.2%  77.9%
 Semiconductors       2.35%  78.0%  79.5%  78.8%  79.5%  81.2%  81.3%  80.9%
Manufacturing        80.83%  76.6%  77.5%  77.5%  77.6%  77.7%  78.5%  79.6%
Mining                9.90%  91.3%  91.7%  90.7%  90.6%  90.6%  90.7%  88.9%
Utilities             9.27%  81.5%  84.4%  85.9%  84.5%  86.6%  85.4%  87.0%
                             -----------Motor Vehicle Assemblies--------------
Total                 10.75%   8.19   9.76   9.25   8.68   8.44   9.39  10.96
Autos & light trucks 10.47%   7.96   9.56   9.04   8.42   8.17   9.13  10.71
===============================================================================
NOTE: All figures are seasonally adjusted. Motor vehicle assemblies
are in millions of units at an annual rate.



To contact the reporter on this story:
Alex Tanzi in Washington  atanzi@bloomberg.net

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U.S. Economy: Industrial Production Contracts Most Since 2005

By Shobhana Chandra

Sept. 15 (Bloomberg) -- Industrial production in the U.S. fell in August by the most in almost three years as the slowdown in consumer spending prompted automakers to cut back.

The 1.1 percent decrease in production at factories, mines and utilities was more than forecast, Federal Reserve figures showed today. Car output slumped 12 percent, the most in a decade, and declines ranged from semiconductors to building supplies.

Today's report indicates the domestic slump is pulling down a U.S. manufacturing industry that has been buttressed by record exports. The figures may stoke concern the economic downturn will deepen amid a housing recession, rising unemployment and a credit crunch that today sent Lehman Brothers Holdings Inc. into bankruptcy.

``We're seeing more pervasive weakness in manufacturing, going beyond autos,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``The economy is taking a lurch downward. This is another report that points to a recession.''

Stocks slid and Treasuries climbed today in the aftermath of the Lehman bankruptcy and on concerns American International Group Inc., the largest U.S. insurer by assets, lacks sufficient assets to offset losses.

The Standard & Poor's 500 Stock Index fell 1.4 percent to 1,234.82 at 10:56 a.m. in New York. Yields on benchmark 10-year notes fell to 3.57 percent, from 3.72 percent at last week's close.

Economists' Forecasts

Industrial production was forecast to drop 0.3 percent, according to the median estimate of 68 economists surveyed by Bloomberg News. July's reading was revised down to a 0.1 percent gain from the 0.2 percent previously estimated.

Earlier today, a report from the New York Fed showed manufacturing worsened this month in that region. The Empire State general economic index fell to minus 7.4, the lowest reading since June, from 2.8 a month earlier. A reading of zero is the dividing line between growth and contraction.

The Fed's production report also showed that capacity utilization, which measures the proportion of plants in use, decreased to 78.7 percent, the lowest level since October 2004. Capacity was estimated to fall to 79.6 percent, according to the Bloomberg survey median.

Economists track plant operating rates to gauge factories' ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher. The utilization rate has averaged 81 percent over the past 30 years.

Factory Output

Factory output, which accounts for about four-fifths of industrial production, dropped 1 percent after a 0.1 percent increase the prior month, the report showed.

Production at utilities fell 3.2 percent, reflecting a cooler August than usual, economists said. Mining output, which includes oil drilling, decreased 0.4 percent. Shutdowns in the Gulf of Mexico as Hurricane Gustav approached may have contributed to the drop. Shutdowns ahead of Hurricane Ike will probably hurt mining output this month.

The slump in motor vehicle and parts production followed a 2.5 percent gain the prior month, the report said. Carmakers assembled just 8.19 million autos at an annual pace last month, the fewest since April 1991.

Production of consumer durable goods, including automobiles, furniture and electronics, fell 6 percent.

Factories may slow further as sales weaken. Purchases at U.S. retailers fell 0.3 percent in August following a 0.5 percent decline in July as Americans retrenched in the face of mounting job losses and record foreclosures, Commerce Department figures showed last week.

GM, Ford

Carmakers are struggling. General Motors Corp. and Ford Motor Co., the biggest U.S. automakers, dragged the domestic industry to its 10th straight monthly sales decline in August as consumers snubbed trucks because of high fuel prices. Ford this month further pared production plans for the rest of 2008.

``Not only is the U.S. in a recession, but the rest of the world is slowing down,'' Ford Chief Executive Officer Alan Mulally said during a speech on Sept. 8 in Dearborn, Michigan. ``I've never seen anything quite like it.''

Manufacturers are also cutting payrolls. Factories eliminated 61,000 jobs last month, the biggest decline in five years, Labor figures showed on Sept. 5. The drop included a loss of 39,000 jobs in auto-making and parts industries.

Other recent reports show American manufacturers have become more cautious as consumer spending weakens. The Institute for Supply Management's factory index fell in August for the first time in three months, the group reported on Sept. 2.

Consumer spending, the biggest part of the economy, will stall this quarter, while economic growth will slow to a 1.2 percent annual rate, less than half the prior quarter's pace, according to a Bloomberg survey from Sept. 2 to Sept. 9.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net



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Lehman Files Biggest Bankruptcy Case as Suitors Balk

By Yalman Onaran and Christopher Scinta

Sept. 15 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history.

The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.

Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94 percent of its market value this year. Chief Executive Officer Richard Fuld, who turned the New York-based firm into the biggest underwriter of mortgage-backed securities at the top of the U.S. real estate market, joins his counterparts at Bear Stearns Cos., Merrill Lynch & Co. and more than 10 banks that couldn't survive this year's credit crunch.

``There is likely to be a domino effect as other firms and individuals who relied on Lehman for financing feel the effects of its meltdown,'' said Charles ``Chuck'' Tatelbaum, a bankruptcy lawyer with Adorno & Yoss in Florida and former editor of the American Bankruptcy Institute Journal. ``The whole thing is frankly frightening for the U.S. economy.''

Shares, Bonds

Lehman's filing was made by lawyers from New York-based Weil Gotshal & Manges, led by bankruptcy lawyer Harvey Miller. The case was assigned to U.S. Bankruptcy Judge James Peck, according to court records. Peck was sworn in as a judge in January 2006. Before taking the bench, he served as co-chair of business reorganization at Schulte Roth & Zabel, and prior to that was a partner at Duane Morris, according to the court's web page.

Lehman shares at 9:39 a.m. dropped 92 percent in New York trading to 29 cents from their $3.65 close on Sept. 12. UBS AG, HBOS Plc and Axa SA led a decline of more than 3 percent for European stock markets on speculation a forced sale of Lehman's assets may lead to further writedowns at other banks.

Benchmark gauges of corporate credit risk rose by a record in Europe, and traded at an all-time high in North America as investment banks sought to minimize losses from Lehman's collapse. U.S. two-year Treasuries climbed, pushing yields below 2 percent for the first time since April, as investors sought the relative safety of government debt.

60 Cents

Lehman bondholders may get about 60 cents on the dollar if the investment bank is forced into liquidation, analysts at CreditSights Inc. said. The filing is by Lehman's holding company and won't include any of its subsidiaries. Lehman owes its 10 largest unsecured creditors more than $157 billion, including debts to bondholders totaling $155 billion.

The largest single creditor listed in today's filing is Tokyo-based Aozora Bank Ltd., owed $463 million for a bank loan. Other top creditors include Mizuho Corporate Bank Ltd., owed $382 million, and a Citigroup Inc. unit based in Hong Kong owed an estimated $275 million. Lehman listed $639 billion of assets. New York-based Citigroup and The Bank of New York Mellon Corp. are among trustees for bondholders who Lehman owed about $155 billion.

London-based Barclays, which emerged as a leading candidate to acquire Lehman, pulled out first yesterday, saying it couldn't obtain guarantees from the U.S. government or other Wall Street firms to protect against losses on Lehman's assets.

Three Hours Later

Bank of America Corp. withdrew about three hours later, before saying it would acquire New York-based Merrill Lynch. Brokers sought yesterday to consolidate trades linked to Lehman to minimize the impact of a bankruptcy filing.

Founded in 1850 by three immigrants from Germany, Lehman has managed to avert previous potential disasters and was among the handful of U.S. financial firms that had endured for more than a century.

Fuld, the longest-serving CEO on Wall Street, attempted to shore up the firm's finances in the second quarter by raising $14 billion of capital, selling $147 billion of assets, increasing cash holdings and reducing reliance on short-term funding to create a buffer against a bank run.

Instability in the financial and credit markets left Lehman officials struggling to keep the firm afloat, Ian Lowitt, the firm's chief financial officer, said in a court filing in the bankruptcy case. Liquidity problems plagued Lehman earlier this year, he said.

``This loss of liquidity created a chain reaction of adverse economic consequences,'' Lowitt said.

25,000 Employees

Lehman, which has about 25,000 employees worldwide, last week reported the biggest loss in its history and said it planned to sell a majority stake in its asset-management unit, spin off real-estate holdings and cut the dividend in an effort to shore up capital and regain investor confidence. The efforts failed to stem speculation that the firm's mortgage holdings would lead to more losses.

``The uncertainty, particularly among the banks through which the company clears securities trades, ultimately made it impossible for the company to continue to operate its business,'' Lowitt said in the filing. The firm had sought about $4 billion for the asset-management unit, he added.

The U.S. Treasury and the Federal Reserve negotiated with Wall Street executives for the past three days in New York, trying to strike a deal that would prevent the investment bank from failing before markets open today. Treasury Secretary Henry Paulson indicated that he didn't want to use U.S. taxpayer funds to ease a sale of the company.

Exploring the Sale

Fuld, 62, is exploring the sale of its broker-dealer operation and continues to hold talks on the sale of its asset- management unit, including fund manager Neuberger Berman, the company said today in the statement.

The U.S. Securities and Exchange Commission said customer accounts at Lehman are protected and agency staff will remain at the brokerage firm in the coming weeks.

Securities rules require segregation of Lehman's securities and cash, and accounts are covered by insurance provided by the Securities Investor Protection Corp., the Washington-based agency said last night. SEC employees working inside the broker's office will continue that assignment, the agency said.

``We are committed to using our regulatory and supervisory authorities to reduce the potential for dislocations from recent events, and to maintain the smooth functioning of the financial markets,'' said SEC Chairman Christopher Cox in a statement yesterday.

Units That Fail

Brokerage units that fail usually are handled by the SIPC, which appoints a trustee to liquidate the business and protect its customers. Lehman's customer accounts may also be farmed out to other firms that may protect cash and securities, on the model of the failed junk-bond firm Drexel Burnham Lambert, which filed for bankruptcy in 1990.

Lehman's trades in commodities, derivatives and other financial instruments may be unwound by the bank's counterparties, said Andrew Rahl, co-head of bankruptcy in New York at law firm Reed Smith and a specialist in financial companies.

A liquidation of the brokerage unit might be ``a big mess'' if Lehman used customer accounts to raise cash, and sale and repurchase agreements had to be unwound, Rahl said.

Take Over

The trigger for SIPC to take over the Lehman brokerage would be a freezing of customer accounts, or a Chapter 11 filing that implied the unit was insolvent and its customers might not be able to access their property, the official said.

``First there will be chaos and then an adjustment process as losses distribute themselves through the market,'' said Gilbert Schwartz, a former Federal Reserve attorney and now a partner at Schwartz & Ballen in Washington. ``There won't be any lasting turmoil. Treasury and the Fed have determined that markets have adjusted to the situation since Bear Stearns. If every time a big institution went bust the markets expected the government to step in, no one would ever adapt.''

Ladenburg Thalmann & Co. analyst Richard Bove wasn't as sanguine.

``We will be entering uncharted territory,'' he said. ``Forcing liquidation will set off problems in other companies and markets everywhere.''

Rival Banks

Rival banks and brokers yesterday held a session for netting derivatives transactions with Lehman to reduce uncertainty in that market. That move means canceling trades that offset each other, the International Swaps and Derivatives Association said in a statement. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

In the U.K., the Financial Services Authority asked banks to disclose their exposure to Lehman, spokeswoman Teresa LaThangue said in a statement today.

Any sale of Lehman's investment management units is subject to court approval and creditor scrutiny under bankruptcy rules, according to Tatelbaum.

``Bankruptcy severs all counterparty contracts, and therein lies the systemic risk,'' said David Kotok, chief investment officer of Vineland, New Jersey-based Cumberland Advisors Inc., which manages $1 billion. ``This would be the first time we've tested how much damage will be done by a bankruptcy.''

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Christopher Scinta in U.S. Bankruptcy Court for the Southern District of New York in Manhattan at cscinta@bloomberg.net; Yalman Onaran in New York at yonaran@bloomberg.net.

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ECB, BOE Join Fed in Soothing Markets After Lehman

By John Fraher
More Photos/Details

Sept. 15 (Bloomberg) -- The European Central Bank and the Bank of England joined the Federal Reserve in taking action to soothe financial markets spooked by Lehman Brothers Holdings Inc.'s bankruptcy filing.

The ECB said it awarded banks 30 billion euros ($43 billion) in a one-day money-market auction that was more than three times oversubscribed. The Bank of England loaned banks 5 billion pounds ($9 billion) for three days. Earlier, the Federal Reserve widened the collateral it accepts for loans to securities firms.

Stocks plunged and the cost of borrowing dollars surged after Lehman became the latest victim of a yearlong credit squeeze. Financial institutions worldwide have reported more than $500 billion in losses and writedowns and the credit-market turmoil has erased $11 trillion from global stocks in the past year.

``It remains to be seen whether today's operation will be sufficient to restore market confidence,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc. ``The ECB will likely wait for the U.S. open to consider more aggressive action. Key will be how credit and equity markets develop in the coming days.''

The ECB said it injected the funds at a marginal rate of 4.30 percent. The Swiss central bank offered liquidity through its overnight facility for the first time since Feb. 22.

``We have to be extraordinarily alert,'' ECB President Jean-Claude Trichet told reporters in Frankfurt today. ``We have said it in recent weeks'' that ``it's an ongoing market correction'' with ``episodes of a high level of volatility.''

China, Australia

China cut interest rates for the first time in six years and the Reserve Bank of Australia added A$2.1 billion ($1.7 billion) through so-called repurchase agreements today. The Bank of Japan, whose markets were closed today for a holiday, said it was monitoring the situation.

``The job of central banks now is to ensure there is sufficient liquidity in the system and they're assuring market participants of that,'' said Thomas Mayer, co-chief economist at Deutsche Bank AG in London.

The Fed also yesterday boosted its program for lending Treasuries to bond dealers by $25 billion, bringing it to $200 billion. At the same time, a group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. formed a $70 billion fund to ensure market liquidity.

Yields on two-year Treasury notes fell below 2 percent for the first time since April on speculation the Fed will need to cut rates. U.S. index futures dropped, with December contracts on the Standard & Poor's 500 Index falling 3.3 percent. The cost of borrowing dollars overnight jumped to 3.11 percent today from 2.15 percent.

No Rate Cut Yet

The ECB and the Bank of England may nevertheless hold off cutting rates right away as they seek to curb inflation. The ECB has spent much of the past year arguing that it can use its money market operations to tackle the credit crisis and doesn't need to resort to rate cuts.

``Rate cuts are only likely to be forthcoming if financial markets melt down in the coming days or weeks,'' said David Mackie, chief European economist at JPMorgan Chase & Co. ``For the time being, European policy makers look like they will continue to hold the line on the separation of powers. At some point though, that line could be reached.''

Trichet said in his speech today that ``price stability is a prerequisite for financial stability, a very important objective at the current juncture.''

The ECB was the first central bank to respond when credit markets first seized up in August last year by offering financial institutions unlimited funds. Banks today asked for 90.3 billion euros in funds, close to the 94.8 billion euros bid on the first day of the crisis last year.

``The results of the one-day refinancing bill auction show that demand for liquidity is currently very high and highlights how fragile the current situation is,'' said Cailloux. ``The ECB will likely take note that the financial system remains starved of cash and that it might thus be forced to step in again.''

To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net



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China Cuts Rates as U.S. Turmoil Adds to Global Risks

By Li Yanping and Kevin Hamlin

Sept. 15 (Bloomberg) -- China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dimmed the outlook for economic growth.

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio at the nation's smaller banks by 1 percentage point. The changes were in a statement on the central bank's Web site today.

Lehman Brothers Holdings Inc. filed for bankruptcy today and Merrill Lynch & Co. agreed to be sold, adding to evidence that the credit crisis is deepening and threatening the global economy. The slowest inflation in 14 months has given China room to cut borrowing costs and protect jobs in the world's fourth- largest economy.

``Policy makers see the probability of a recession in the U.S. is higher now, so the outlook for Chinese exports has deteriorated,'' said Darius Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong. ``This is the beginning of an easing cycle in China.'' He was the only one of seven economists in a Bloomberg survey last week to predict a rate cut this year or in the first quarter of 2009.

The announcement came on a holiday, with markets closed.

`Important Problems'

The rate cut is ``to help solve important problems in our economy for its continued stable and fast development,'' the central bank said.

Inflation cooled to 4.9 percent in August, export growth slowed and industrial production expanded by the least in six years, according to data released last week. China's economy expanded 10.1 percent in the three months to June 30 from a year earlier, the fourth straight quarter of slower growth.

In the U.S., banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. formed a $70 billion fund to ensure market liquidity as Lehman filed for bankruptcy and Bank of America Corp. agreed to acquire Merrill.

The Federal Reserve has widened the collateral it accepts for loans to securities firms and boosted its program for lending Treasuries to bond dealers. It may reduce the benchmark interest rate tomorrow to 1.75 percent from 2 percent, according to the futures market.

Reserve Requirements

China's central bank pushed the reserve requirement for lenders to a record 17.5 percent in June. The biggest banks are excluded from the reduction. Those exempted are: Bank of China Ltd., Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank Corp., Bank of Communications Co. and Postal Savings Bank of China.

The requirement for smaller banks drops by 1 percentage point from Sept. 25. In areas affected by the Sichuan earthquake, the reduction is 2 percentage points.

The central bank left the key deposit rate unchanged at 4.14 percent, narrowing banks' margins on loans.

Economists were split on whether the rate cut would cause the yuan to rise or fall. Mark Williams, of Capital Economics Ltd. in London, said ``using interest rates to stimulate growth is pretty good for further yuan appreciation.''

Falling interest rates are ``obviously negative for the yuan,'' said CFC Seymour's Kowalczyk.

The currency has climbed 6.8 percent against the dollar this year, the best performer among Asian currencies. It closed at 6.8450 against the U.S. currency in Shanghai on Sept. 12.

Stock-Market Slump

Zhu Baoliang, the chief economist at the State Information Center, a government research agency, said August's weaker economic data probably prompted today's moves, rather than events in the U.S.

Capital Economics' Williams said it was ``suspicious'' that the central bank acted when the Shanghai Composite Index seemed set to drop below 2,000. It closed on Sept. 12 at 2,079.67 after slumping 60 percent this year on concern that measures to tame inflation will erode company profits.

The property market could be headed for a ``meltdown'' as home prices and sales decline, Morgan Stanley said Sept. 12.

China's policy makers have already loosened loan quotas -- restrictions on how much banks can lend -- and raised export-tax rebates for garments and textiles to help exporters and small businesses.

-- With reporting by Chua Kong Ho in Shanghai and Patricia Kuo in Hong Kong. Editors: Paul Panckhurst, Riad Hamade.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.netKevin Hamlin in Beijing on khamlin@bloomberg.net



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Natural Gas Falls on Signs of Little Offshore Damage From Ike

By Reg Curren

Sept. 15 (Bloomberg) -- Natural gas futures fell in New York on speculation damage to offshore rigs and platforms from Hurricane Ike was limited. Prices also dropped on speculation the bankruptcy filing by Lehman Brothers Holdings Inc. signals reduced trading in commodities.

Ike moved through the Gulf of Mexico last week, forcing companies to keep a majority of offshore production shut after closing platforms for Hurricane Gustav earlier this month. About 14 percent of U.S. natural gas output comes from the Gulf. Lehman toppled after it was unable to find a buyer to help overcome losses in subprime mortgages.

``There's a lot of liquidation of positions and a lot of the commodity stuff is going to be thinner because you're not going to have the players you usually have,'' said Michael Rose, trading director at Angus Jackson Inc., a futures brokerage in Fort Lauderdale, Florida.

Natural gas for October delivery fell 20.7 cents, or 2.8 percent, to $7.159 per million British thermal units at 10:26 a.m. on the New York Mercantile Exchange. Prices have dropped 4.3 percent this year.

Lehman and Merrill Lynch & Co., which is being bought by Bank of America Corp., have significant commodity trading operations, Rose said.

``This huge credit thing has swung across and hit everything in its path. It's like a huge hurricane and it's going to take a while for these markets to recover,'' Rose said.

Lehman Trading

Lehman had built up its energy trading operation ``quite sizably over the past couple of years,'' said John Kilduff, senior vice president of risk management at MF Global Inc. in New York.

``This isn't so much about Lehman's footprint in the commodity space, but on overall concerns about liquidity and what represents a safe haven,'' he said. ``People are going to cash. We had made the argument that energy had taken its place among treasuries, gold and the dollar as a safe haven, though it's pretty clear in these most desperate times that it doesn't make the cut.''

Royal Dutch Shell Plc, Europe's largest oil company, said it has found some ``moderate'' damage to offshore oil and gas installations following Ike and no major structural damage to any platforms or drilling rigs.

Total SA may resume operations today at two offshore oil platforms in the Gulf of Mexico after they escaped major damage, the company said. Devon Energy Inc. began to return workers to offshore platforms, though the company didn't say when production might resume.

Crude oil also fell on the lack of damage from the storm and the trading fallout from Lehman.

Crude oil for October delivery declined $5.27, or 5.2 percent, to $95.91 a barrel on the New York exchange.

To contact the reporters on this story: Reg Curren in Calgary at rcurren@bloomberg.net.



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BP Fined for Safety Violations in January Texas Refinery Death

By Laurel Brubaker Calkins and Margaret Cronin Fisk

Sept. 15 (Bloomberg) -- BP Plc has been fined $28,000 by the U.S. Occupational Safety and Health Administration for ``serious'' safety violations in January at a Texas refinery where an explosion in 2005 killed 15 people.

The fine hasn't been publicly announced. BP agreed not to contest the findings or penalty and didn't admit wrongdoing, according to a copy of the settlement.

London-based BP, Europe's largest oil company, has been making improvements at the Texas City refinery as part of an OSHA settlement that included a $21 million fine for 300 safety violations related to the 2005 blast.

In the January violations, OSHA cited BP for failing to document safe operating limits and procedures and for using inadequate bolts on a water-filtration unit that blew its lid, killing one worker. OSHA issued the citations July 11, and BP signed an informal settlement Aug. 1.

``We have expended considerable energy and resources in the last few years to improve process and personal safety resulting in a significant reduction in potential risks,'' BP spokesman Daren Beaudo said in an e-mailed response to questions about the violations. ``We believe we have come a long way, but are aware of the work that remains.''

OSHA categorized the new violations as ``serious.'' Three involved failing to have written procedures covering safe operating limits and correct start-up and operating procedures for the filtration unit that blew its 500-pound lid on Jan. 14.

Two more violations concerned failure to insure that correct bolts were used to secure the lid. A final violation dealt with BP's failure to properly assess the ramifications of disconnecting one of the unit's alarms from a control panel.

Agreed to Correct

BP agreed to correct three of the violations, including the bolt citations, by Aug. 27 and the rest by May 2009. The agency posted notice of the violations and fines on its Web site without making a formal announcement. Beaudo said notices have also been posted at ``appropriate locations'' inside the Texas City facility, BP's largest refinery.

The new citations aren't violations of BP's 2005 settlement agreement with OSHA, the agency said in an e-mailed message. OSHA continues to monitor BP's compliance, the agency said. OSHA didn't publicly announce the fines because the ``amount was below the threshold'' for issuing a press release, the agency said.

BP has spent more than $1 billion and 55 million man-hours repairing and upgrading its Texas refinery during the past three years, according to Beaudo. The company said the refinery is safe and in compliance with the regulatory accord that resolved OSHA's 2005 investigation.

Death Sparks Probe

The new OSHA citations resulted from an investigation into the death of veteran BP supervisor William Joseph Gracia, 56, who died from head trauma when the water-filtration unit's lid blew off. Beaudo confirmed the OSHA investigation involved the same incident.

The 2005 blast occurred when an octane-boosting unit overflowed as it was being restarted after repairs. Gasoline spewed into an inadequate vent system and ignited in a vapor- cloud explosion that shattered windows five miles away. The filtration unit that blew its lid in January is located across a side street from the unit that exploded in 2005.

The U.S. Chemical Safety Board, a federal agency that investigates serious accidents at chemical facilities, is looking into whether the bolt failures played a role in Gracia's death, said CSB investigator Don Holmstrom.

``We believe this incident to be process-safety related,'' Holmstrom said of Gracia's death. ``We're looking to see if there's any connection between 2005 and this,'' he said.

Admitted Responsibility

BP admitted responsibility for the 2005 blast while denying it ever intentionally endangered workers. The company has resolved all but one federal claim of the more than 4,000 civil damage claims generated by the explosion from a $2.1 billion settlement fund.

BP pleaded guilty last year to a violation of the U.S. Clean Air Act, agreeing to a fine of $50 million and three years probation linked to safety and environmental compliance. Blast victims asked the federal judge overseeing the criminal case to reject the fine as too lenient and order court supervision of plant safety.

BP and federal prosecutors say a larger fine isn't necessary.

Last month, prosecutors told U.S. District Judge Lee Rosenthal, who is weighing BP's plea, about the 2008 OSHA violations without mentioning the fines. They said OSHA monitoring will insure sufficient safe operations at the site.

The criminal case is U.S. v. BP Products North America Inc., 07-cr-434, U.S. District Court for the Southern District of Texas (Houston).

The 2008 claim is Gracia v. BP Products North America, 08cv0038, District Court, Galveston County, Texas.

The civil cases are consolidated in Arenazas v. BP Products North America, 05CV0337, 212 District Court, Galveston County, Texas (Galveston).

To contact the reporters on this story: Laurel Brubaker Calkins in Houston at laurel@calkins.us.com; Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net.



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Lehman Is Suspended From European Energy Exchange

By Lars Paulsson

Sept. 15 (Bloomberg) -- Lehman Brothers Holdings Inc. was suspended from trading on the European Energy Exchange AG in Germany after the firm filed for bankruptcy protection in a New York court.

``The management of the exchange has decided to suspend Lehman Brothers as a trading and clearing member,'' the bourse's spokesman Daniel Wragge said today by phone from Leipzig.

Lehman's European subsidiary started trading derivatives on the EEX in February 2007. The U.S. investment bank had been trading electricity for day-ahead delivery and futures on the exchange.

The fourth-largest U.S. investment bank was suspended from the exchange as of 11:30 a.m. local time and was told to close its positions.

EEX's suspension of Lehman follows similar decisions by the London Metal Exchange, the world's largest copper bourse, the Liffe commodities exchange, and Intercontinental Exchange Inc.'s ICE Futures Europe which all banned the bank from trading. LCH.Clearnet Group Ltd., which clears trades, declared Lehman's European subsidiary a defaulter.

EEX, Europe's biggest electricity exchange after Nord Pool ASA, is in the process of merging its power trading activities with Powernext SA of France. The Paris-based exchange is considering what actions to take regarding Lehman, spokesman Richard Katz said today in a phone interview.

Lehman isn't a member of Nord Pool.

To contact the reporters on this story: Lars Paulsson in London at lpaulsson@bloomberg.net



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Lehman Brothers Suspended From London Commodity Trade

By Chanyaporn Chanjaroen and Alexander Kwiatkowski
Enlarge Image/Details

Sept. 15 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, was suspended from energy and commodities trading in London after Europe's biggest clearing house declared the company a defaulter.

The London Metal Exchange, the world's largest copper bourse, the Liffe commodities exchange, and Intercontinental Exchange Inc.'s ICE Futures Europe, part of the second-biggest energy exchange, all suspended Lehman today. LCH.Clearnet Group Ltd., which clears trades, declared Lehman's European subsidiary a defaulter.

``Lehman is an important counterparty in the commodity markets,'' Robin Bhar, a strategist at Calyon in London, said by phone. Still, the bank's positions on the LME are ``unlikely to be huge,'' he said.

Lehman was forced to file for bankruptcy after two suitors, Barclays Plc and Bank of America Corp., abandoned takeover talks yesterday. It joins Bear Stearns Cos. and other banks that couldn't survive the credit crunch.

The firm's value-at-risk to commodities, a measure of how much the bank estimates it could lose, averaged $15 million a day in the quarter ended Aug. 31, compared with $12 million in the previous quarter, according to a Sept. 10 statement.

Lehman is a so-called category 2 member of the LME and eligible to issue and clear contracts. It can't trade on the floor of the exchange. It was suspended from trading on the bourse's Select electronic platform. The LME trades copper, aluminum, zinc, nickel, tin, lead, steel and plastics.

Winding Down Business

The firm can still trade by phone, LME spokesman Thom Lant said. Each trade has to be approved by PricewaterhouseCoopers LLP, which is handling the winding down of the business, he said.

Lehman's head of European commodities is Jason Tudor, a former head of metals at Barclays Capital. He joined Lehman in 2006.

Intercontinental Exchange suspended Lehman's access to its ICE Futures Europe trading facilities. The exchange trades Brent crude oil, gasoil and other energy futures. Lehman also trades emissions on ICE.

Liffe has commodities trading in coffee, sugar, cocoa in London. The move does not apply to trading in Paris because there has been no statement from LCH.Clearnet SA to say Lehman is in default, Liffe spokesman James Dunseat said.

The London clearing house ``is managing the markets in an orderly manner,'' LCH.Clearnet spokeswoman Rachel Harper said today by phone.

Lehman remains a clearing member at the New York Mercantile Exchange, the bourse said today.

Gold Impact

The London Bullion Market Association expects no impact from the bankruptcy of member Lehman, Chief Executive Officer Stewart Murray said. The LBMA, representing the wholesale gold and silver market in London, has 57 ordinary members this year, up from 55 last year and 52 in 2006, Murray said.

``They're ordinary members, they're not market makers, they're not clearers,'' Murray said by phone from London today. The two banks' weighting within the London bullion market was ``quite small given the many number of ordinary members.''

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



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Nigeria's MEND Claims Responsibility for Shell Attack

By Dulue Mbachu and Alexander Kwiatkowski

Sept. 15 (Bloomberg) -- The Movement for the Emancipation of the Niger Delta, the main militant group in Nigeria's oil region, said its fighters destroyed a Royal Dutch Shell Plc flow station in a third day of attacks against oil installations.

``The Alakiri flow station has been completely destroyed,'' Jomo Gbomo, a spokesman for the group also known as MEND, said in an e-mailed statement to Bloomberg today.

Militants in speed boats raided the Alakiri facility overnight with rocket-propelled grenades and dynamite, Lieutenant Colonel Sagir Musa, a spokesman for the joint military task force, said by phone from the oil industry hub of Port Harcourt. Shell evacuated about 100 staff from the station, Reuters reported, though a company spokesman in Nigeria was unable to confirm this.

The latest attacks started on Sept. 13 when Nigerian troops and militants clashed in the Elem-Tombia district, south of Port Harcourt. The militants said the military had launched an air and marine offensive against its positions and declared an ``oil war'' targeting all oil installations in the region that produces nearly all of Nigeria's oil.

The latest attacks have been concentrated in Nigeria's Rivers state, which is proving to be ``the least stable'' of the Delta region, according to Antony Goldman, an independent U.K.-based analyst specializing in Nigeria. ``The absence of legitimacy creates a vacuum that one group or another will fill.''

`Perished Inside'

MEND reiterated its call on oil workers to leave the Niger Delta, saying ``foolhardy workers and soldiers who did not heed our warning perished inside'' the Alakiri facility.

Shell is investigating reports of the attack, according to company spokesman Rainer Winzenried. The Alakiri flow station is located between Port Harcourt and the Bonny export terminal, he said in a phone interview from The Hague today.

Shell last week extended so-called force majeure on Bonny light exports, which were disrupted after an attack in July. Force majeure is a legal clause that allows producers to miss contracted deliveries because of circumstances beyond their control.

Further attacks were launched yesterday on Shell's Soku gas plant and Chevron Corp.'s Robertkiri flow station among other installations, MEND said. The military and Chevron confirmed the attacks while Shell said it was investigating the reports. MEND says it's fighting on behalf of the inhabitants of the Niger Delta, who are yet to share in the oil wealth of the region. Attacks by armed groups in the region have cut more than 20 percent of Nigeria's oil exports since 2006.

Although Nigeria has Africa's biggest hydrocarbon reserves, with more than 30 billion barrels of crude and 187 trillion cubic feet of gas, it has dropped behind Angola as the continent's biggest oil exporter because of militant violence. The west African country is the fifth-biggest source of U.S. oil imports.

To contact the reporters on this story: Dulue Mbachu via the Johannesburg bureau at abolleurs@bloomberg.net Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net



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Oil, Gasoline Tumble as Lehman Collapse Raises Demand Concern

By Mark Shenk

Sept. 15 (Bloomberg) -- Crude oil fell to a seven-month low and gasoline tumbled as Lehman Brothers Holdings Inc. filed for bankruptcy and refineries along the Gulf of Mexico escaped major damage from Hurricane Ike.

Metals and crops also dropped, prompting a 5 percent slump in the S&P GSCI Index of 24 commodities, on speculation turmoil on Wall Street and the worsening credit crisis may weaken the global economy, cutting demand for raw materials. Refiners said preparations are under way to restart plants in the Houston area, home to more than 20 percent of U.S. refining capacity.

``There are grave concerns about financial stocks and what their weakness will mean for the real economy and energy demand,'' said Adam Sieminski, Deutsche Bank's chief energy economist, in Washington. ``It also appears that most refineries along the Gulf are OK.'' Some ``are already gearing up to restart, which has to be good news.''

Crude oil for October delivery fell $5.83, or 5.8 percent, to $95.35 a barrel at 9:05 a.m. on the New York Mercantile Exchange. Futures dropped as much as $7.05, or 7 percent, to $94.13 a barrel, the lowest since Feb. 14.

Gasoline for October delivery tumbled 20.34 cents, or 7.3 percent, to $2.5662 a gallon in New York. The contract dropped as much as 24.46 cents, or 8.8 percent, to $2.525 a gallon, the lowest since March 20.

Lehman Brothers was suspended from energy and commodities trading in London after Europe's biggest clearing house declared the company a defaulter.

The London Metal Exchange, the world's largest copper bourse, the Liffe commodities exchange, and Intercontinental Exchange Inc.'s ICE Futures Europe, part of the second-biggest energy exchange, all suspended Lehman today. LCH.Clearnet Group Ltd., which clears trades, declared Lehman's European subsidiary a defaulter.

13 Days

Brent crude oil for October settlement declined $5.62, or 5.8 percent, to $91.96 a barrel on the ICE exchange. Futures touched $91.17, the lowest since Feb. 11. Prices have dropped 13 straight days, the longest stretch since the contract was introduced in 1988.

Valero Energy Corp., the largest U.S. refiner, said it found ``no significant structural damage'' at three Houston-area refineries shut before the storm.

Exxon Mobil Corp. said its Baytown refinery, the largest in the U.S., has power, and damage appears ``limited.'' It is checking its Beaumont, Texas, plant, which is without power. Royal Dutch Shell Plc said it was assessing its Texas plants and that it was too early to determine when they will restart.

``With most of the Gulf Coast shut down, there will be less demand, which is what occurred after Katrina,'' said Tom Bentz, senior energy analyst at BNP Paribas in New York. ``Prices went beyond what the fundamentals justified on the upside and the same may occur as we move lower.''

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.



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India's Rupee Drops Past 46 a Dollar as Risk Aversion Increases

By Anil Varma

Sept. 15 (Bloomberg) -- India's rupee weakened past 46 per dollar for the first time in two years on concern investors will dump riskier assets after Lehman Brothers Holdings Inc. filed for bankruptcy.

The Indian currency declined for a fifth day on concern liquidation of the 158-year old U.S. securities firm will deepen a financial crisis that threatens to drag the global economy into a recession. The rupee fell as local traders sold the currency, taking a cue from its decline in the overseas non- deliverable forward market, said Paresh Nayar, head of currency and debt trading at Development Credit Bank Ltd. in Mumbai.

``Concerns about a pullout of investors from emerging- markets is driving rupee sales,'' Nayar said. ``Also, the NDF market is influencing the rupee's trend.''

The rupee fell 0.7 percent to 46.05 per dollar at the 5 p.m. close in Mumbai, adding to last week's 2.3 percent loss, according to data compiled by Bloomberg. That is the lowest closing level since Sept. 19, 2006.

Lehman, once the fourth-biggest U.S. investment bank, failed to find a buyer and succumbed to the subprime mortgage crisis after listing more than $613 billion of debt. Bank of America Corp., the largest U.S. consumer bank, said today it has agreed to buy Merrill Lynch & Co. in an all-stock deal that values the world's biggest brokerage firm at about $50 billion.

Indian stocks fell. The Bombay Stock Exchange's Sensitive Index, or Sensex, declined 3.4 percent, taking the year's losses to 33.3 percent. Overseas investors have sold a record $7.9 billion more Indian shares than they bought this year, according to the Securities and Exchange Board of India.

Offshore contracts that allow traders to bet on the rupee's value in one month indicate an implied exchange rate of 46.35 a dollar, or 0.6 percent lower than the spot rate, Bloomberg data show. Non-deliverable contracts are used for currencies that can't be freely converted and are settled in dollars. Local forwards show an implied rate of 46.21 a dollar in a month.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.



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Russia Market Drop May Temper Medvedev Georgia Moves

By Henry Meyer

Sept. 15 (Bloomberg) -- When it comes to containing Russia, the invisible hand of the markets may be the West's most potent weapon.

Tightening access to international credit and mounting stock losses are hurting Russian billionaires as well as state- owned corporations, prompting calls by businessmen to heed Western complaints over Kremlin policy in Georgia.

The head of the country's biggest business association, the Russian Union of Industrialists and Entrepreneurs, met President Dmitry Medvedev today, urging him to take ``anti-crisis'' measures.

``The stock market is plunging, capital is fleeing, there is a severe shortage of liquidity in the banking system, prices for many core exports are falling and inflationary pressures are strengthening,'' the business group's Alexander Shokhin said in a live televised Kremlin meeting. Current policies ``may turn out to be inadequate,'' he said.

After rejecting Western appeals not to recognize breakaway Georgian regions, Medvedev last week signaled compromise for the first time. He agreed to implement a European Union-brokered cease-fire and pull troops back into the disputed territories of South Ossetia and Abkhazia.

Mevedev told the gathering of Russian billionaires that the government doesn't want ``either confrontation or isolation.''

Investor Concerns

Last month's five-day war, triggered by Georgia's effort to retake South Ossetia, sent equity, debt and currency markets reeling, reflecting investor worries that commercial ties would fray.

``This is a natural alarm clock,'' Igor Yurgens, a board member of the business group and adviser to Medvedev, said in an interview before today's meeting. ``It's a concern to big owners, it's a concern to the Russian economy. There are limits to what Russia can do alone if it chooses to be isolated.''

Finance Minister Alexei Kudrin acknowledged the impact Sept. 11, saying Russian companies felt a ``jolt'' as reaction to the war added to the fallout from turmoil in global financial markets. Medvedev called for officials to do ``everything necessary'' to attract capital. Central-bank chairman Sergey Ignatiev said the bank was taking ``massive measures'' to provide extra funds to lenders.

Stocks Decline

The U.S. dollar-denominated RTS index has plunged nearly 30 percent since war broke out Aug. 7, putting its loss since July 1 at 43 percent. The ruble is close to a 13-month-low and investors have pulled $35 billion from Russia since the war, according to BNP Paribas SA. That is the worst capital flight since the 1998 debt default; the cost to insure against default has risen to a four-year high.

That's making it pricier for the two biggest energy companies, OAO Gazprom, where First Deputy Prime Minister Viktor Zubkov succeeded Medvedev, 43, as chairman, and OAO Rosneft, whose chairman is Deputy Prime Minister Igor Sechin, to borrow abroad.

``The government will soften its stance because Gazprom needs to refinance, Rosneft too,'' said Irina Yassina, a researcher at the Moscow-based Institute for Economy in Transition. ``This isn't just a question of national security, it's a matter of personal wealth of top officials.''

Among those feeling the pinch are the owner of steelmaker OAO Severstal, Alexei Mordashov, who was listed as the world's 18th richest person with $21.2 billion by Forbes magazine in May. The value of his stake in the company is more than $3 billion, or a fifth lower than it was before Aug. 7, putting it at below $12 billion.

At the Meeting

Mordashov was at the Kremlin today, along with other billionaires including Vagit Alekperov, president of OAO Lukoil, and Viktor Vekselberg, founder of the Renova Group and an investor in British Petroleum Plc's TNK-BP joint venture.

State-run OAO Sberbank, Russia's largest bank, was the first Russian company to price a loan since the war. To borrow $1.2 billion, it was forced to pay almost double the interest- rate margin above the London interbank offered rate that it paid in November, or 85 basis points.

Russian banks need to refinance about $45 billion of debt by year's end, according to Standard & Poor's.

While losses have mounted, complaints have been muted. The reluctance of those with the most at stake to criticize the government stems from the fate of Mikhail Khodorkovsky, once Russia's richest man.

Khodorkovsky is now serving an eight-year prison term for fraud and tax evasion, charges he blames on his political opposition to Vladimir Putin, 55, then Russia's president, now its prime minister, and still the paramount source of political power in the country.

Businessmen `Frightened'

Alexander Lebedev, a billionaire who owns 30 percent of OAO Aeroflot, says the government has intimidated even the wealthy into silence. ``Businessmen are frightened,'' Lebedev, whose stake in the airline is worth some $210 million less than before the conflict, said in an interview.

While he criticized the government's ``stupid, militaristic rhetoric'' since the war, he said he had no means to convey his concerns. But the need for action is urgent, Lebedev said: ``There is panic on the markets, liquidity has practically dried up.''

Billionaire Vladimir Potanin, the main shareholder in OAO GMK Norilsk Nickel, the biggest mining concern, complained to Medvedev last month about the credit squeeze, state-owned news agency Itar-Tass reported. Sergei Porshakov, an official at Potanin's holding company Interros, confirmed the meeting with Medvedev, though he declined further comment.

Leaders' Rhetoric

Rhetoric from Russia's leaders has remained unyielding as U.S. and European officials express concern over Russian aims in former Soviet states, particularly Ukraine.

Reflecting a return to Cold War-style maneuvering, two Russian bombers were set to fly for about six hours over neutral waters in the Caribbean Sea today, taking off from a base in Venezuela.

Even with central-bank sales of dollars to prop up the ruble, Russia still has $573.6 billion of foreign reserves, the world's third-largest stockpile, giving it plenty of financial ammunition to withstand Western condemnation.

Yet investors say Russia, the world's biggest energy exporter, may have to curtail ambitions to broaden an economy now largely dependent on oil and gas.

``Unless they come to terms with what caused the market to collapse, they won't build the foundations for sustainable growth,'' said James Beadle, chief investment strategist at Pilgrim Asset Management in Moscow.

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net



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India's Rupee Drops Past 46 a Dollar as Risk Aversion Increases

By Anil Varma

Sept. 15 (Bloomberg) -- India's rupee weakened past 46 per dollar for the first time in two years on concern investors will dump riskier assets after Lehman Brothers Holdings Inc. filed for bankruptcy.

The Indian currency declined for a fifth day on concern liquidation of the 158-year old U.S. securities firm will deepen a financial crisis that threatens to drag the global economy into a recession. The rupee fell as local traders sold the currency, taking a cue from its decline in the overseas non- deliverable forward market, said Paresh Nayar, head of currency and debt trading at Development Credit Bank Ltd. in Mumbai.

``Concerns about a pullout of investors from emerging- markets is driving rupee sales,'' Nayar said. ``Also, the NDF market is influencing the rupee's trend.''

The rupee fell 0.7 percent to 46.05 per dollar at the 5 p.m. close in Mumbai, adding to last week's 2.3 percent loss, according to data compiled by Bloomberg. That is the lowest closing level since Sept. 19, 2006.

Lehman, once the fourth-biggest U.S. investment bank, failed to find a buyer and succumbed to the subprime mortgage crisis after listing more than $613 billion of debt. Bank of America Corp., the largest U.S. consumer bank, said today it has agreed to buy Merrill Lynch & Co. in an all-stock deal that values the world's biggest brokerage firm at about $50 billion.

Indian stocks fell. The Bombay Stock Exchange's Sensitive Index, or Sensex, declined 3.4 percent, taking the year's losses to 33.3 percent. Overseas investors have sold a record $7.9 billion more Indian shares than they bought this year, according to the Securities and Exchange Board of India.

Offshore contracts that allow traders to bet on the rupee's value in one month indicate an implied exchange rate of 46.35 a dollar, or 0.6 percent lower than the spot rate, Bloomberg data show. Non-deliverable contracts are used for currencies that can't be freely converted and are settled in dollars. Local forwards show an implied rate of 46.21 a dollar in a month.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.



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Dollar Drops Most in Decade Against Yen as Lehman Goes Bankrupt

By Bo Nielsen and Ron Harui

Sept. 15 (Bloomberg) -- The dollar fell the most in a decade against the yen after Lehman Brothers Holdings Inc. filed for bankruptcy and traders speculated the Federal Reserve may need to cut interest rates to buoy financial markets.

The U.S. currency also dropped the most since June against the Swiss franc as American International Group Inc. sought capital to avoid credit downgrades. The dollar erased declines against the euro after Bank of America Corp. agreed to acquire Merrill Lynch & Co. and as investors sought the relative safety of U.S. Treasuries.

``Risk aversion is going through the roof,'' said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London. ``There is great deal of uncertainty on how this will affect the markets.''

The dollar weakened as much as 3.4 percent to 104.54 yen, the most since October 1998, and traded at 105.27 at 6:45 a.m. in New York, from 107.94 on Sept. 12. The U.S. currency traded at $1.4185 per euro, from $1.4224, and after weakening to $1.4481 earlier. It touched $1.3882 on Sept. 11, the strongest since Sept. 18, 2007.

The Japanese currency surged 2.7 percent to 149.38 per euro, the biggest jump since 2001, and rallied against all 16 major currencies as investors reduced so-called carry trades. In such transactions, funds are borrowed in a country with low interest rates and used to buy assets where returns are higher. Traders earn the spread between the two rates, taking the risk that currency market moves erase their profit.

`Pressure on Dollar'

The Australian dollar fell 4.1 percent to 85.29 yen, the biggest drop since November, and New Zealand's dollar declined 3.6 percent to 69.51 yen. Japan's benchmark interest rate is 0.5 percent, making the yen a favorite funding currency for the carry trade. The 15-nation euro region's key interest rate is 4.25 percent.

``The pressure on the dollar will be more emphasized against the low-yielders as markets remain volatile and risk reduction is the theme,'' said Ian Stannard, a senior currency strategist at BNP Paribas SA in London. The dollar may trade as low as 101 yen in the coming weeks, he said.

The U.S. currency fell as Lehman filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of New York. The ICE's Dollar Index, a gauge measuring the dollar against the currencies of six U.S. trading partners, slipped 0.1 percent to 78.912 on concern that credit-market losses will spread to other financial institutions.

AIG, trying to stave off credit downgrades that would force it to post more than $13 billion in collateral, is seeking capital from buyout firms Kohlberg Kravis Roberts & Co. and J.C. Flowers & Co., said a person familiar with the situation yesterday. The insurer is seeking $40 billion from the Fed, the New York Times reported.

Merrill Purchase

Bank of America Corp. said in a statement today it agreed to acquire Merrill Lynch for about $50 billion, after shares in Merrill plummeted in the past week.

The dollar also declined as futures on the Chicago Board of Trade soared to a 86 percent chance that the Fed will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point, compared with no chance a week ago.

``In prior crises, after the initial sell-off in the dollar, the remainder of the day was all about moves back into the dollar on safe-haven flows as people go back into cash,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``I expect dollar strength to be the core theme of the day.''

Swiss Franc

The yield on the two-year Treasury dropped 38 basis points to 1.81 percent, the biggest decline since the September 2001 terror attacks and the first time is has fallen below 2 percent since April, as investors sold higher-yielding assets.

The Swiss franc, which typically strengthens when trader aversion to higher-risk investments increases, rose 1.3 percent to 1.1155 per dollar, the biggest gain since June 6.

Stocks tumbled, with Standard & Poor's 500 Index futures expiring in December snapping three days of gains to slide 4 percent. The MSCI World Index of shares fell 1.4 percent. Markets in China, Hong Kong, Japan and South Korea were shut for holidays today.

China Cuts Rate

The dollar gained about 11 percent through to the end of last week since touching an all-time low of $1.6038 per euro on July 15.

``If the stress in the U.S. financial system intensifies, there's the potential for a partial retracement of the dollar's recent gains,'' Hardman said. The dollar may trade at $1.46 this week, he said.

China today cut its one-year lending rate by 27 basis points and lowered the reserve ratio by 1 percentage point at some of the banks, according to People's Bank of China, in response to the slowdown in the global economy.

The world may face ``Japan-like'' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Tony Tan, deputy chairman of Government of Singapore Investment Corp., said yesterday.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Tokyo at rharui@bloomberg.net



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Asian Currencies: Peso, Ringgit Decline on Lehman Bankruptcy

By Lilian Karunungan and Karl Lester M. Yap

Sept. 15 (Bloomberg) -- The Philippine peso and the Malaysian ringgit fell on concern deepening credit-market losses will prompt global funds to prefer safer bets to emerging-market assets.

The peso extended a seven-week slide as Asian shares slid after Lehman Brothers Holdings Inc. filed for bankruptcy and the U.S. government said it won't bail out the investment bank. Foreign funds sold more Philippine shares than they bought every day this month, according to data compiled by Bloomberg. The ringgit has slumped 5.2 percent in the past three months.

``After Lehman declared bankruptcy, people will want to avoid additional risks and emerging-market assets are considered risky,'' said Rafael Algarra, treasurer at Security Bank Corp. in Manila.

The peso dropped 0.40 percent to 47.08 a dollar as of the 4 p.m. close in Manila, according to Tullett Prebon Plc. The ringgit fell 0.4 percent to 3.4565 in Kuala Lumpur, according to data compiled by Bloomberg.

Bank of America Corp., the biggest U.S. consumer bank, agreed to buy Merrill Lynch & Co. for about $50 billion after shares of the third-biggest U.S. securities firm fell by more than 35 percent last week.

Political Tension

Malaysia's ringgit weakened on speculation domestic political tension will escalate and global financial turmoil will deter investors from buying regional assets.

The government on Sept. 13 ordered the arrest of an opposition lawmaker, a political blogger and a local newspaper reporter as racial tensions flared.

``Offshore funds are not going to be enticed, they will probably wait for lower levels with the market turmoil in the backdrop,'' said Suresh Kumar Ramanathan, a rates and currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. ``Political risks have risen a few notches and that will likely exert pressure on the ringgit market,''

Last week's arrests, under a law allowing detention without trial, came as Opposition Leader Anwar Ibrahim seeks to persuade government-aligned lawmakers to defect to his party, aiming to topple Abdullah Ahmad Badawi's government as early as this week. Anwar needs at least 30 of 222 lawmakers from Abdullah's coalition to control parliament.

The government released the reporter after a 20-hour detention. The move may only have a short-term impact on the economy, Second Finance Minister Nor Mohamed Yakcop said, according to a Sept. 13 report from state news agency Bernama.

India's rupee slumped to a two-year low on concern investors will dump riskier assets.

The rupee dropped for a fifth day as local traders sold the currency, taking a cue from its decline in the overseas non- deliverable forwards market, said Paresh Nayar, head of currency and debt trading at Development Credit Bank Ltd. in Mumbai.

Stocks Decline

``Concerns about a pullout of investors from emerging- markets is driving rupee sales,'' Nayar said. ``Also, the NDF market is influencing the rupee's trend.''

The rupee fell 0.5 percent to 45.93 in Mumbai, adding to last week's 2.3 percent slide, Bloomberg data show. It earlier touched 45.995, the lowest since September 2006.

Indian stocks fell, with the Bombay Stock Exchange's Sensitive Index, or Sensex, declining as much as 6.1 percent.

Indonesia's rupiah weakened as the Jakarta Composite Index of shares dropped 2.9 percent, taking this month's loss to 19 percent.

Shake-Up

``Nobody's going to buy the rupiah for now,'' said Gundy Cahyadi, an economist at IDEAglobal in Singapore. ``The market will be waiting for the conclusion of Lehman Brothers and the shake-up in Wall Street banks and how that's going to affect risk positions.''

The rupiah fell 0.3 percent to 9,460 in Jakarta, from 9,435 on Sept. 15, according to data compiled by Bloomberg. The rupiah reached 9,488 per dollar on Sept. 12, the weakest since January.

``We know the central bank is still supporting the rupiah,'' Cayhadi said. ``My view is that they're not going to let it cross the 9,500 mark easily.''

The central bank will intervene ``if needed'' to defend the rupiah, Deputy Governor Hartadi A. Sarwono said in Jakarta today. Central banks intervene in currency markets by arranging purchases or sales of foreign exchange.

Elsewhere, the Singapore dollar rose 0.3 percent to S$1.4316 against the U.S. currency and The Thai baht gained 0.3 percent to 34.58. Taiwan's dollar was little changed at NT$32.039 and Vietnam's dong traded at 16,590 compared with 16,580 on Sept. 15. Financial markets were closed in South Korea, China and Hong Kong for public holidays.

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Karl Lester M. Yap in Manila at kyap5@bloomberg.net.



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East European Currencies: Hungarian Forint, Polish Zloty Slide

By Yon Pulkrabek

Sept. 15 (Bloomberg) -- Hungary's forint slumped against the euro as Lehman Brothers Holdings Inc.'s bankruptcy filing stoked concern about credit-market losses, damping demand for higher- yielding emerging-market assets. The Polish zloty dropped.

The forint slid the most in six weeks as Lehman filed for bankruptcy in Manhattan today. The collapse of the bank, which listed more than $613 billion of debt, dwarves WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990. The Hungarian currency was also buffeted because the Hungarian government faces a vote to dissolve parliament today.

The forint is getting ``hit by risk aversion,'' said Jon Harrison, an emerging-markets currency strategist in London at Dresdner Kleinwort. ``There are risks because inflation is peaking and rates are going down and there is political risk.''

Hungary's currency tumbled to as low as 241.32 per euro, the biggest drop since July 31 on an intraday basis. It was at 240.92 as of 12:30 p.m. in Budapest, from 237.45 at the end of last week.

Hungarian Prime Minister Ferenc Gyurcsany wants the country's lawmakers to vote today on an opposition-sponsored motion to dissolve the legislature, paving the way for early elections.

Gyurcsany has the support of the majority of lawmakers after former governing coalition party Free Democrats' Alliance said it doesn't support the move to call an election, the ruling Socialist Party said on its Web site.

Zloty Drops

Elsewhere, the Polish zloty fell the most in a week, dropping 1.4 percent to 3.3749 per euro. Central bank Governor Slawomir Skrzypek said two days ago the government's forecast for economic growth of 4.8 percent next year ``seems to be very optimistic.''

``There is a downside risk to this forecast,'' Skrzypek told reporters at a meeting of European Union finance officials in Nice, France, on Sept. 13. The central bank governor also said Prime Minister Donald Tusk's plan to adopt the euro by 2011 is ``a challenge.''

The Czech koruna declined to 24.199 per euro, after rising to 24.381, from 24.151 on Sept. 12. The Romanian leu declined to 3.6200 per euro, from 3.6071.

Turkey's lira sank 1.9 percent to 1.2624 against the U.S. dollar, from 1.2390 from the end of last week.

To contact the reporter on this story: Yon Pulkrabek in Prague at ypulkrabek@bloomberg.net



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Nordic Currencies: Norway's Krone Drops on Lehman Bankruptcy

By Bo Nielsen

Sept. 15 (Bloomberg) -- Norway's krone dropped against the euro by the most in six months as investors sold higher-yielding assets after Lehman Brothers Holdings Inc. filed for bankruptcy, sparking concern about another round of financial-market turmoil. Sweden's krona fell to the lowest level since November 2005.

The Norwegian currency also slipped as the price of oil, the country's biggest export, slid to the lowest level since February as refineries along the Gulf of Mexico coast escaped major damage from Hurricane Ike.

The krone declined as much as 1.1 percent to 8.2218 per euro, and was at 8.2057 by 9:07 a.m. in Oslo, from 8.1313 on Sept. 12. It advanced 0.2 percent to 5.7272 per dollar.

Crude oil fell as much as 2.7 percent to 98.46 a barrel in New York, the lowest level since Feb. 26.

The Swedish krona dropped 0.5 percent to 9.5699 per euro, after slipping to 9.5881, the weakest in almost three years. It rose 0.1 percent to 6.6887 against the dollar.

Investors sold the dollar after New York-based Lehman petitioned the U.S. Bankruptcy Court for the Southern District of New York today, according to a statement. The collapse of Lehman, which has more than $613 billion of debt, surpasses Drexel Burnham Lambert's failure in 1990.

Merrill Lynch, the biggest brokerage, agreed to sell itself to Bank of America Corp. for $50 billion in an emergency deal reached yesterday.

Investors also sold higher-yielding currencies such as the New Zealand and Australian dollar. Sweden's benchmark interest rate of 4.75 percent and Norway's main rate of 5.75 percent are only topped by New Zealand, Australia among the Group of 10 nations.

Yen Favored

When risk aversion is lower, investors borrow in low- yielding currencies such as the yen to buy assets in higher- yielding countries like Norway, in so-called carry trades. When risk aversion spikes the trades are unwound. The yen is the best performer today among the major currencies monitored by Bloomberg.

In other trading, Iceland's krona rose 0.5 percent to 89.13 against the dollar. The central bank, or Sedlabanki, last week kept its benchmark interest rate at a record 15.5 percent, in line with a Bloomberg survey.

Nordic government bonds rose as investors sought refuge in the relative safety of fixed-income securities, with the yield on Sweden's 5.25 percent note due March 2011 falling 17 basis points to 4.01. The yield on Norway's 6 percent bond maturing May 2011 slipped 1 basis point to 5.01 percent, according to Danske Bank A/S prices. Yields move inversely to bond prices.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net



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Swiss Franc Rises as Lehman's Collapse Sparks Aversion to Risk

By Lukanyo Mnyanda

Sept. 15 (Bloomberg) -- The Swiss franc rose against the euro and dollar as Lehman Brothers Holdings Inc.'s collapse into bankruptcy boosted demand for the safest assets, causing investors to reduce so-called carry trades.

The franc had its biggest one-day gain in six months against the dollar as stocks worldwide slumped. European government bonds and Treasuries surged as traders turned to fixed-income assets after Lehman triggered a record jump in the cost of protecting corporate debt from default. The yen rose versus all 16 major currencies as investors cut holdings of higher-yielding securities financed in Japan, which has the lowest interest rates among industrialized nations.

``The franc is strengthening with the yen on the Lehman news,'' said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking arm of France's Credit Agricole SA. ``It's all about risk at the moment.''

Against the dollar, the franc rose as much as 2.2 percent to 1.1057, the biggest gain since March 17, and was at 1.1219 by 3:53 p.m. in Zurich. It climbed 1 percent to 1.5915 per euro, from 1.6075 on Sept. 12. It may advance to 1.58 per euro this week, Maher predicted.

The Swiss Market Index of equities slid 5.1 percent, set for its biggest drop since Jan. 21, declining with other European indexes. The Dow Jones Stoxx 600 Index of European shares slipped 4.5 percent.

The Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings jumped by as much as 89 basis points, and was up 68 basis points to 614, according to JPMorgan Chase & Co. prices at 1:07 p.m. in London.

TED Spread

Investors also bought safer assets as the so-called TED spread, the difference between what the U.S. government and banks pay to borrow in dollars for three months, jumped 55 basis points to 209 basis points, the widest since Dec. 14.

The decline in financial-market confidence encouraged investors to seek safer alternatives to carry trades, where they borrow in a currency at a low interest rate and convert the proceeds into one they can lend out for a higher return. They take the risk currency fluctuations will erode their profits.

The dollar fell the most in a decade against the yen as traders speculated the Federal Reserve may cut interest rates. Futures on the Chicago Board of Trade showed a 72 percent chance the Fed will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point tomorrow, compared with no chance a week ago.

Risk Aversion

``It was an extraordinary way to wake up this morning,'' Peter Rosenstreich, chief market analyst at ACM Advanced Currency Markets SA in Geneva, said in a Bloomberg Television interview. ``Risk aversion is going to stay very heavy.''

Switzerland's benchmark rate is the industrialized world's third-lowest, and compares with 0.5 percent in Japan and 4.25 percent for the 15 nations using the euro.

The franc gained even as a government report showed Swiss producer and import-price inflation eased from the fastest pace in more than 19 years in August as oil retreated from a record.

Prices for factory and farm goods and imports rose 4 percent in the year after rising 4.9 percent in July, the fastest pace since May 1989, the Federal Statistics Office said today.

Swiss government bonds surged, with the yield on the 3 percent note due January 2018 falling 12 basis points to 2.71 percent. A basis point is 0.01 percentage point. Yields move inversely to bond prices.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net



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Overnight Money-Market Rate for Dollars Jumps Most Since June

By Justin Carrigan

Sept. 15 (Bloomberg) -- The cost of borrowing in dollars overnight jumped the most since June, according to the British Bankers' Association.

The London interbank offered rate, or Libor, increased 96 basis points to 3.11 percent, the BBA said today. The three- month rate was little changed at 2.82 percent.

To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net



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Latin American Currencies: Colombia Peso Drops on Lehman Filing

By Andrea Jaramillo

Sept. 15 (Bloomberg) -- Colombia's peso fell, trading near a nine-month low, amid reduced investor's appetite for emerging- market assets after Lehman Brothers Holdings Inc. filed for bankruptcy.

Colombia's peso slid 1.3 percent to 2,077 per dollar at 9:56 a.m. New York time, from 2050.55 on Sept. 12, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX. The currency on Sept. 11 touched 2,105, its weakest since November.

The yield on Colombia's benchmark 11 percent bonds due in July 2020 rose 12 basis points, or 0.12 percentage point, to 11.7 percent, according to Colombia's stock exchange. The bond's price dropped 0.733 centavo to 95.553 centavos per peso.

The fourth-largest U.S. investment bank succumbed to the subprime mortgage crisis, filing a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The 158-year-old firm was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net



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Yen Advances Most in Decade Against Dollar on Lehman Bankruptcy

By Bo Nielsen

Sept. 15 (Bloomberg) -- The yen strengthened the most in 10 years against the dollar after Lehman Brothers Holdings Inc. filed for bankruptcy, prompting traders to sell assets financed with loans in Japan.

The Japanese currency also climbed to its strongest in two years versus the euro as American International Group Inc. failed to present a plan to raise capital and avoid credit downgrades. The Swiss franc rose against every major currency except the yen as investors reversed so-called carry trades.

``This is momentous, it's hard to imagine anything more cataclysmic than this,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``It will be hard to top that kind of news flow. The yen hasn't looked so good for quite a while.''

The yen gained as much as 3.4 percent to 104.54 per dollar, the most since October 1998, and traded at 105.71 at 9:55 a.m. in New York, from 107.94 on Sept. 12. The U.S. currency was at $1.4193 per euro, from $1.4224, after weakening to $1.4481 earlier. It touched $1.3882 on Sept. 11, the strongest since Sept. 18, 2007.

The Japanese currency surged 2.3 percent to 149.88 per euro and rallied against all 16 major currencies as investors reduced carry trades. In such transactions, traders borrow in low- yielding countries such as Switzerland and Japan to buy higher- yielding assets elsewhere. They earn the spread between the two, taking the risk that currency moves erase their profit.

The yen may strengthen to 1.40 per euro in three months, Ruskin said.

`Yen Will Strengthen'

The Australian dollar fell 4.1 percent to 85.24 yen, the biggest drop since November, and New Zealand's dollar declined 3.5 percent to 69.54 yen. Japan's benchmark interest rate is 0.5 percent, making the yen a favorite funding currency for the carry trade. The 15-nation euro region's key interest rate is 4.25 percent, Australia's is 7 percent and New Zealand's 7.5 percent.

Lehman filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of New York after Bank of America Corp. and Barclays Plc pulled out of talks to buy the New York-based bank.

AIG, trying to stave off credit downgrades that would force it to post more than $13 billion in collateral, asked the Federal Reserve for a $40 billion bridge loan after rejecting an offer from J.C. Flowers & Co., the New York Times reported, citing an unidentified person.

``The yen will strengthen on the back of this news,'' said Ian Stannard, a senior currency strategist at BNP Paribas SA in London. ``Risk reduction is the theme.'' The dollar may trade as low as 101 yen in the coming weeks, he said.

Merrill Lynch

The U.S. currency rose against the euro after Bank of America agreed to acquire Merrill Lynch & Co. for $50 billion, reducing the risk of financial collapse, and as investors sought the relative safety of U.S. Treasuries.

The ICE's Dollar Index, a gauge measuring the dollar against the currencies of six U.S. trading partners, slipped as much as 1.7 percent to 77.642 on concern that credit-market losses will spread to other financial institutions. It was last unchanged at 78.935.

``I expect dollar strength to be the core theme of the day,'' said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp. ``People move back into cash and the dollar on safe-haven flows.''

The yield on the two-year Treasury note dropped 38 basis points to 1.81 percent, the biggest decline since the September 2001 terror attacks and the first time it has fallen below 2 percent since April, as investors sold higher-yielding assets.

Swiss Franc

The dollar weakened as expectations for a Fed rate cut surged. Futures on the Chicago Board of Trade showed an 64 percent chance the central bank will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point tomorrow, compared with no chance a week ago.

The Swiss franc, which typically strengthens when trader aversion to higher-risk investments increases, rose as much as 1.3 percent, the biggest gain since June 6, before trading at 1.1216 from 1.1305 on Sept. 12. Switzerland's benchmark rate of 2.75 percent is the lowest among the biggest economies after Japan, whose key rates is 0.5 percent.

Stocks tumbled, with Standard & Poor's 500 Index falling 2.5 percent. The MSCI World Index of shares fell 1.4 percent. Markets in China, Hong Kong, Japan and South Korea were shut for holidays today.

China Cuts Rate

The dollar gained about 11 percent through to the end of last week since touching an all-time low of $1.6038 per euro on July 15.

``If the stress in the U.S. financial system intensifies, there's the potential for a partial retracement of the dollar's recent gains,'' Hardman said. The dollar may trade at $1.46 this week, he said.

China cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves as worsening credit-market turmoil and weakening export demand dim the outlook for economic growth.

The People's Bank of China reduced the one-year lending rate to 7.20 percent from 7.47 percent, effective tomorrow, and lowered the reserve ratio at the nation's smaller banks by 1 percentage point. The changes were in a statement on the central bank's Web site today.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net



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Canadian Dollar Falls as Lehman Files for Record Bankruptcy

By Ye Xie

Sept. 15 (Bloomberg) -- The Canadian dollar fell the most in more than two weeks as Lehman Brothers Holdings Inc.'s bankruptcy filing raised speculation that deepening financial losses may prolong the economic slowdown in the U.S., Canada's largest export market.

The currency also dropped after crude oil fell below $95 a barrel to the lowest in seven months. Commodities such as oil and gold make up half of the country's exports. Canada's dollar depreciated the most versus the yen since November as traders cut holdings of high-yielding assets funded by loans in Japan.

``It's certainly a disaster,'' said Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. ``There's a flight back to less-risky assets. As commodities come off, I won't be surprised to see the Canadian dollar suffer.''

Canada's dollar, dubbed the loonie because of the aquatic bird on the one-dollar coin, fell 0.9 percent to C$1.0691 per U.S. dollar at 8:51 a.m. in Toronto, from C$1.0601 on Sept. 12. It declined 1.2 percent on Aug. 29. One Canadian dollar buys 93.53 U.S. cents.

The loonie declined as low as 97.84 yen, the weakest since April, as investors pared carry trades, in which they borrow in countries with low interest rates to buy high-yielding assets elsewhere.

Canada's dollar rose versus currencies of other commodity exporters that offer higher yields. It gained 0.5 percent versus the Norwegian krone. The benchmark interest rate in Japan is 0.5 percent, compared with 3 percent in Canada and 5.75 percent in Norway.

`Taking Money Home'

``People are getting out of carry trades and taking money back home,'' said Butler. ``The mood on the trading floor is extremely edgy.''

The yield on Canada's two-year government bond fell 20 basis points, or 0.20 percentage point, to 2.57 percent. Earlier it reached 2.56 percent, the lowest since March 31. The price of the 2.75 percent security maturing in December 2010 rose 43 cents to C$100.38. The yield on Canada's 10-year government bond fell 9 basis points to 3.50 percent.

Lehman, the fourth-largest U.S. investment bank, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, is the largest in history. In another development, Bank of America Corp. agreed to acquire Merrill Lynch & Co. for about $50 billion.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net



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London Bullion Group Expects Little Effect From Lehman, Merrill

By Marianne Stigset

Sept. 15 (Bloomberg) -- The London Bullion Market Association expects no impact from the bankruptcy of member Lehman Brothers Holding Inc. or the sale of member Merrill Lynch & Co., Chief Executive Officer Stewart Murray said.

``They're ordinary members, they're not market makers, they're not clearers,'' Murray said by phone from London today. The two banks' weighting within the London bullion market was ``quite small given the many number of ordinary members.''

Lehman Brothers, the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history. Merrill Lynch agreed to sell itself to Bank of America Corp.

The LBMA, representing the wholesale gold and silver market in London, has 57 ordinary members this year, up from 55 last year and 52 in 2006, Murray said.

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net



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Sugar Falls in New York as Lehman Fails, Crude Oil Plummets

By Ron Day

Sept. 15 (Bloomberg) -- Sugar in New York fell as much as 5.6 percent as commodities including crude oil slumped after the bankruptcy filing by Lehman Brothers Holdings Inc.

Lehman Brothers listed $613 billion in debts, the most in U.S. Bankruptcy Court history, when it sought protection from creditors today in New York. Crude oil fell more than $7 to a seven-month low as refineries in Texas and Louisiana escaped major damage from Hurricane Ike. That cut demand for ethanol, refined from sugar cane in Brazil.

Raw-sugar futures for March delivery dropped 0.53 cent, or 3.8 percent, to 13.53 cents a pound at 8:58 a.m. on ICE Futures U.S., the former New York Board of Trade.

To contact the reporter on this story: Ron Day in New York at rday1@bloomberg.net.



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Zinc Leads Drop in Metals as Lehman Curbs Commodities Demand

By Rachel Graham

Sept. 15 (Bloomberg) -- Zinc fell the most in almost 10 months, leading industrial metals lower in London, as the collapse of Lehman Brothers Holdings Inc. curbed demand for commodities.

Lehman, once the fourth-largest U.S. investment bank, posted the biggest bankruptcy filing in history today, raising concern a worsening credit crisis will slow the economy. The S&P GSCI Index of 24 commodities fell 5 percent, extending its slide from July's record to 31 percent. Crude oil traded at a seven-month low.

``It's largely a stampede out of commodities,'' Dan Smith, a metals analyst at Standard Chartered Plc in London, said by phone. ``People are avoiding anything that's risky because of Lehman.''

Zinc for three-month delivery fell as much as $176 a ton, or 9.3 percent, to $1,710 a metric ton on the London Metal Exchange, the steepest intraday decline since Nov. 19, 2007. It traded at $1,730 a ton as of 12:50 p.m. local time. Nickel slid 6 percent, extending this year's slide to 31 percent, the steepest drop of the exchange's six industrial metals.

Lehman was suspended from energy and commodities trading in London after Europe's biggest clearing house declared the company a defaulter.

The LME, the world's largest copper bourse, the Liffe commodities exchange, and Intercontinental Exchange Inc.'s ICE Futures Europe, part of the second-biggest energy exchange, all suspended Lehman today. LCH.Clearnet Group Ltd., which clears trades, declared Lehman's European subsidiary a defaulter.

Phone Trading

Lehman is a so-called category 2 member of the LME and eligible to issue and clear contracts. It can't trade on the exchange floor and was suspended from trading on the bourse's Select electronic platform. The LME trades copper, aluminum, zinc, nickel, tin, lead, steel and plastics.

The firm can still trade by phone, LME spokesman Thom Lant said. Each trade has to be approved by PricewaterhouseCoopers LLP, which is handling the winding down of the business, he said.

The surplus in the zinc market widened in the first seven months of the year, according to the International Lead and Zinc Study Group.

World output was 6.85 million metric tons during January to July, while usage was 6.78 million tons, the Lisbon-based group said today on its Web site. The 77,000-ton surplus compares with 16,000 tons a year earlier.

Among other metals traded on the London Metals Exchange, copper fell $307, or 4.3 percent, to $6,815 a ton, aluminum fell $95, or 3.6 percent, to $2,570 a ton and tin fell $1,050, or 5.5 percent, to $18,200 a ton.

To contact the reporter on this story: Rachel Graham in London at rgraham13@bloomberg.net



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