US Dollar: Don't Trust This Rally

Daily Forex Fundamentals | Written by Global Forex Trading | Sep 25 08 14:54 GMT |

It is now confirmed that the US housing and labor market is in serious trouble. New home sales broke below the 500k make or break mark for the first time in 17 years. The last time we saw new home sales at these levels was during Bush Senior's Administration. Jobless claims also climbed to 493k, the highest since 2001. To add salt to the wound, durable goods orders dropped 4.5 percent last month. However these depression like numbers failed to put a dent into the US dollar as investors hold their breath for the approval of Paulson's Troubled Asset Relief Program. With Congress going on recess at the end of next week, something needs to happen over the next few days. The euphoria in the markets could be short lived since the stock and currency markets have been very fickle. Gold prices are higher and everyone is hungry for US Treasuries, driving the TED spread and the LIBOR/OIS spread near historic highs. This tells us one thing - which is that lending between banks have frozen and big investors are still risk averse. Therefore I would not trust the USD/JPY and carry trade rally. Paulson's Plan Could be a Lose-Lose for the US Dollar Paulson's plan is ultimately a lose-lose situation for the US dollar. If it is approved, it would cause a destruction of the US balance sheet by increasing the nation's debt ceiling by 6.6 percent to $11.315 trillion. If it is not approved or if Paulson and Bernanke only get a trimmed down version of the plan, they would have to go back to the drawing board to come up with other solutions to unclog the mess. If we end up being between rescue plans, the uncertainty would weigh on the US dollar. Therefore I still believe that the US dollar could fall another 5 percent over the next few months. Kathy Lien http://www.gftforex.com DISCLAIMER: This forum and the information provided here should not be relied on as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. The views of the author are not necessarily those of Global Forex Trading, its owners, officers, agents or employees. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Cornelius Luca will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Cornelius Luca do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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New Home Sales Fell Sharply in August

Daily Forex Fundamentals | Written by Wachovia Corporation | Sep 25 08 14:50 GMT |

New home sales fell to 460K, their lowest level since 1991, and the steepest pace of decline since late last year. We had seen an easing in the pace of decline over the past few months, but clearly this month suggests that may not hold. Still, sales activity can be volatile and lower mortgage rates in September may help the next release. Sales Drop Sharply Sales fell as sharply as they have since November 2007, and reached levels last seen in the 1990-91 recession. Sales fell in three of the four census regions, with the sharpest fall in the West. Sales in the West region fell 44,000 on the month as builders continue to cut inventory in some of the hardest hit markets in the country. Inventory Continues to Improve The only silver lining in the report may be the improvement in the level of inventories. Inventory has been falling sharply, off a total of 50K in the last three months. Builders continue to aggressively curtail speculative building as well as current inventory. With the pressure to improve balance sheets, builders should continue to try to move inventory. Wachovia Corporation http://www.wachovia.com Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

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How Will the Fear Factor Impact Markets?

Daily Forex Fundamentals | Written by Black Swan Capital | Sep 25 08 14:46 GMT |

Is it just me or does anyone else think that an impromptu Presidential Address should be designated for declaring war, explaining foreign matters or tending to personal Whitehouse affairs ... if you know what I mean? President Bush's address to the Nation last night did none of those things, really. Sure, it was a fairly clear and concise synopsis for all those who are wrapped up in the markets on a daily basis and/or already understand what's going on. Rather, Bush took the air to play 'bailout salesman'. For all the people disconnected from the markets, for all the people that don't really know or haven't really had a chance to lend any thought to what's going on and what's been proposed, President Bush needed to sell them on the idea of a several hundred billion dollar bailout billed to the US taxpayer. His strategy was not all that uncommon as it's consistently used around election time. Opportunistic scare tactics is what I'll call it. And I'm not talking Democrats or Republicans here, I'm talking Democrats AND Republicans - they're all guilty. It is the simple idea of using fear and uncertainty to trigger the socialistic instinct of human beings. 'Please, if something horrible is happening, do anything in your power and even beyond your constitutional jurisdiction to take care of us. Please!' This is one of the ways government can further blur the line between the public and private sectors. Consider the USA Patriot Act, written and signed into law after 9/11 with the intent of protecting Americans from the spread of terror. The act is actually a long acronym that stands for: Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Controversy surrounds the Patriot Act, specifically its blatant disregard of several civil liberties (though some see it as an appropriate response in a dangerous world). I am in the blatant disregard camp, but do understand there are extremely valid arguments on the other side. Now let's consider this bailout plan proposed by Bush and/ or Paulson. For grins, let's call it USA Patriot Act II which is aimed at stabilizing the financial system and sparing the economy from its disastrous consequences should no action be taken. Perhaps the acronym would go something like this: Uniting and Strengthening America by Pick-pocketing Assets, Twisting Regulations and Imposing on Ordinary Taxpayers Don't you think that outlines the recent initiatives rather well? Now this bailout plan, that President Bush is calling his own, may or may not win the approval of the public. And an overwhelming disapproval maybe shows that taxpayers are sick and tired of footing the bill for reckless government spending. Regardless, it seems some form of bailout plan is going to pass through Congress and be granted to Mr. Paulson and friends. The question is how the markets will behave once this remedy is finally prescribed. Thus far, with the fear factor firmly in play, currencies don't seem to want to commit to any particular direction. What's interesting is the US dollar's ability to hold up the face of this bailout. The consensus has turned decisively anti-dollar now that its multi-month rally has taken a rest. The way we see it, there's a pretty good chance the anti-dollar consensus is in for a rude awakening. That is if reasonable market players see past the scare tactics seeping into the dollar-view ... something that reasonable people have done lately. The main theme of money flowing out of emerging and developed markets and back into the US is what's supporting the buck. It's a somewhat perverse concept, I will admit. But the fact that we're told, and the rest of the world is realizing, that the US economy is walking a tight rope with no safety net could very quickly become a major problem outside of US shores and cause foreign economies to tumble. This idea isn't sitting well with some. Check out our blog entry (Coming Over to the Dollar-Bullish Camp) for a story on one Asian bond fund diversifying back into US dollars. In the meantime, risk-averse currency plays may gain the upper hand ... though an overwhelming advantage is not clear just yet. As I wrap this up most US dollar pairs are range bound in the short-term and most currencies attempted to strengthen at the expense of the US dollar in the wake of crummy durables goods and jobless claims numbers this morning. But that commotion calmed down rather quickly. There's a lot of steam built up in the market. And there's a good chance a break out of these sideways ranges will open the door to substantial moves, for or against the buck. Be ready and be quick and be careful when the government tries sticking their hand in your pocket. Oil vs. US$ Index inverted 240-min chart: Of late, the dollar has ebbed and flowed with oil prices. Of course we don't know who leads and who follows, but the slowdown story seems to be dollar supportive still. This can change at any moment and why any near-term breakout here might be worth a punt. [US$ index inverted means when the red line in the chart below is going down, the dollar is appreciating. We show the chart in this manner so you can see the visual correlation with crude.] Black Swan Capital http://www.blackswantrading.com Black Swan Capital's Currency Snapshot is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html

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US New Home Sales Plunge To A 17 Year Low, Dollar Traders Are Numb To The Data

Daily Forex Fundamentals | Written by DailyFX | Sep 25 08 14:41 GMT |

With the US housing market already deep into its worst recession in generations, it seems new lows in sales activity is generating less and less of a reaction from the dollar. Indeed, traders seem to have priced in an indefinite decline in this battered component of growth, as a massive 11.5 percent drop in new home sales to a fresh 17-year low would only set the currency back for a few minutes. However, while the market's response was muted, the data itself was certainly disappointing. The contraction was the biggest since last November's record, leading the annualized pace of sales to a 460,000 pace - a dramatic shift from the 1.04 million clip reported just two years ago. On the other hand, the components of the Commerce Department report suggest the necessary changes are being made to eventually recharge the market when demand is found. Homes for sale fell for yet another month to 408,000 (from 427,000 last month) as construction activity cools and inventory is worked off. More important to meeting an equilibrium for demand, the average preice fell yet again to $221,900. While next month's reading will almost certainly be depressed by the recent financial crisis, the market looks as if it may improve further out - that is if consumers aren't put into a worse position by a recession. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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U.S. Losing Finance Superpower Status, Germany Says

By Leon Mangasarian

Sept. 25 (Bloomberg) -- German Finance Minister Peer Steinbrueck said the U.S. will lose its position as the world's undisputed financial ``superpower'' and called for a ban on speculative short-selling to help restore the global economy.

Steinbrueck, in a speech on the financial-market crisis to lawmakers in Berlin today, set out an eight-point plan urging greater regulation and larger capital reserves for banks. He championed the German banking system over its U.S. counterpart, dismissing the ``Anglo-Saxon'' model as having ``an exaggerated fixation on returns.''

``The long-term effects of the crisis are impossible to gauge,'' Steinbrueck said. ``One thing seems probable to me: The U.S. will lose its status as the superpower of the global financial system. The global financial system will become multipolar.''

Steinbrueck's comments underline a deepening divide between European and U.S. attitudes to the financial system and how to resolve the rout triggered by the worst U.S. housing slump since the Great Depression. European members of the Group of Seven leading industrial nations refused to back a U.S. bank-rescue plan Sept. 22, with Steinbrueck saying that the U.S. situation ``is not comparable'' to that in Germany.

`Purely Speculative'

In his speech, Steinbrueck targeted short-selling, where traders borrow shares with the hope of buying them back later at a lower price. The global financial community ``must together agree to a ban on purely speculative short-selling at the international level.''

He said in a later interview with Bloomberg Television that someone looking back from 2018 would regard the events of today as the beginning of a ``slight erosion'' in the status of the U.S. in financial terms.

``America will not be the only power to define which standards and which financial products will be traded all over the world,'' he said. ``The dollar will remain a very reliable and important currency, as well as the euro as well as the yuan and the yen, so I think it will perhaps be the starting point of some changes.''

Steinbrueck said that sovereign wealth funds and banks from Asia, the Middle East and Europe will play a bigger role in the new financial world. In the medium- and long-term, ``new pledges of voluntary action or self-regulation by the financial sector'' will not resolve the current crisis, he said.

`Not Enough'

``That's not enough,'' he said in the speech. ``For me the important answer is stronger, internationally agreed regulation at the international level because the crisis goes beyond measures that can be taken by nation states.''

Steinbrueck is a deputy leader of the Social Democratic Party, coalition partners to Chancellor Angela Merkel's Christian Democrats. A former prime minister of North Rhine- Westphalia, Germany's most populous state and home to the industrial Ruhr Valley, Steinbrueck became finance minister in 2005 after Merkel came to power. The two parties will compete against each other in national elections in September 2009.

Merkel pressed for an international framework to bring greater transparency to financial markets during Germany's Group of Eight presidency last year. She returned to that theme this week, welcoming the conversion of the U.S. and the U.K. to her cause while bemoaning them for not listening to her sooner.

Merkel's Mantra

Economic players ``must accept'' rules on strengthening the independence of ratings companies, greater transparency in financial markets and the fact that high-risk products entail big risks, Merkel told employers in Berlin on Sept. 22.

``These measures aren't new; they were spelled out at the G-7 meeting in Heiligendamm,'' northern Germany, Merkel said. ``Germany has always pointed out how necessary they are.''

Steinbrueck, in his speech to the lower house of parliament, the Bundestag, blamed the U.S. as the source of the current crisis that will leave ``deep scars'' globally.

``The U.S. is the origin and the clear focal point of the crisis,'' Steinbrueck said, adding that the ramifications are now ``spreading worldwide like a poisonous oil spill.''

The world will have to brace itself for lower economic growth rates, he said, without giving any new projections for Germany. The government forecasts 1.7 percent growth this year and 1.2 percent in 2009.

Steinbrueck said the root cause of the crisis lies far deeper than the collapse of the U.S. subprime mortgage market.

``In my view, it's the irresponsible overemphasis on the `laissez-faire' principle, namely giving market forces the most possible freedom from state regulation in the Anglo-American financial system.''

To contact the reporters on this story: Leon Mangasarian in Berlin at lmangasarian@bloomberg.net.

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Barker Says It's Too Early to Dismiss U.K. Inflation Risk

By Brian Swint and Svenja O'Donnell

Sept. 25 (Bloomberg) -- Bank of England policy maker Kate Barker said there's a threat that the fastest inflation in a decade may persist even as the financial crisis raises the chances of the bank undershooting its target for consumer prices.

``The latest developments in financial markets have now increased the downside risks,'' Barker said in Wilmslow, England today. ``I remain somewhat concerned about the possibility of more persistent higher inflation, even as growth slows.''

The comments suggest Barker may be wary of the call by her colleague, David Blanchflower, for immediate interest-rate cuts. The crisis that pushed U.K. mortgage lender HBOS Plc into an emergency sale last week is choking the supply of credit to companies and households, pushing Britain toward its first recession since the early 1990s.

``There are real dangers that the impact of these will be a downturn in the economy which is unnecessarily large, and would therefore result in a large undershoot of the inflation target,'' of 2 percent, Barker said in a speech. ``In these circumstances, judgments about the timing of any change in policy that may become necessary are particularly difficult.''

Blanchflower, another of the nine members of the Monetary Policy Committee, said this week that unemployment will jump and the bank needs to lower rates ``decisively and soon.'' He voted for a half-point cut from the current 5 percent interest rate at the September meeting. The rest kept the rate unchanged.

`Prolonged Hump'

``The rise in energy prices is leading to a rather more prolonged hump in overall inflation than the MPC expected earlier this year,'' Barker said. ``It may be too soon to dismiss completely the risk of significantly higher wage growth in the wage round early in 2009, although it is now receding as the labor market weakens.''

Inflation accelerated to 4.7 percent in August and has ``probably not yet reached the peak,'' Barker said today. While prices have declined 28 percent since hitting a record in July, the depreciation of the pound against the dollar may blunt the effect of lower fuel costs in the U.K., she said.

``To bring inflation back to 2 percent in two years, unless there is an unexpected shift in some of these external factors, might prove demanding,'' Barker said. ``In addition, continually changing credit conditions means that it is not easy to form a clear view about the restrictiveness of a 5 percent bank rate.''

Barker also defended the bank's target for consumer price inflation, saying that changing the goal ``now would be to run considerable risks with credibility.''

The Bank of England will wait until November before cutting the rate to 4.75 percent, according to the median forecast of 24 economists in a Bloomberg News survey. The next interest-rate decision is on Oct. 9.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Svenja O'Donnell in London at sodonnell@bloomberg.net.



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U.S. Jobless Claims for the Week of Sept. 20: Summary (Table)

By Andy Burt

Sept. 25 (Bloomberg) -- Following is a summary of the Sept. 20 initial jobless claims report from the Labor Department.

========================================================================
Week Ending                  Sept. 20   Sept. 13   Sept. 6   Prior Year
========================================================================
Initial Claims (SA)            493,000    461,000    445,000    309,000
    Change                     32,000     16,000     -6,000    184,000
    Percent change               6.9%       3.6%      -1.3%      59.5%
4-Wk moving average           462,500    446,500    440,000    317,500
------------------------------------------------------------------------
Initial Claims (NSA)           395,601    385,057    336,733    247,643
    Change                     10,544     48,324    -21,997    147,958
    Percent change               2.7%      14.4%      -6.1%      59.7%
========================================================================
Week Ending                  Sept. 13   Sept. 6    Aug. 30   Prior Year
========================================================================
Continuing claims (SA)       3,542,000  3,479,000  3,532,000  2,560,000
    Change                     63,000    -53,000    128,000    982,000
========================================================================
Week Ending                  Sept. 13   Sept. 6    Aug. 30   Prior Year
========================================================================
    Percent change               1.8%      -1.5%       3.8%      38.4%
4-Wk Moving average (SA)    3,489,250  3,461,000  3,431,000  2,575,000
------------------------------------------------------------------------
Ins. Unemployment Rate (SA)       2.6%       2.6%       2.6%       1.9%
Ins. Unemployment Rate (NSA)      2.3%       2.3%       2.3%       1.6%
------------------------------------------------------------------------
Continuing claims (NSA)      3,014,605  3,068,695  3,059,126  2,160,459
    Change                    -54,090      9,569    -38,459    854,146
========================================================================
                            Sept. 6    Aug. 30    Aug. 23   Prior Year
========================================================================
    Percent change              -1.8%       0.3%      -1.2%      39.5%
Extended benefits (NSA)          1,324        526      1,548          5
    Change                        798     -1,022        135      1,319
Emergency Unemp. Comp. (NSA) 1,056,924  1,394,329  1,097,375          0
    Change                   -337,405    296,954   -297,374  1,056,924
========================================================================

(SA) = Seasonally adjusted figures. (NSA) = Not seasonally adjusted.

To contact the reporter on this story: Andy Burt in Washington at aburt1@bloomberg.net

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Dodd Says `We've Got Work to Do' for Financial Rescue Accord

By James Rowley

Sept. 25 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd said that lawmakers have ``work to do'' to reach an agreement on a $700 billion financial rescue plan.

Dodd made his comment this morning before a meeting with Republicans to negotiate an accord.

President George W. Bush in a televised address last night urged swift action to help avert ``a long and painful'' recession. The $700 billion proposal would allow the Treasury to buy troubled assets to restore financial stability, Fed Chairman Ben S. Bernanke said yesterday.

Representative Spencer Bachus, the top Republican on the Financial Services Committee, said lawmakers were not close to a deal, as he entered a meeting to negotiate an accord.

House Financial Services Committee Chairman Barney Frank told reporters last night that House and Senate Democrats had reached a deal among themselves on the legislation. Democrats on Frank's panel and the Senate Banking Committee are meeting today with committee Republicans to try to reach an accord.

Michael Steel, a spokesman for House Republican leader John Boehner, said there ``will not be a final deal as a result'' of the meeting this morning. ``We have made some progress but are not nearly at that point,'' Steel said in an e-mail message last night.

``The package is basically done,'' Representative Paul Kanjorski, a Pennsylvania Democrat, told CNBC today. ``The hard issues are resolved. They have to shake hands. They have to smile and they have to have the photo set.''

Bush invited presidential candidates John McCain and Barack Obama, along with congressional leaders, to a meeting at the White House this afternoon to accelerate the talks.

To contact the reporters on this story: Catherine Dodge in Washington, at Cdodge1@bloomberg.net; Roger Runningen in Washington, at rrunningen@bloomberg.net

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U.S. Jobless Claims Jump 32,000 to 493,000 Last Week

By Shobhana Chandra

Sept. 25 (Bloomberg) -- The number of Americans filing first-time claims for unemployment benefits rose last week to the highest since September 2001 as hurricanes kept residents of Texas and Louisiana out of work.

Initial jobless claims increased by 32,000 to 493,000 in the week that ended Sept. 20, from a revised 461,000 the prior week, the Labor Department said today in Washington. Economists in a Bloomberg survey had forecast a drop. Hurricanes Ike and Gustav added 50,000 claims, the department said.

The figures may reinforce concern that consumer spending, which accounts for more than two-thirds of the U.S. economy, will falter. Growth already is slowing during a housing slump and the worst financial crisis since the Great Depression.

``The labor market is clearly in recession,'' Steven Wood, president of Insight Economics LLC in Danville, California, said before the report.

Separately, orders for U.S. durable goods fell more than twice as much as forecast in August, a sign that slower sales and tighter credit conditions prompted companies to cut spending.

Initial claims were forecast to decrease to 450,000 from 455,000 initially reported for the prior week, according to the median projection of 39 economists in a Bloomberg News survey. Estimates ranged from 433,000 to 505,000.

Weekly jobless claims figures in recent weeks have been distorted by the fallout from storms earlier this month.

Unemployment Rising

The four-week moving average of initial claims, a less volatile measure, increased 462,500 from 446,500, today's report showed.

The number of people continuing to collect jobless benefits rose close to a five-year high of 3.542 million in the week ended Sept. 13, from 3.479 million the prior week.

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, stayed at 2.6 percent for a third straight week. These data are reported with a one-week lag.

Forty-one states and territories reported an increase in new claims, while 12 reported a decrease.

Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows.

So far this year, weekly claims have averaged 384,700, compared with an average 321,000 for all of 2007.

Credit Crunch

The economy lost 605,000 jobs this year until August. The monthly payrolls report for September, due from the Labor Department on Oct. 3, may show job losses continued for the ninth consecutive month, according to the Bloomberg survey.

The credit crisis may spur more layoffs. The turmoil has pushed Lehman Brothers Holdings Inc. into bankruptcy, Merrill Lynch & Co. into an acquisition by Bank of America Corp., and led to a government takeover of mortgage financiers Fannie Mae and Freddie Mac, and of insurer American International Group Inc.

Slower sales of big-ticket items is prompting even foreign automakers to pare workers at their U.S. units. Bayerische Motoren Werke AG, the world's largest maker of luxury autos, on Sept. 18 said it'll eliminate 90 office jobs in North America because of slowing U.S. sales.

``We can no longer afford to just modify or cut back on the way in which we have been operating,'' Jim O'Donnell, president of BMW of North America LLC, said in an e-mail to dealers.

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



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Ireland Becomes First Euro Nation to Enter Recession

By Fergal O'Brien

Sept. 25 (Bloomberg) -- Ireland became the first euro area economy to slide into a recession, as homebuilding and consumer spending slumped and the global financial crisis intensified.

Gross domestic product contracted 0.5 percent in the three months through June from the previous quarter, when it shrank 0.3 percent, the Central Statistics Office said today in Dublin. From a year earlier, the economy lost 0.8 percent.

The housing collapse, coupled with the global credit crisis, forced the Irish government to slash spending to keep its deficit in check and pushed the benchmark stock index to fall more than any other in western Europe this year. Ireland's slump may be followed by recessions across Europe, according to the European Commission, which has cut its forecasts for growth across the euro area.

``Italy looks to be the next candidate'' to enter recession, Julian Callow, an economist at Barclays Capital, said in a note. ``Germany is also emerging as a major candidate.''

Ireland's contraction follows a decade-long boom, sparked by exports in the mid-1990s and then extended by record homebuilding. The economy has expanded around 7 percent a year for a last decade, three times the euro-area average. Ireland hasn't had a full-year economic contraction since 1983.

Now, home building is plunging as house prices drop. Bank of Ireland Plc, the country's second-biggest bank, said on Sept. 17 it will slash its dividend by 50 percent and post a drop in first-half profit as loan losses mount. House prices fell 9.4 percent in July from a year earlier.

`Torpedoing the Economy'

``The housing market is torpedoing the economy,'' Pat McArdle, chief economist with Ulster Bank Ltd. in Dublin, said in a phone interview. ``The third quarter will definitely be worse.''

From a year earlier, consumer spending fell 1.4 percent in the second quarter, the first year-on-year decline in at least 11 years, according to the statistics office. Exports rose 2.4 percent and imports fell 1.1 percent.

``It is clear that the domestic economy has already entered recession, as evidenced by the fall in consumer and investment spending,'' Dermot O'Leary, chief economist at Goodbody Stockbrokers in Dublin, said before today's report. ``Judging by the state of our main trading partners, it may be too big of an ask for them to take up the slack.''

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.



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Orders for U.S. Durable Goods Drop More Than Forecast

By Timothy R. Homan

Sept. 25 (Bloomberg) -- Orders for U.S. durable goods fell more than twice as much as forecast in August, a sign that slower sales and tighter credit conditions prompted companies to cut spending.

The 4.5 percent drop in bookings of goods meant to last several years followed a revised 0.8 percent gain in July that was smaller than previously reported. Excluding transportation equipment, orders decreased 3 percent, the biggest drop since January 2007.

The credit crisis that brought down Lehman Brothers Holdings Inc. and American International Group Inc. this month is making it harder for companies to invest in new equipment. Less U.S. demand and shrinking economies overseas increase the risk that manufacturing will falter.

``This is finally some sort of reaction to a tightness in credit,'' said Rudy Narvas, a senior economist at 4Cast Inc. in New York, whose forecast for the drop in non-transportation orders was closest. ``Plans to invest by companies are being restrained.''

Another government report today showed the number of Americans filing first-time claims for unemployment benefits rose last week to the highest since September 2001 as hurricanes threw thousands out of work in Texas and Louisiana. Initial jobless claims increased by 32,000 to 493,000 in the week that ended Sept. 20, from a revised 461,000 the prior week, the Labor Department said.

Treasuries Higher

Treasuries held earlier gains after the reports, pushing yields lower. The benchmark 10-year note yielded 3.78 percent as of 8:41 a.m., down 3 basis points from yesterday. Stock index futures were higher.

Economists had projected durable goods orders would fall 1.9 percent after a previously reported 1.3 percent increase in July, according to the median of 74 forecast in a Bloomberg News survey. Estimates ranged from a drop of 5.9 percent to a gain of 0.3 percent.

Excluding transportation equipment, orders were projected to fall 0.5 percent, according to the Bloomberg survey. Estimates ranged from a decline of 2.5 percent to an increase of 0.9 percent.

Growth Impact

Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, dropped 2 percent after a 0.4 percent increase in July that was smaller than previously estimated. The decline last month was the biggest since January 2007. Shipments of those items, used in calculating gross domestic product, fell 1.7 percent.

Bookings for transportation equipment dropped 8.9 percent, today's report showed. Orders for commercial aircraft decreased 38 percent and those for automobiles fell 8.1 percent, the most since January 2007.

Boeing Co., the world's second-largest commercial planemaker, may have to provide more financing for its customers and may see more cancellations because of the spreading financial turmoil, Chief Executive Officer Jim McNerney said yesterday.

Previous economic slumps saw 5 percent to 10 percent of Boeing's orders canceled, McNerney told reporters after a speech in Boston. This time around, ``it could be a little worse, could be better than that. We'll have to monitor the situation,'' he said. The company has a record $275 billion in order backlogs for commercial planes.

Plane Orders

Chicago-based Boeing received orders for 38 aircraft in August, down from 70 a month earlier. About 27,000 Boeing machinists went on strike on Sept. 6.

Orders for machinery dropped 6.2 percent and demand for metals fell 9.3 percent, the biggest decline since April 1993. The drop in metals may partly reflect the fall in commodity costs in recent months since the figures aren't adjusted for prices.

American manufacturers have offset weakening domestic demand in recent months by filling overseas orders, with support from a lower dollar that's made U.S. goods more competitive. Still, further export expansion is in question as economies overseas falter.

Europe's economy contracted in the second quarter for the first time since the introduction of the euro almost a decade ago. Japan's economy shrank in the same period as consumers spent less and exports fell, the Japanese government said last month.

Slump Spreads

A technology slump that started in the U.S. last quarter spread to Western Europe and some Asian countries, Dell Inc., the second-biggest personal-computer maker, said on Sept. 16, reiterating comments made last month.

``We saw a very weak August,'' Chief Financial Officer Brian Gladden said at a Bank of America Corp. investment conference in San Francisco. ``It is not coming back the way we thought it would.''

Today's report may lead some economists to lower forecasts for growth in the third quarter. Final second-quarter GDP figures from the Commerce Department, due tomorrow, may show the economy expanded at a 3.3 percent annual rate from April through June, the same as reported last month, according to a Bloomberg survey.

Federal Reserve Chairman Ben S. Bernanke said yesterday in testimony before Congress that the U.S. is facing ``grave threats'' to financial stability and warned that the credit crisis has started to damage household and business spending.

``Economic activity appears to have decelerated broadly,'' Bernanke said yesterday in testimony before a congressional Joint Economic Committee hearing. The Fed chief reiterated his call for Congress to pass Treasury Secretary Henry Paulson's plan for a $700 billion rescue fund to remove devalued assets from the banking system.

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

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U.S. New-Home Sales Fell in August to 17-Year Low

By Bob Willis

Sept. 25 (Bloomberg) -- Sales of new homes in the U.S. fell in August to a 17-year low, signaling the housing market suffered another setback even before the latest turmoil in financial markets.

Sales dropped 11.5 percent, more than forecast, to an annual rate of 460,000, the fewest since January 1991, the Commerce Department said today in Washington. The median sales price dropped to a four-year low.

A financial meltdown that prompted the government this week to ask Congress for $700 billion in emergency funding to buy up troubled bank assets may continue to clog the flow of credit to homebuyers and businesses. Shrinking credit availability threatens to extend the three-year housing slump and deepen the economic downturn.

``The market is looking particularly depressing,'' said Guy Lebas, chief economist at Janney Montgomery Scott LLC in Philadelphia, whose sales forecast was the closest. ``Construction activity has to fall further than it has, as do prices,'' to reduce a glut of unsold homes.

Economists had forecast new-home sales would drop to a 510,000 annual pace, according to the median estimate in a Bloomberg survey of 75 economists. Forecasts ranged from 493,000 to 555,000. July sales were revised up to a 520,000 pace from a previously estimated 515,000.

Stocks rose on speculation that Congress will reach agreement on the bailout package and help avert a long recession. The Standard & Poor's 500 index was up 1.9 percent to 1208.81 as of 10:08 a.m. in New York.

Durable Goods, Claims

Other reports today showed orders for durable goods in August dropped 4.5 percent and first-time claims for unemployment benefits surged last week to the highest level in seven years as hurricanes Ike and Gustav threw thousands out of work in Texas and Louisiana.

The median price of a new home dropped 6.2 percent from a year earlier to $221,900, the lowest level since September 2004.

Sales of new homes were down 35 percent from August 2007, the Commerce report showed.

While builders cut back, they weren't able to keep pace with the slump in sales. The number of homes for sale fell to a four-year low of 408,000, down 4.4 percent from the prior month. The decline was the biggest since 1963. Still, the supply of homes at the current sales rate rose to 10.9 months' worth from 10.3 months.

Timely Indicator

While accounting for only about 10 percent of the housing market, new-home purchases are considered a timelier indicator because they are based on contract signings. Sales of previously owned homes, which make up the remainder, are compiled from closings and reflect contracts signed weeks or months earlier.

Resales decreased 2.2 percent in August to an annual pace of 4.91 million units and median prices fell 9.5 percent from a year earlier, a record decline, the National Association of Realtors said yesterday.

Inventories of new properties have been falling since July 2006 as builders have scaled back in the last two years. Ground was broken on the fewest new houses in 17 years in August, and permits, a sign of future construction, also fell, Commerce Department figures showed last week.

New-home sales dropped in three of four regions, led by a 36 percent slump in the West and a 32 percent decline in the Northeast. Purchases rose 7.2 percent in the Midwest, today's report showed.

Lennar's Loss

Lennar Corp., the second-largest U.S. homebuilder, this week reported its sixth straight quarterly loss and said the government must take measures to boost home prices that are down by nearly a fifth from their 2006 peaks.

``Consensus is building that falling home prices are not only detrimental to the economy at large, but in order to repair our failing financial system we will have to stop the decline,'' Chief Executive Officer Stuart Miller said.

Stricter lending regulations and tumbling home prices make it harder for Americans to tap home equity for extra cash. Consumer spending in the third quarter will probably be the weakest since 1991, according to economists surveyed earlier this month.

``The continuing decline in house prices reduces homeowners' equity and puts continuing pressure on balance sheets of financial institutions,'' Fed Chairman Ben S. Bernanke told a congressional hearing yesterday. ``Stabilization of our financial system is an essential precondition for economic recovery.''

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



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Bernanke Moves Closer to Rate Cut as Risks to Economy Intensify

By Scott Lanman and Craig Torres

Sept. 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke moved closer to cutting interest rates, signaling that risks to U.S. growth are greater than policy makers saw them just last week.

The ``intensification'' of the financial crisis in recent weeks is curbing Americans' access to borrowing, making the outlook for consumer spending ``sluggish at best,'' Bernanke told lawmakers in Washington yesterday. While he noted that risks to inflation remain, the Fed chief's testimony focused on ``grave threats'' to the banking system.

``It opens the door a bit further for rate cuts, although it doesn't signal that the committee is at that point already,'' said former Fed researcher Brian Sack, now senior economist at Macroeconomic Advisers LLC in Washington. ``It still seems like it would take a further deterioration in financial conditions or in the data to prompt a rate cut.''

Bernanke's assessment reflected further disruptions to money markets since the central bank met Sept. 16, when the Federal Open Market Committee left the benchmark rate at 2 percent. The three-month London interbank offered rate, or Libor, a benchmark for confidence in the banking system, jumped the most in eight years today.

Traders increased bets on a quarter-point rate cut at or before the FOMC's Oct. 28-29 meeting, sending the probability implied in futures contracts to 80 percent yesterday from 58 percent the previous day.

`Coming Back'

``Increasingly, the odds favor the Fed coming back and easing again,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. The FOMC cut rates seven times from September 2007 to April.

Still, interest-rate futures proved false in anticipating last month's decision, when the FOMC kept the main rate unchanged at 2 percent for a third meeting. Bernanke has shown a preference for separating monetary policy from efforts to increase liquidity and help financial markets function.

The Fed chief used his description of the dangers to the economy in trying to persuade lawmakers yesterday to support Treasury Secretary Henry Paulson's $700 billion plan for the government to remove devalued assets from the financial system.

Fed policy makers last week said tighter credit would ``weigh'' on growth, and consumer spending was ``softening.'' By contrast, Bernanke yesterday said that without congressional passage of Paulson's plan, the economy's performance may be damaged ``over perhaps a period of years.''

Growth Slows

Bernanke's testimony yesterday before the Joint Economic Committee signaled that restrictive credit has now slowed the economy from its 3.3 percent annualized pace in the second quarter to a pace ``appreciably below its potential rate.''

The Fed chief later joined Paulson for a House Financial Services Committee hearing yesterday to discuss the proposed financial rescue.

Fed officials have so far failed to stem the credit crisis even after the steepest rate cuts in two decades and interventions in Bear Stearns Cos. and American International Group Inc. this year. The Fed also backed the Treasury's action this month to take over Fannie Mae and Freddie Mac as the turmoil engulfed the two largest mortgage finance companies.

The central bank has also pumped billions of dollars into banks to try to restore liquidity, while invoking emergency powers to loan to securities firms. This week, the Fed expanded agreements with central banks abroad to offer dollars in overseas markets, providing up to $30 billion for Australia, Sweden, Norway and Denmark.

Fed Strategy

``We still think that they're going to leave the funds rate at 2 percent and try to address the specific market problems with liquidity provisions,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets. The Fed will leave rate unchanged ``barring an absolute cataclysm in the economy and/or financial markets,'' said Stanley, a former economist at the Richmond Fed.

The crisis has intensified even with the Fed's cash injections, with banks hesitant to lend to each other on concern more institutions will fail.

Three-month Libor, a rate banks charge each other for loans in dollars, rose to 3.77 percent from 3.48 percent today, the biggest jump since 1999, British Bankers' Association data showed today.

Lawmakers at both hearings yesterday pressed Bernanke to explain better how the crisis would affect average Americans, such as constituents who were calling and writing to oppose what some termed a bailout for Wall Street.

In a worsening credit crisis, ``people cannot borrow to buy a car, to send a student to college, to buy a house,'' Bernanke told the House committee. Scant lending harms ``people at the lunch-bucket level,'' he said.

``Bernanke was refreshingly frank, open and honest about the economic outlook in a way that has been uncommon in his tenure,'' said Joseph Brusuelas, chief economist at fund manager Merk Investments LLC in Palo Alto, California.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

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Natural Gas Falls as U.S. Report May Show Ample Winter Supply

By Reg Curren

Sept. 25 (Bloomberg) -- Natural gas futures declined for a second day on expectations a U.S. government report today will show supplies are sufficient to meet demand this winter.

Stockpiles probably rose 63 billion cubic feet in the week ended Sept. 19, according to the median of 20 analyst estimates compiled by Bloomberg. Inventories the previous week stood at 2.972 trillion cubic feet, 2.1 percent above the five-year average, according to the Energy Department.

``There's a perception that supplies are ample,'' said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. ``Even if we had no injection, we'd likely still be above the five-year average.''

Natural gas for October delivery fell 15.9 cents, or 2.1 percent, to $7.52 per million British thermal units at 9:24 a.m. on the New York Mercantile Exchange. The October contract expires tomorrow. The November futures contract fell 15.3 cents, or 1.9 percent, to $7.755 per million Btu.

The Energy Department's weekly gas supply report is scheduled for release at 10:35 a.m. in Washington.

Gas also followed crude oil lower, after a petroleum report yesterday showed reduced fuel demand.

Oil for November delivery fell $1.50, or 1.4 percent, to $104.23 a barrel in New York.

``Gas is taking a cue from oil before the storage report,'' Flynn said. ``It's pressuring all energies.''

The pace of gains for winter storage of natural gas has slowed because of storms in the Gulf of Mexico. Lower demand because of blackouts from those same storms and mild weather have limited the pinch on supplies.

About 57 percent of daily gas production from the Gulf of Mexico, was still offline yesterday because of hurricanes Ike and Gustav, a government report showed. The region accounts for 7.4 billion cubic feet of gas a day, or about one-seventh of U.S. production.

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



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Crude Oil Falls as Concern Grows About U.S. Fuel-Demand Outlook

By Mark Shenk

Sept. 25 (Bloomberg) -- Crude oil fell for a third day on concern that U.S. fuel consumption will drop further because of risks to economic growth.

Oil fell as much as 2.4 percent after President George W. Bush's statement yesterday that the nation may ``slip into a financial panic'' if Congress doesn't pass a $700 billion bailout program. U.S. fuel demand averaged 19.5 million barrels a day during the past four weeks, the lowest since October 2003, the Energy Department said.

``I think concern about economic growth driving demand down is weighing on the market,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Unfortunately, the end of the economic crisis isn't in sight. After being reassured that things were fine for the last year people are fatigued.''

Crude oil for November delivery fell $1.28, or 1.2 percent, to $104.45 a barrel at 9:02 a.m. on the New York Mercantile Exchange. Prices are down 29 percent from the record $147.27 a barrel reached on July 11.

Gasoline demand averaged 9 million barrels a day during the past four weeks, down 4.4 percent from the period last year, yesterday's report showed. Gasoline stockpiles dropped 5.9 million barrels to 178.7 million barrels, the lowest since 1967. Inventory levels prior to 1990 were reported on a monthly basis.

Stockpiles of crude fell 1.52 million barrels to 290.2 million in the week ended Sept. 19, the department said yesterday in its weekly report on supplies.

Durable Goods

Orders for U.S. durable goods fell more than twice as much as forecast in August, a sign that slower sales and tighter credit conditions prompted companies to cut spending. The 4.5 percent drop in bookings of goods meant to last several years followed a revised 0.8 percent gain in July that was smaller than previously reported, the Commerce Department said today.

Interruptions to supplies of crude and products increased today as Royal Dutch Shell Plc shut a gasoline-making unit at Europe's largest oil refinery, while in Nigeria, Chevron Corp. faces renewed strike action.

Shell shut the unit at its Pernis refinery in the Netherlands following a technical fault yesterday, company spokesman Wim van de Wiel said.

In Nigeria, a strike planned by Members of the National Union of Petroleum and Natural Gas Workers may disrupt exports from Chevron's Escravos terminal. The company produced 353,000 barrels of crude oil daily in Nigeria in 2007, according to its Web site.

Brent crude oil for November settlement declined $1.35, or 1.3 percent, to $101.10 a barrel on London's ICE Futures Europe exchange.

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



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Gasoline Shortages Won't Last a Month, Bodman Says

By Tina Seeley

Sept. 25 (Bloomberg) -- Spot shortages of gasoline in the U.S. in the aftermath of hurricanes Gustav and Ike shouldn't last a month, Energy Secretary Samuel Bodman said.

The U.S. experienced gasoline shortages for about a month after hurricanes Katrina and Rita hit the Gulf of Mexico region in 2005, Bodman told reporters today in McLean, Virginia.

``I would think it would be a shorter time,'' to recover from Gustav and Ike, he said. Bodman said several refineries in Texas and Louisiana should resume operations by either this weekend or next week.

The storms shutdown about 20 percent of U.S. refining capacity. Five refineries in the region are still idled, the department said in a report posted yesterday.

Bodman also said there were no pending requests to release oil from the U.S. Strategic Petroleum Reserve. The department has released almost 3.3 million barrels to refiners that faced supply disruptions because of the storms.

To contact the reporter on this story: Tina Seeley in Washington at tseeley@bloomberg.net.

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Canadian Dollar Reaches Highest in Seven Weeks on U.S. Plan

By Michael J. Moore

Sept. 25 (Bloomberg) -- Canada's dollar touched the highest in more than seven weeks as the U.S. Congress moved closer to an agreement on a $700 billion financial rescue plan after President George W. Bush urged swift action to help avert a recession.

The Canadian dollar has strengthened 2.8 percent against its U.S. counterpart so far this month. The U.S. is Canada's largest trading partner.

``Expectations of the passage of the plan should help stabilize the macroeconomic environment for the U.S., and therefore will positively affect the Canadian economy,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. ``The investment and trade links between the U.S. and Canada is why this passage is particularly important for Canada, and why it's helping the Canadian dollar.''

The Canadian currency appreciated 0.4 percent to C$1.0346 per U.S. dollar at 10:36 a.m. in Toronto, from C$1.0386 yesterday. It reached C$1.0299, the strongest since Aug. 4. One Canadian dollar buys 96.67 U.S. cents.

Immediately after Bush's speech last night, House Financial Services Committee Chairman Barney Frank told reporters that House and Senate Democrats had reached a deal on legislation. Frank said the bill will be signed into law in less than a week.

The Canadian currency will slip to C$1.12 against the U.S. dollar by the end of 2009, according to the median forecast of 33 economists surveyed by Bloomberg News.

Two-Year Yield

The yield on the two-year government bond climbed 4 basis points, or 0.04 percentage point, to 2.89 percent. The price of the 2.75 percent security due in December 2010 fell 8 cents to C$99.72.

The 10-year government note's yield increased 2 basis points to 3.69 percent. The price of the 4.25 percent note maturing in June 2018 fell 19 cents to C$104.58.

The 10-year bond yielded 80 basis points more than the two- year security, down from 92 basis points on Sept. 18.

The two-year bond's yield will rise to 2.95 percent by the end of this year, while the 10-year bond's yield will increase to 3.76 percent, according to the median forecasts of economists surveyed by Bloomberg News.

The yield advantage of the 10-year U.S. Treasury note compared with similar-maturity Canadian government bonds was 15 basis points, up from 3 basis points on Sept. 18. The Canadian 10-year bond yielded 36 basis points more than its U.S. counterpart on Jan. 22.

Canadian government bonds have returned 4.4 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries have returned 4.7 percent this year.

Bank of Canada Governor Mark Carney will deliver a speech on recent economic developments at 1:15 p.m. in Montreal.

To contact the reporter on this story: Michael J. Moore in New York at Mmoore55@bloomberg.net.



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Crude Oil Falls as Concerns Grow Over U.S. Fuel-Demand Outlook

By Grant Smith

Sept. 25 (Bloomberg) -- Crude oil declined for a third day, erasing earlier gains amid growing concerns over U.S. demand.

The U.S. could ``slip into a financial panic'' if Congress doesn't pass a $700 billion bailout program to help stabilize the financial system, President George W. Bush said last night. The country's crude inventories fell less than expected, the Energy Department said, and refinery rates dropped to the lowest in at least 19 years amid slowing consumption.

``The hurricane season is behind us but stormy economic conditions are not, and there are implications for weaker demand,'' said Christopher Bellew, a senior broker at Bache Commodities Ltd.

Crude oil for November delivery fell as much as $2.38, or 2.3 percent, to $103.35 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It earlier rose 0.8 percent to $106.60 and traded at $104.35 at 11:32 a.m. London time.

The contract settled 88 cents lower at $105.73 yesterday, even after an Energy Department report showed gasoline stockpiles dropped to 178.7 million barrels, the lowest since 1967.

``The fact prices didn't rise further after the inventory report shows the uncertainty about the U.S. recovery package,'' said Carsten Fritsch, a Commerzbank AG analyst in Frankfurt. ``Price risks are still tilted to the upside because of growing supply risks.''

Supply Threats

Threats to supply of crude and products increased today as Royal Dutch Shell Plc shut a gasoline-making unit at Europe's largest oil refinery, while in Nigeria, Chevron Corp. faces renewed strike action.

Shell shut the unit at its Pernis refinery in the Netherlands following a technical fault last night, company spokesman Wim van de Wiel said.

In Nigeria, a strike planned by Members of the National Union of Petroleum and Natural Gas Workers may disrupt exports from Chevron's Escravos terminal. The company produced 353,000 barrels of crude daily in Nigeria in 2007, according to its Web site.

U.S. supplies of crude oil fell 1.52 million barrels to 290.2 million in the week ended Sept. 19, the Energy Department said yesterday, less than the 2.5 million-barrel drop forecast by analysts. Refineries operated at 66.7 percent of capacity last week, the lowest since the department began compiling weekly figures in 1989.

Brent crude oil for November settlement declined as much as $2.34, or 2.3 percent, to $100.11 a barrel on London's ICE Futures Europe exchange. It was at that price at 12:50 p.m. local time.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

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Dollar Falls Versus Euro as Traders Raise Bets on Fed Rate Cut

By Ye Xie and Bo Nielsen

Sept. 25 (Bloomberg) -- The dollar fell against the euro for the first time in three days after traders increased bets the Federal Reserve will cut borrowing costs next month as credit market losses threatened to slow economic growth further.

The greenback weakened versus the Brazilian real and the South African rand as orders for U.S. durable goods fell in August more than twice as much as forecast. The pound rose against the dollar as policy maker Andrew Sentance said the Bank of England must temper its response to the credit crisis and stick to its inflation focus.

``The right medium-term trade is selling the dollar,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, in an interview on Bloomberg Television. ``It looks like the U.S. economy is slowing again more than any other part of the world. When you add together all the fiscal contingent liability risk the U.S. government is taking on to backstop the financial system, you really have to question the long-term prospects for the dollar.''

The dollar fell 0.5 percent to $1.4698 per euro at 10:14 a.m. in New York, from $1.4621 yesterday. The U.S. currency advanced 0.2 percent to 106.27 yen, from 106.11. The euro increased 0.7 percent to 156.23 yen, from 155.15.

Futures contracts on the Chicago Board of Trade showed a 98 percent chance that the Fed will cut the 2 percent target rate for overnight lending between banks on Oct. 29. That compares with 80 percent odds yesterday.

Congress moved closer to an agreement on a $700 billion plan to rid banks of distressed mortgage securities as President George W. Bush urged swift action to help avert ``a long and painful'' recession.

Bernanke on `Threats'

Fed Chairman Ben S. Bernanke told lawmakers yesterday the U.S. faces ``grave threats'' to market stability, signaling risks to U.S. growth are greater than policy makers saw them just last week. The financial system is ``frozen to a large extent,'' Treasury Secretary Henry Paulson said.

``The prospects of loose fiscal and monetary conditions in a economy that's slowing rapidly is hitting the dollar,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. The bailout package ``may restore confidence in a lot of things, but it won't restore confidence in the dollar.''

The euro may advance as high as $1.53 as the market refocuses on economic fundamentals once the bailout package is in place, said Tom Fitzpatrick, London-based global head of currency strategy at Citigroup Global Markets Inc., in a note sent to Bloomberg yesterday.

Higher Libor

The collapse of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group Inc. have led to a seizure in lending between banks. The three-month London interbank offered rate, or Libor, for dollars rose to 3.77 percent today, the highest level relative to the Fed's target rate on record.

``The credit channel is blocked up,'' said Stephen Malyon, co-head of currency strategy in Toronto at Scotia Capital Inc., a unit of Canada's third-largest bank by assets. ``Odds favor the next move by the Fed will be a cut. It surely will hurt the dollar.''

Sterling climbed 0.5 percent to $1.8558 after Sentance said policy makers should guard against ``allowing the economic slowdown to develop into a deflationary spiral.'' The median forecast of 46 economists surveyed by Bloomberg News is for the Bank of England to hold its target rate at 5 percent on Oct. 9.

Taiwan's dollar lost 0.2 percent to 32.008 per U.S. dollar after the central bank unexpectedly reduced interest rates for the first time since 2003, saying the deepening global financial crisis has heightened the risk of an economic slump. Governor Perng Fai-nan and colleagues cut the discount rate on 10-day loans to banks by 12.5 basis points to 3.5 percent. Only two of 13 economists surveyed by Bloomberg News expected the decision.

Dollar's Decline

The dollar has fallen 6 percent against the euro since touching a one-year high of $1.3882 on Sept. 11. The dollar reached $1.6038 on July 15, the weakest level since the European currency made its debut in 1999.

Orders for U.S. durable goods, items meant to last several years, dropped 4.5 percent in August after a revised 0.8 percent gain in the prior month, the Commerce Department reported today. The median forecast of 74 economists surveyed by Bloomberg News was for a 1.9 percent decrease.

``Restrictive credit conditions are preventing previous rate cuts from stimulating the economy,'' said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. ``At the same time, economies in Europe and Japan are not getting better. The euro-dollar in the $1.45-$1.50 range is consistent with economic fundamentals and rate expectations.''

The dollar dropped 1.8 percent to 1.8262 reais and 0.8 percent to 8.1048 rand.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

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Libor Soars on Concern Bank Bailout Will Be Diluted

By Gavin Finch and David Yong

Sept. 25 (Bloomberg) -- Money-market rates around the world soared on mounting concern the U.S. Treasury's $700 billion bailout plan will be diluted as it makes its way through Congress, causing financial institutions to hoard cash.

The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped today by the most since 1999 and the euro rate rose to the highest level since November 2000. Rates in Hong Kong and Singapore climbed as Bank of East Asia Ltd. faced a run on deposits. The difference between the three-month dollar rate and the overnight indexed swap rate, the Libor-OIS spread, widened to the most on record.

``Liquidity in the money markets in maturities over a week is desperately scarce,'' said Tim Bond, head of global asset allocation at Barclays Capital in London. ``A near-term solution to the crisis is urgent. Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank capital contraction and deep recession within a matter of weeks.''

Money-market rates signal banks have all but stopped lending to each other. Treasury Secretary Henry Paulson's bailout plan, which proposes removing tainted assets from bank balance sheets, may be cut back in size, U.S. House Budget Committee Chairman John Spratt said today. The U.S. faces a ``painful'' recession if the package isn't approved, President George W. Bush said yesterday.

`Nothing's Working'

The Libor-OIS spread, a measure of the availability of cash among banks, widened 33 basis points to 200 basis points today, the most on record. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began.

``The message coming from our money-market traders is that nothing's working,'' said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank NV. ``Banks are not dealing with one another and the situation has gotten worse. The real market is probably about 10 to 20 basis points above where Libor fixings are.''

The turmoil in money markets is rippling through the economy. General Electric Co. cut its earnings forecast today and said it will pare back GE Capital's commercial paper to between 10 percent and 15 percent of total debt. Pilgrim's Pride Corp., the biggest U.S. chicken producer, expects to breach one of its credit covenants because it will post a ``significant'' fourth-quarter loss.

Fortis, the financial-services company that set out in June to bolster capital by 8.3 billion euros ($12.2 billion), tumbled as much as 21 percent in Brussels trading, the most since it was formed in 1990, on concern it needs help with funding.

Deposit-Base `Fear'

The drop is ``linked to rumors that every Belgian citizen is frightened by Fortis,'' said Scander Bentchikou, a Paris-based analyst at Oddo Securities. ``Lots of people say they should diversify and fear a drop in the deposit base.''

``We don't have any indication of the withdrawal of customers,'' said Fortis spokeswoman Liliane Tackaert in Brussels.

``Systemic risks are extremely high, and the outlook appears bleak,'' said Laurence Mutkin, the London-based head of European fixed-income strategy at Morgan Stanley. ``Term lending markets appear almost to have closed, while cash hoarding continues.''

The cost of three-month loans in euros climbed 5 basis points to 5.11 percent, the British Bankers' Association said today. The dollar rate rose 29 basis points to 3.77 percent. That's the most compared to the Federal Reserve's target rate on record. Hong Kong's three-month rate rose 13 basis points to 3.80 percent, the highest level since December 2007.

`Stay Calm'

Hong Kong had its first bank run since the Asian financial crisis in 1997 as depositors rushed to withdraw funds from Bank of East Asia. The bank's chairman, David Li, said the lender has ``no problem'' and Joseph Yam, chief executive of Hong Kong's central bank, urged customers to ``stay calm.'' The Hong Kong Monetary Authority injected HK$3.88 billion ($500 million) into the banking system today.

Chinese lenders, including Industrial and Commercial Bank of China, have set tighter standards on credit lines with international finance companies, according to people at the banks' treasury departments who declined to be named. Others like China Citic Bank Corp. imposed tighter limits on interest-rate swaps to avoid losses.

Singapore's three-month dollar loan rate surged 29 basis points to 3.684 percent today, the highest level since Jan. 22, according to the Association of Banks in Singapore. In Australia, the one-month bank bill swap rate, used to determine yields on variable-rate loans, was 7.458 percent, the highest level since Aug. 5, according to data compiled by Bloomberg.

Losses and Writedowns

``The Australian financial system has felt the impact'' of global difficulties, the Reserve Bank of Australia said in its half-yearly Financial Stability Review published today in Sydney. ``The general increase in uncertainty has also meant that most banks are taking a more cautious attitude to lending.''

The nation's banks were holding A$7 billion ($5.9 billion) of on-call deposits with the central bank, the most since at least 2003, according to the Reserve Bank of Australia.

Financial institutions around the world have posted $523 billion in losses and writedowns on assets linked to the collapse of the U.S. subprime-mortgage market since the start of last year.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened 24 basis points to 326 basis points. That's the most since Bloomberg began compiling the data in 1984. It was 114 basis points a month ago.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net



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Gold Drops on Speculation U.S. Rescue Plan Will Placate Markets

By Pham-Duy Nguyen

Sept. 25 (Bloomberg) -- Gold futures dropped for the second time this week on speculation that a U.S. plan to ease the credit crunch will stabilize markets and reduce the appeal of the precious metal as a haven. Silver rose.

President George W. Bush said ``a long and painful'' recession is ahead if Congress doesn't move quickly to approve a $700 billion plan to rescue financial firms. Before today, gold gained 14 percent from Sept. 15, the day Lehman Brothers Holdings Inc. sought bankruptcy court protection in New York.

``If the bailout is cheered, the stock market will rally and the dollar can gain and gold could go down,'' said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. ``Maybe there'll be a day or two of absolute euphoria. You could have the mother of all stock market rallies on the bailout.''

Gold futures for December delivery fell $2.60, or 0.3 percent, to $892.40 an ounce on the Comex division of the New York Mercantile Exchange. Gold reached a record $1,033.90 on March 17.

Silver futures for December delivery rose 10.5 cents, or 0.8 percent, to $13.545 an ounce.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.



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Canadian Stocks Advance, Led by Canadian Natural; Potash Falls

By John Kipphoff

Sept. 25 (Bloomberg) -- Canadian stocks rose for the first time in four days as Canadian Natural Resources Ltd. paced gains among energy producers.

Raw-materials producers declined along with metals and grain prices, led by Potash Corp. of Saskatchewan Inc.

The Standard & Poor's/TSX Composite Index added 0.2 percent to 12,540.26 at 9:56 a.m. in Toronto.

Research In Motion Ltd, maker of the BlackBerry e-mail phone, which is scheduled to report results today after markets close, gained 0.8 percent to C$101.20.

Canadian Natural, the nation's fourth-largest energy company by market value, gained 0.8 percent to C$82.83.

Toronto-Dominion Bank, the nation's second-largest lender by assets, gained 0.8 percent to C$63.88.

Potash Corp., the largest maker of crop nutrients, dropped 2.8 percent to C$163.25.

To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net.



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U.S. Stocks Gain on Speculation Bank Bailout Will Be Approved

By Elizabeth Stanton

Sept. 25 (Bloomberg) -- U.S. stocks advanced, led by banks, as speculation Congress will reach an agreement on a $700 billion bailout of financial institutions overshadowed General Electric Co.'s reduced profit forecast.

Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. climbed as much as 4.4 percent on expectations policy makers will approve Treasury Secretary Henry Paulson's plan, avoiding the ``long and painful recession'' President George W. Bush warned would occur otherwise. Nike Inc. gained 6.3 percent as the largest athletic-shoe maker said earnings fell less than analysts estimated. GE retreated 1.9 percent after blaming ``unprecedented weakness'' in financial markets for its cut.

The Standard & Poor's 500 Index increased 9.83 points, or 0.8 percent, to 1,195.70 at 9:34 a.m. in New York. The Dow Jones Industrial Average climbed 87.54, or 0.8 percent, to 10,912.71. Two stocks rose for each that fell on the New York Stock Exchange.

``Optimism lies in the hope that we're nearing the end of the credit crisis and that Paulson's plan will help settle things down and businesses can get back to functioning as normal,'' said James Gaul, a Boston-based money manager at Boston Advisors LLC, which oversees $1.8 billion.

The S&P 500 is down 19 percent this year on concern more than $500 billion in credit losses and writedowns at financial firms globally and a slowing economy is curbing profits. Speculation that lawmakers will derail the White House's plan to rescue banks pushed stocks lower yesterday.

`Basically Done'

Stocks rallied after representative Paul Kanjorski, a Pennsylvania Democrat, told CNBC that ``the package is basically done.'' Following Bush's speech last night, House Financial Services Committee Chairman Barney Frank told reporters that House and Senate Democrats had reached a deal on legislation.

The benchmark index for U.S. equities has erased 70 percent of the gains it posted on Sept. 18 and 19 after the bailout plan was proposed. Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson yesterday appeared before the congressional Joint Economic Committee and the House Financial Services Committee.

``The market knows the deal's going to be done,'' said Peter Kenny, managing director in institutional sales at Knight Equity Markets LP in Jersey City, New Jersey. ``If the market suspected it was not going to pass, we'd be trading much lower.''

Rate-Cut Odds

Bush's forecast for the economy and a warning yesterday from Bernanke that the U.S. faces ``grave threats'' increased chances of a Fed interest rate cut to 92 percent by the next meeting Oct. 29. Financial futures show traders expect the central bank to lower its benchmark rate to 1.75 percent in October and see 31 percent odds they will shift to 1.50 percent before the year is over.

Bank of America Corp. rose 3 percent to $34.07. JPMorgan Chase added 4.4 percent to $42.30. Citigroup advanced 1.5 percent to $19.24.

Nike climbed $3.72 to $62.99. It said orders in China surged and reported first-quarter earnings that beat analysts' estimates after the Beijing Olympics boosted sales.

GE fell 47 cents to $24.12, declining for the fourth consecutive day. The company cut its third-quarter profit forecast to between 43 cents and 48 cents a share, less than a previous forecast of 50 cents to 54 cents. GE also suspended its stock buyback.

``We thought GE would be a defensive holding,'' said Ralph Shive, chief investment officer at South Bend, Indiana-based 1st Source Corp. Investment Advisors, which manages $3 billion including GE shares. ``It's a disappointment.''

Orders Trail Estimates

Stocks briefly pared their gain after the government said orders for U.S. durable goods fell more than twice as much as forecast in August, a sign that slower sales and tighter credit conditions prompted companies to cut spending. The 4.5 percent drop in bookings of goods meant to last several years followed a revised 0.8 percent gain in July that was smaller than previously reported. Excluding transportation equipment, orders decreased 3 percent, the biggest drop since January 2007.

A report at 10 a.m. in Washington is forecast to show fewer Americans purchased new homes in August than in July, signaling the housing slump will keep weighing on the economy. Sales of new homes probably dropped 1 percent last month to a 510,000 annual pace, according to the median estimate of economists surveyed by Bloomberg News.

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

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