Dollar Fights Back

Daily Forex Fundamentals | Written by KBC Bank | Jun 08 09 07:30 GMT |

Sunrise Market Commentary Bond markets sell off on better than expected US Payrolls report On Friday, the sell-off on the government bond market continued and shifted towards the short end of the curve, as the slowdown in job losses may indicate that the US recession is coming to an end, which may force central bankers to tighten their extreme loose monetary policy earlier than previously assumed. Dollar fights back A better than expected US payrolls release and market speculation that the Fed might raise rates sooner than anticipated until now caused a sharp rebound in the US dollar. Political uncertainty continues to affect sterling trading The Sunrise Headlines On Friday, US Equities closed the session broadly unchanged as excitement over the better than expected payrolls waned and profit taking kicked in ahead of the weekend. This morning, Japanese shares gain 1%, while other Asian stocks trade mixed. Centre-right parties tightened their grip on Europe in the European Parliament elections that ended on Sunday night with a record low turnout, but most big national governments were spared from embarrassing defeats. On Saturday, a group of pension funds and consumer groups made a last-ditch effort to block the alliance between Chrysler and Fiat and asked the US Supreme Court to put the deal on hold. Growth in Japanese bank lending slowed to a seven-month low in May as firms stopped hoarding cash and obtaining funds via capital markets gets easier. Crude oil ($67.78) retreated from a seven-month high on Friday despite better than expected jobless data. Today, the calendar is thin with only the German factory orders and Belgian unemployment rate. Currencies: Dollar Fights Back EUR/USD On Friday, the US payrolls report was the key factor for trading on almost all markets. Investor sentiment was already quite positive from the start of trading in Europe. EUR/USD temporary moved above the 1.42 mark early in the session but settled in a 1.4150/1.4200 trading range ahead of the publication of the US payrolls report. The payrolls came out much better (far less negative), than expected and this initially triggered to usual Pavlov reaction. Bonds were hammered; stocks and other 'riskier' assets including the euro jumped higher. EUR/USD tested offers in the 1.4265 area immediately after the publication. Of course, it remains quite a strange story to see the dollar losing ground on a much better than expected US economic release. Some investors apparently also came to this conclusion. EUR/USD soon had to return the post-payrolls' gains and the pair even slipped in negative territory. This was no only a story of a scaling back global risk aversion. It is still early days, but if this report would be confirmed by other hard data; it could become a story of the US taking the lead toward an economic recovery. On top of that, the payrolls were not the only issue. Markets were pondering the exit strategy of the central bankers in case this would be the start a better era going forward. In this respect, there were some headlines on the screens last Friday from Fed Lockhart. He suggested that at some point the Fed might maintain its expansionary balance sheet while at the same time already raising the policy rate. This kind of reasoning is quite interesting. If implemented, it would of course have important implications for the yield curve (flattening) but it could also change the course of events for the dollar. It is still highly hypothetical, but such a scenario would be less USD negative. Whatever the reason, the EUR/USD nosedived after the initial spike higher and closed the session at 1.3968, compared to 1.4183 on Thursday evening. Today, eco calendar is light. In the US there are no important data on the agenda. In Europe, the German factor orders are scheduled for release. It will be interesting to see whether this indicator confirms the picture that the worst of the economic downturn might be behind us. EUR/USD: hammered by a better than expected payrolls report Support comes in at 1.3927/25 (reaction low hourly/Break-up hourly), at 1.3895 (Boll Midline), and at 1.3739 (Previous reaction high). Resistance stands at 1.4042 (STMA), at 1.4070 (Previous reaction low), at 1.4113 (MTMA) and at 1.4267 (Friday high). The pair is in neural territory. USD/JPY Over the previous weeks, market sentiment turned dollar negative and the euro took profit from improved global risk appetite. On top of that, there was a lot of uncertainty whether the Fed will raise its program of asset purchases (including Treasuries) and markets grew also more concerned on the fiscal situation in the US. It is still very early, but after last Friday's developments, markets might look at things from a different angle. Until now, the swings in risk appetite were the most dominant factor for trading on almost all markets. After the payrolls, markets might shift their attention to the pace of the recovery in the US and its potential impact on the Fed policy. This might bring the focus to the developments on the interest rate markets. It is a bit too early to say that from now the fate of the dollar will depend on (the rise) in US short-term interest rates. Nevertheless, we wouldn't be surprised to see the dollar gaining ground on good US eco data. In this respect, we will also take a very close look at the signals that will come from the Fed. Do the quotes from Fed's Lockhard (Fed might raise rates sooner than expected) mirror the way of thinking of the majority within the Fed? If the Fed is indeed considering raising rates much sooner than markets anticipated until now, this would make the picture less dollar negative. Until last week we had a euro positive/dollar negative bias. We think that Friday's developments at least warrant some caution for our strategy. So, we change our EUR/USD bias from positive to neutral. There are not many high profile (US) data on the calendar this week, but for example the reaction to the US retail sales (Thursday) could be interesting to see whether markets have indeed adopted a different way of reacting. Looking at the technical charts, the LT outlook remains euro positive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). However, Friday's forceful correction clearly is a negative for the short-term momentum in this pair. The pair dropped blow the MTMA (today at 1.4044). So, we have the impression that the topside in EUR/USD is becoming more difficult. For now, we expect some consolidation in the 1.3739/1.4338 trading range. A break below this range bottom could be indication that the ST USD sentiment is improving. On Friday, the US payrolls report was also the tipping point for USD/JPY trading. The pair traded in a tight range between 96.50 and 97.00 in the run-up to the report. After the publication of the payrolls and the Lockhard headlines, the pair jumped sharply higher and build out its gains later in the session. The reaction to the payrolls on the stock markets was mixed. However, from a dollar point of view, the prospect that better eco data might lead to an earlier than expected rise in (short-term) US interest rates obviously was a supportive factor for the US currency. USD//JPY closed the session at 98.64, a gain of more than two big figures compared to the 96.58 close on Thursday. Overnight, Asian stock markets showed a mixed picture. Japanese indices outperformed (gains of around 1%, supported by the stronger dollar?). The Japanese current account surplus continued to decline (to JPY 630.5 Bln, from 1485.6 Bln in March). However, as usual the impact on the yen was limited. Global context. Over the previous weeks, USD/JPY developed a sideways trading pattern between 101.40 and 93.86/54 (May low/March low). The 'traditional link' between USD/JPY and the performance of global stock markets/risk appetite was no longer as tight is it used to be some time ago. Global dollar weakness was the name of the game. USD/JPY came close to the key 93.54 range bottom, but a break didn't occur probably as markets fear Japanese (verbal) action in case of additional yen gains. Friday's jump in the dollar also propelled USD/JPY higher in the medium term trading range. Higher short-term US interest rates of course could also be a support for the dollar against the yen. We maintain a buy-on-dips approach in this pair. A break above the 99.74 May high, might open the way fro a retest of the 101.44 range top. USD/JPY jumps higher. Support stands at 98.13 (Broken Boll top), at 97.23/08 (Previous high/STMA), at 96.80 (MTMA) and at 96.04 (LTMA). Resistance comes in at 98.89 (Reaction high), at 99.74(Previous reaction high), at 100.73 (Reaction high) and at 101.44 (Range top). The pair is in overbought territory. EUR/GBP On Friday, EUR/GBP showed again some rather wild swings. Sterling stayed under pressure early in the session, with the political tensions in the UK the most obvious explanation for this move. The pair reached an intraday high around 0.8865. However, sterling already managed to recoup part of the losses during the morning session and the move even accelerated after the US payrolls report as cable outperformed EUR/USD. Most of this move might be technical in nature. Nevertheless, if market would change their assessment on the US economic recovery and on the US policy reaction, this might also have some impact on the position of sterling against the euro as the UK is in a similar position as the US. EUR/GBP closed the session at 0.8740, compared to 0.8768 on Thursday. Today, the UK eco calendar is empty (except for a reverse auction). This morning the focus in the UK will again be on the political scene as PM Brown will face more pressure after a defeat of his Labour Party in the European elections. Recently, we were a bit surprised by the force of the rebound in sterling. In a longterm perspective sterling is probably undervalued against the euro, but we considered it too early to bet on a sustained sterling rebound. We saw the aggressive BoE QE policy (even extended at the previous BoE meeting) as a reason to stay cautious on sterling (for a similar reason we stayed dollar skeptic). We don't see any change in the UK monetary policy assessment, but as we give much weight to the technical charts in our tactical approach, we couldn't do anything else but drawing conclusions as EUR/GBP fell below the key 0.8637 level. This move forced us to leave our longstanding buy-on-dips approach and turn to a more neutral approach vis-à-vis the UK currency. We don't expect a swift and forceful break lower in EUR/GBP. Nevertheless, the (albeit temporary) break below this key support level is an important signal/ confirmation that something is changing in market sentiment towards the UK currency. At the end of last week, the sterling picture was again clouded by the political turmoil. However, this doesn't change the global assessment. For now we keep a neutral, wait and see approach and look out whether the political uncertainty will have a more lasting impact on sterling trading. Short-term we expect some consolidation in the 0.8576/0.9000 range. EUR/GBP: political uncertainty causes nervous sterling trading conditions Support stands at 0.8733 (Reaction low/STMA), at (Reaction low), at 0.8721 (MTMA), at 0.8619/13 (Reaction low hourly/Break-up hourly), 0.8576 (Reaction low) and at 0.8556 (38% retracement). Resistance is seen at 0.8809 (Previous reaction high), at 0.8849 (LTMA), 0.8867/69 (reaction high), at 0.8925 (38% retracement), at 0.8944 (1st target neckline off 0.8799) and at 0.9022 (2nd target neckline off 0.8799). The pair is in neutral territory. News US: Decline in payrolls softens further in May In May, the US payrolls report came out significantly better than expected showing a decline in employment by 345 000, while the consensus was looking for a drop by 520 000. Both the March (-652 000 from -699 000) and April figures (-504 000 from - 539 000) were significantly upwardly revised. All revisions taken into account, the payrolls dropped by 257 000 less than expected. Looking at the details, 225 000 (from 274 000) jobs were lost in the goods-producing sector of which 156 000 (from 154 000) in manufacturing and 120 000 (from 230 000) in the service providing sector. Government payrolls dropped by 7 000 in May. The civilian labour force rose from 154.73 million to 155.08 million, while the number of people unemployed increased from 13.72M to 14.51M. The unemployment rate rose from 8.9% to 9.4% in May, while an outcome of 9.2% was expected. Also the temporary help agencies, that often lead overall payrolls changes, showed some improvement (-7 000 from -55 000). Education and health (44 000 from 13 000) and leisure, hospitality (3 000 from -38 000) were the only sectors that added jobs. Average weekly hours worked dropped slightly (33.1 from 33.2) and the aggregate hours worked index declined from 100.4 to 99.7. This outcome confirms that the sharp decline in employment is slowing and also the development in temporary help agencies indicates that the worst of the recession might be behind us. Other: UK input PPI shows biggest drop since 2001 In the UK, PPI data came out very close to expectations in May. Output PPI rose by 0.4% M/M to an annual figure of -0.3% Y/Y, which is significantly below the April outcome of 1.3% Y/Y. Core PPI dropped from an upwardly revised 2.5% Y/Y to 1.2% Y/Y. Input PPI came out somewhat lower than expected at an annual -9.4% Y/Y (from -5.8% Y/Y), the biggest yearly drop in PPI since 2001. Download entire Sunrise Market Commentary Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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USD Buying Continues

Daily Forex Fundamentals | Written by AC-Markets | Jun 08 09 08:40 GMT |

Market Brief The Usd was stronger in the Asian session, as the mixed US data has given recovery bulls a moment of pause. The EurUsd traded down to 1.3890 from 1.4000, while the UsdJpy rose sharply to 98.80 from 98.20 (now trading above daily cloud covering). Commodity prices have also retreated, with copper and crude falling from yearly highs. And 2-year Treasury yields surged by 35bp to 1.29%, while 10-year Treasury yields rose by 13bp. Asian regional indexes were mixed, but European indexes are all trading lower. The big question is: was Friday's stark reversal a sign of things to come or just a short term correction? The big story and one still being debated was Friday's labor numbers, which showed that Non-Farm payrolls declined by 345k vs. 520k exp, yet unemployment rate rose to 9.4% vs. 9.2% exp. It's important to note that the US bank stress tests worst case scenario was based on a 9.3% figure, which has already been breached. The lack of fresh data will keep FX markets guessing and we expect a continuation of Friday's trend in the short term. ACM FOREX Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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Sterling Plummets On UK Political Turmoil As PM Faces Calls To Quit

Daily Forex Fundamentals | Written by Finotec Group | Jun 08 09 08:45 GMT |

Sterling fell against the dollar on Friday after a series of resignations by government ministers and calls for Prime Minister Gordon Brown to step down stoked concern about UK political uncertainty. Sterling pared the worst of its losses as Brown announced a cabinet reshuffle and finance minister Alistair Darling was left in his post. The immediate danger of government collapse was averted, but investors were wary that sterling could be dented further, with Brown's position seen by markets as tenuous despite his expressed determination to remain as prime minister. 'The Prime Minister may have been able to appoint a cabinet but that doesn't necessarily mean that cabinet responsibility will still be hanging together come Monday morning,' Rabobank currency strategist Jeremy Stretch said. The GBP/USD is currently trading at $1.5840 as of 8:33am, London Time. The dollar rose against a basket of currencies on Monday extending sharp gains made late last week as U.S. Treasury yields rose to seven month highs, prompting investors to cover short-dollar positions. Smaller-than-expected job losses in the United States in May sparked concerns on Friday that the Federal Reserve may lift interest rates sooner than previously thought, helping push up Treasury yields, dealers said. 'The market is weighing how much more U.S. yields will rise and how they will impact the U.S. stocks and the economy,' said a senior trader at a Japanese bank. Some market players fretted that the rise in Treasury yields could hurt US equities, which in turn could encourage investors to buy the dollar back to reduce risk exposure. The EUR/USD is currently trading at $1.3890 as of 9:00am, London Time. Former Bank of England policy maker David Blanchflower said the central bank may expand and widen its program of buying assets with newly created money as the British economy keeps shrinking. The bank may seek to spend more than the 150 billion pounds ($240 billion) authorized by Prime Minister Gordon Brown's government, as well as buying different types of bonds, Blanchflower said in an interview on Bloomberg Television. Britain will be mired in a recession for another year, he said. 'My expectation would be: look at the data, and if the data is not strong and growth isn't coming, they could do more,' Blanchflower said. 'They may decide they have to alter the type of gilts they're buying or do rather more in commercial paper, but it's really going to depend.' Economic Calendar Time (GMT) E Event Currency Period Previous Previous Significance Actual 12:15 Housing Starts (M-o-M) Canada 117.6 08:00 Official Foreign Reserves NOK/Norway 288.7 ** 312 07:30 Industrial Production (M-o-M) Denmark -2.4 1.3% 07:00 Industrial Production (Y-o-Y) Slovakia -18.0 ** -24.8% 07:00 Industrial Production (Y-o-Y) Slovakia -17.8% ** -24.8% 07:00 Unemployment Rate Czech Republic 7.9 7.9% 05:45 Unemployment Rate Switzerland 3.4 3.6 3.5 05:00 Eco Watchers Survey: Current Japan 34.2 34 05:00 Eco Watchers Survey; Outlook Japan 39.7 ** 05:00 Eco Watchers Survey: Current Japan 34.2 34 36.7 05:00 Eco Watchers Survey; Outlook Japan 39.7 ** 43.3 04:30 Bankruptcies (Y-o-Y) Japan 9.4 -6.7 Finotec Group Inc. http://www.finotec.com/ Disclaimer: FINOTEC Tradings Market Commentaries are provided for informational purposes only. The information contained within these reports is gathered from reputable news sources and not intended as investment advice. FINOTEC Trading assumes no responsibility or liability from gains or losses incurred by the information herein.

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Currency Pair Daily Forecasts

Daily Forex Technicals | Written by Finotec Group | Jun 08 09 09:07 GMT |

EUR/USD Daily Technical Reports EUR/USD-market strategy can be a sell from the level 1.3890$ Technical oscillators supporting the bearish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bearish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bearish direction. USD/JPY Daily Technical Reports USD/JPY-market strategy can be a buy from the level 98.30 Technical oscillators supporting the bullish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bullish crossover above the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction. GBP/USD Daily Technical Reports GBP/USD-market strategy can be a sell from the level 1.5890$ Technical oscillators supporting the bearish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bearish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bearish direction. USD/CHF Daily Technical Reports USD/CHF-market strategy can be a buy from the level 1.0910 Technical oscillators supporting the bullish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bullish crossover above the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction. Finotec Group Inc. http://www.finotec.com/ Disclaimer: FINOTEC Tradings Market Commentaries are provided for informational purposes only. The information contained within these reports is gathered from reputable news sources and not intended as investment advice. FINOTEC Trading assumes no responsibility or liability from gains or losses incurred by the information herein.

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Forex Technical Update

Daily Forex Technicals | Written by India Forex | Jun 08 09 07:33 GMT |

Rupee: Rupee opened 20 paisa weak at 47.30 today as the dollar across the board strengthened in the last session. The overall outlook continues to remain strong for Rupee, however 46.80 remains an important support. Retracement upto 47.50 -70 could be seen where exporters should look for opportunities to sell. (USD/INR : 47.29). Medium Term Bullish. Euro: Euro witnessed highly volatile trading session on Friday as it nose-dived close to 330 pips. Major sell off was seen in Euro after the NFP data. Immediate support comes around 1.3840-3880 levels (21 Daily EMA). Above this level, the bias for Euro remains bullish. Cautious buying around those levels is suggested for 100-120-150 pips. (Eur/Usd:1.3975). Bullish above 1.3750. Pound: Cable crashed to 1.5938 levels (as expected) after better than expected Non Farm Payrolls on Friday. The overall trend however remains bullish with no clear trend reversal signs. Strong cluster support comes around 1.5820-50 where longs can be considered for 150 pips. (Gbp/Usd: 1.5935). Short term Bullish Yen: Dollar-Yen pair took resistance close to 99 levels (55 Weekly EMA) and is trading below it. The charts indicate slight upside and holding below 99 can bring a pull back upto 97 levels (21 4-hourly EMA). The outlook for the pair would become bullish above 99 levels targeting 102. (USD/JPY 98.32). Australian Dollar: Aussie fell to 0.7916 in the last trading session with the 4-hourly charts now in the oversold region. The daily charts continue to indicate further downside with support around 0.7815 levels (21 Daily EMA). Thus, buying can be considered at the dips around 0.7840-50 levels for 100 pips. (Aud/Usd: 0.7977). Bullish. Gold: Gold plunged $31 as Dollar strengthened across the majors. Gold as expected retraced to take support around $952 (21 Daily EMA and trendline support). The charts are reaching the oversold territory and decisive break of this support can take Gold to $925 support. Initiate longs around $950 for $10 and further around $925 for $15-20. (Gold- $958.40). Bullish Dollar Index: DX surged to 80.65 levels breaking past the resistance of 80 (falling trendline). The stochastic is turning mid-way to indicate bearish bias in Dollar. Shorts at up-ticks could be considered. Overall Bearish. (DI- 80.64) India Forex http://www.indiaforex.in DISCLAIMER These views/ forecasts/ suggestions, though proferred with the best of intentions, are based on our reading of the market at the time of writing. They are subject to change without notice.Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. Those acting in the market on the basis of these are themselves responsible for any profits or losses that might occur, without recourse to us. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.

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FX Technical Analysis

Daily Forex Technicals | Written by Mizuho Corporate Bank | Jun 08 09 07:46 GMT |

EURUSD Comment: Dropping by a little more than we had allowed for but still well within normal retracement parameters. The Euro is no longer overbought and though lower than earlier, momentum is still decidedly bullish. With a little luck this week prices will tray and base between trendline support (which is very steep and therefore likely to fail) and the lower edge of the weekly Ichimoku 'cloud' at 1.3850. Strategy: Attempt longs at 1.3945; stop below 1.3850. Short term target 1.4020, then 1.4245. Direction of Trade: →↗ Chart Levels: Support Resistance 1.3932 " 1.4004 1.3925 1.4023 1.388 1.4050/1.4065* 1.385 1.41 1.3790/1.3775* 1.417 GBPUSD Comment: Retracing more than we had allowed for but unfortunately this is to be expected when confronted with some of the biggest monthly moves ever. Nevertheless it is still well within normal retracement parameters and above trendline support. Two-way price action should keep the bid tone to implied volatility. The pound is no longer overbought and with a little luck should try and base around the fairly pivotal level at 1.5800. Strategy: Attempt small longs at 1.5865; stop below 1.5740. First target 1.6000, then 1.6200. Direction of Trade: →↗ Chart Levels: Support Resistance 1.5845 " 1.598 1.5800* 1.602 1.575 1.61 1.57 1.6245 1.5514* 1.6435 USDJPY Comment: Rallying strongly from the 26-week moving average back into the Ichimoku 'cloud'. Not what we had expected and keeping prices within the range of the last15 weeks. This has forced us to adjust our view, postponing significantly a sustained break below increasingly important support around 94.00. Strategy: Possibly attempt tiny shorts at 98.55; stop above 99.25. First target 97.65 then 96.00. Direction of Trade: → Chart Levels: Support Resistance 98.28 " 98.85/99.00* 98 99.21 97.57 99.49/99.60 97 99.69/99.80* 96 100 EURJPY Comment: Bursting very unsteadily to a new high for this year at 139.26, above April's at 137.42. Allow for more difficult messy work either side of 137.50, probably in a range roughly between 135.50 and 139.50. Strategy: Possibly attempt tiny shorts at 137.25; stop well above 138.20 Short term target 135.50, maybe 134.00. Direction of Trade: → Chart Levels: Support Resistance 137.20 " 137.85 136.25 138.02 135.55 138.2 135.25 138.57 134 139.26* Mizuho Corporate Bank Disclaimer The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.

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Central Bank, Government Policy May Have Ended Slump, BIS Says

By Jennifer Ryan

June 8 (Bloomberg) -- The global recession may be past its worst after central bank and government policies helped shore up investor sentiment, the Bank for International Settlements said.

“Glimmers of hope that the worst of the financial crisis and economic downturn had passed sparked a rebound in risk appetite among investors,” the Basel, Switzerland-based BIS said in its quarterly report for the three months through May. “A number of policy measures contributed importantly to the improvement in investor sentiment.”

Interest rate cuts and asset purchases by central banks to combat the worst financial crisis since the 1930s have eased strains in credit markets, the BIS said. Governments also helped stoke recovery by publishing details on bank rescue plans, as did the coordinated stimulus agreed by the Group of 20 nations in London in April.

U.S. payrolls shrank less than forecast in May, the Labor Department said June 5, reinforcing signs that the deepest recession in half a century is starting to ease. German business confidence has risen for two months after touching a 26-year low in March.

The data “turned out to be less gloomy than expected, particularly for the United States,” the report said. Still, “positive news remained scarce in Japan.” The nation’s output gap, a measure of the balance between demand and supply in the economy, fell by a record in the first quarter.

The Federal Reserve, the Bank of Japan and the Bank of England have all been buying assets, partly to ease the flow of credit in their financial systems, and the European Central Bank is scheduled to join them next month.

Stress Tests

The release of U.S. bank stress tests results and details on the Public-Private Investment Program, along with news on the U.K.’s Asset Protection Scheme and the G20’s pledge of $1 trillion in aid, have also helped confidence, the BIS said.

Government bond yields have risen both because policy measures encouraged an increase in investors’ “risk appetite” and because of “growing concerns about mounting government debt,” the report said.

The yield on the 10-year Treasury note rose to the highest since November last month, while the yield on the comparable maturity U.K. government bond has returned to levels seen before the U.K. central bank started its bond purchase program.

“Sharply rising deficits have led to concerns about the sustainability of public finances and the ability of some governments to fulfill their enlarged obligations,” the BIS said.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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Blanchflower Says BOE May Expand U.K. Money-Printing

By Elliott Gotkine and Brian Swint

June 8 (Bloomberg) -- Former Bank of England policy maker David Blanchflower said the central bank may expand and widen its program of buying assets with newly created money as the British economy keeps shrinking.

The bank may seek to spend more than the 150 billion pounds ($240 billion) authorized by Prime Minister Gordon Brown’s government, as well as buying different types of bonds, Blanchflower said in an interview on Bloomberg Television. Britain will be mired in a recession for another year, he said.

The Monetary Policy Committee entered its fourth month of money printing last week and recommitted to spending 125 billion pounds. Blanchflower, the Dartmouth College professor who left the panel at the end of May, said that the biggest concern is still that the deepest recession since World War II will cause an extended drop in consumer prices.

“The 150 was just, if you like, a notional starting number,” Blanchflower said in a June 5 interview from Hanover, New Hampshire. “The forecast the bank produced essentially said that at constant rates, and with the amount of quantitative easing that we’ve actually voted for, that still doesn’t bring inflation back to target” at 2 percent.

“If you read it that way, the assumption would be there is more QE to come,” Blanchflower said.

The central bank in May predicted that the inflation rate is most likely to drop to around 0.4 percent by the end of this year and will reach only 1.2 percent in the middle of 2011.

Bond Program

So far, the Bank of England has bolstered the money supply by purchasing 77 billion pounds in government bonds with residual maturities of between five and 25 years. It had added 2.1 billion pounds in commercial paper and around 730 million pounds in corporate bonds on its balance sheet as of the end of last week.

“My expectation would be: look at the data, and if the data is not strong and growth isn’t coming, they could do more,” Blanchflower said. “They may decide they have to alter the type of gilts they’re buying or do rather more in commercial paper, but it’s really going to depend.”

The bank’s June 4 move to maintain the plan for 125 billion pounds of purchases and to keep the benchmark interest rate at a record low 0.5 percent “really is a ‘sit-and-wait-and-see decision,’” he said. The Treasury has given the bank authority to spend up to 150 billion pounds, and policy makers can vote to ask permission for more.

Recession Forecast

The U.K. economy contracted 1.9 percent in the first quarter, the most since 1979. The International Monetary Fund expects gross domestic product to fall by the most since at least 1948 this year.

Barclays Plc raised its forecast for GDP on June 4 after a report showing services industries unexpectedly grew for the first time in a year. The British economy will stop contracting in the third quarter, Barclays predicts.

“I’d be surprised to see a positive quarter of growth in 2009,” Blanchflower said. Expansion probably won’t resume “until the second quarter of 2010. Certainly the labor market is going to be pretty terrible for quite a long time.”

For the global economy, “there are some positive signs,” Blanchflower said. “But they’re not exactly strong. It certainly doesn’t look as if we’ll be leaping into a strong recovery this year.”

With the U.K. in recession, inflation slowed to a 15-month low of 2.3 percent in April, down from a peak of 5.2 percent in September. Blanchflower said he’s less concerned about accelerating inflation in a few years than the possibility of a period of falling prices.

Deflation Risk

“We have the tools to deal with rising inflation,” he said. “Obviously we still have the interest-rate tool, and then you can just reverse the purchases of gilts. You can sell them again. The bank knows exactly what to do on the upside. The worry always, in all of this, is deflation.”

Blanchflower suggested that turmoil surrounding Brown’s government, which the prime minister reorganized on June 5 after a spate of resignations, may have unsettled investors. Brown’s Labour Party came third in European Union elections last week, behind the Conservatives and the U.K. Independence Party.

“Uncertainties about government and government policies don’t help,” he said. “There has been some weakening in the pound. The markets don’t like uncertainty. We will see.”

Blanchflower, whose term ended on May 31, often disagreed with Governor Mervyn King. In 36 interest-rate meetings, he voted for a reduction 19 times, favored no change on 16 occasions and wanted an increase only once.

That vote for a higher rate in May 2007 was a “mistake,” Blanchflower said in an article on the Guardian newspaper’s Web site published yesterday. “The hope is that the mistakes that were made by the Monetary Policy Committee on the downside will not be repeated on the upside,” he wrote.

To contact the reporters on this story: Elliott Gotkine in London at egotkine@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.

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BRICs Add $60 Billion Reserves as Zhou Derides Dollar

By Shanthy Nambiar and Lilian Karunungan

June 8 (Bloomberg) -- The BRICs are buying dollars at the fastest pace since before credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the U.S. currency.

Brazil, Russia, India and China increased foreign reserves by more than $60 billion in May to limit currency gains as the first global recession since World War II restricted exports, data compiled by central banks and strategists show. Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July.

While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how dependant they remain on the world’s reserve currency. Russia is proposing the BRICs consider creating a new unit of exchange when they meet in Yekaterinburg on June 16. China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries.

“Foreign central banks do not want to see their currencies relentlessly strengthen,” said Daniel Tenengauzer, head of foreign-exchange and emerging-market debt strategy at Banc of America-Merrill Lynch in New York. “Such a move would dampen an already-weak outlook outside the U.S. and potentially risk even more capital-markets chaos if the dollar appeared to be heading toward a disorderly decline.”

The U.S. currency rallied in Asia today, gaining 0.4 percent against the Indian rupee to 47.29. The yuan 12-month offshore forward contract, an agreement to buy the currency in future, fell 0.2 percent to 6.8356 per dollar.

Real’s Rally

International reserve assets excluding gold held by the BRICs, an acronym coined by Goldman Sachs Group Inc. Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, total $2.8 trillion, a 7.8 percent increase from a year ago and 42 percent of the world’s total, data compiled by Bloomberg show.

The real, ruble, and rupee strengthened and the Dollar Index posted its biggest decline in 24 years last month as signs the global recession may be easing spurred investors to seek higher-yielding alternatives to the U.S. currency. A net $26.1 billion has flowed into emerging-market equity funds this year, EPFR Global, which tracks $11 trillion worldwide, said June 4.

The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee 6.4 percent. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.

Currency Alternatives

The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, lost 6.4 percent last month, the biggest decline since March 1985.

Russian President Dmitry Medvedev proposed on June 5 that nations use a mix of regional reserve currencies to reduce reliance on the dollar. The subject may be on the agenda when he meets his counterparts in the Ural Mountains city of Yekaterinburg, the Kremlin said this month.

China’s central bank Governor Zhou Xiaochuan suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March. His Indian counterpart Duvvuri Subbarao hasn’t commented on that plan. IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take such a “revolutionary” step over time.

Last month, China, the biggest importer of soybeans and iron-ore, and Brazil, whose main exports include soy, metals and petroleum, began studying a proposal to move away from the dollar and use yuan and reais instead.

Dollar ‘Discontent’

“What we are seeing is a public expression of discontent over the dollar, yet nobody knows what needs to be done specifically,” said Elina Ribakova, the chief economist in Moscow for Citigroup Inc.

Brazil, the only country to break down its dollar purchases, acquired $2.8 billion of the greenback in May, Russia bought at least $17 billion of foreign currencies, while India’s reserves rose by $10.6 billion, central bank data show. China may have purchased $30 billion in foreign exchange last month, Hong Kong- based research company SJS Markets Ltd. estimates.

At the end of 2008 the dollar accounted for 64 percent of central bank reserves, up from 62.8 percent in June 2008, according to the IMF in Washington. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.

Rising Holdings

Federal Reserve holdings of Treasuries on behalf of central banks and institutions rose by $68.8 billion, or 3.3 percent, in May, the third most on record, Bloomberg data show. About 51 percent of the $6.36 trillion in marketable Treasuries are held outside America, up from 35 percent in 2000. China is the biggest foreign owner of Treasuries, increasing its holdings to $768 billion as of March from $60 billion in 2000.

A steeper dollar decline would hurt BRIC exports, devalue their reserves and worsen the global credit crisis, said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment banking arm of Credit Agricole SA.

“It would be shooting yourself in the foot to sell U.S. assets and move away from dollars too quickly,” said Kotecha. “As much as we are seeing in terms of rhetoric, the central banks have so much exposure they will be very careful.”

Intervention, where central banks buy or sell currencies to influence exchange rates, may help bolster the dollar, he said.

Currency Forecasts

The median estimate of analysts surveyed by Bloomberg is for the real to fall 8.6 percent to 2.13 per dollar by year-end, while the rupee will drop 1.4 percent to 48. The yen is forecast to weaken 4.7 percent and the euro by 2 percent.

“The dollar will stabilize against its major trading partners around the turn of the quarter,” said Michael Shaoul, chief executive officer at New York-based institutional brokerage Oscar Gruss & Son Inc., who called the emerging-market rally in February. “It got stronger than was warranted during the crisis and weakened rapidly during the recovery.”

Investors abandoned emerging markets after the September bankruptcy of Lehman Brothers Holdings Inc. eliminated demand for all by the safest, most easily traded assets, such as Treasuries. The MSCI EM Index tumbled 54.5 percent last year.

A shortage of the U.S. currency forced central banks to pump reserves into their economies. The Dollar Index rose 18 percent between June 30 and March 31.

Reserves Reversal

Asian central banks, excluding China, ran down foreign- exchange reserves by more than $300 billion in the 12 months ended April 30, according to London-based HSBC Holdings Plc. Russia’s slid by $213 billion in the eight months ended March 31, central bank data show. Brazil’s reserves dropped $5.7 billion in the six months ended Feb. 27.

Emerging-market central banks are buying dollars as stronger currencies threaten exports while the global economy contracts.

The IMF estimates the world’s gross domestic product will shrink 1.3 percent this year. Trade worldwide will plunge 9 percent, the most since World War II, the World Trade Organization said in March.

Brazil’s $1.3 trillion economy, Latin America’s largest, may drop 0.73 percent in 2009, the biggest contraction in 19 years, according to the median forecast in a May 29 central bank survey. Russia’s economy will contract at least 6 percent, Medvedev said this month. China’s exports, which account for 60 percent of its GDP, slumped 22.6 percent in April from a year earlier, according to the government.

Dollar Strength

“There might be a risk-appetite reversal which could mean some temporary dollar strength,” said Peter Eerdmans, head of emerging-market bonds in London at Investec Asset Management Ltd., which manages $700 million in developing-nation debt. “We have taken profits on some of our emerging-market positions.”

Brazil’s central bank President Henrique Meirelles said last month foreign currency flows are creating a “very favorable” condition for policy makers to boost reserves.

“Given the breadth and depth of the U.S. economy in relation to the world economy, it is unlikely the dollar will be displaced as the principal reserve currency anytime soon,” said Nikhil Srinivasan, who overseas $20 billion of assets as chief investment officer for Asia and the Middle East at Munich-based Allianz SE, Europe’s biggest insurer.

To contact the reporters on this story: Shanthy Nambiar in Bangkok at snambiar1@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

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Taiwan’s Export Slump Eased for a Second Month in May

By Janet Ong

June 8 (Bloomberg) -- Taiwan’s exports fell at a slower pace for a second month as Chinese demand for electronics provided some relief for the recession-stricken economy.

Overseas shipments fell 31.4 percent in May from a year earlier, following a 34.3 percent drop in April, the Ministry of Finance said in Taipei today. The median estimate of 10 economists surveyed was for a 34 percent decline. The island posted a trade surplus of $3.17 billion as imports slid 39.1 percent.

To contact the reporter on this story: Janet Ong in Taipei at jong3@bloomberg.net

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Turkish Output Probably Slumped for Ninth Month: Week Ahead

By Steve Bryant

June 8 (Bloomberg) -- Turkish industrial output probably fell in April for the ninth consecutive month as the global economic crisis slashed demand at home and abroad, driving the country into recession, a survey showed.

Output slid 18 percent from the year earlier, according to the median estimate of 10 economists surveyed by Bloomberg, following a decline of 20.9 percent in March. The statistics office in Ankara will announce the figures at 10 a.m. today.

While the pace of decline is slowing, it still points to a third consecutive quarter of economic contraction after gross domestic product fell 6.2 percent in the last quarter of 2008. The economy probably shrank more than 10 percent in the first three months of this year, according to central bank forecasts.

“It may be the smallest decline this year,” said Inan Demir, an economist at Finansbank AS in Istanbul. “Nevertheless, it’s going to remain negative until November or December and even then when we see positive figures they’re going to be very small.”

The central bank has cut its benchmark interest rate by 7.5 percentage points in the past seven months, taking it to a record low of 9.25 percent. Industrial output fell by an average of 22 percent in the first three months of the year and central bank Governor Durmus Yilmaz said on June 4 that he expected the decline to “stabilize” in the second quarter.

Exports fell 33 percent in March from a year earlier to $7.6 billion, the sharpest decline since at least 1985.

Capacity Utilization

The statistics agency will also release capacity utilization data for May on June 10. Capacity usage increased in April from a month earlier, helped by sales tax cuts on new cars the government introduced to help spur demand and protect jobs.

The central bank will report April’s current account, the widest measure of trade in goods and services, on June 10. The current-account deficit has been narrowing as consumer demand for imported goods falls and the price of oil declines.

The benchmark stock index fell 0.7 percent last week to 34,750.19. The lira weakened to 1.5432 to the dollar at 5:13 p.m. in Istanbul on June 5 from 1.5332 a week earlier. The yield on the benchmark lira bond tracked by ABN Amro rose to 12.91 percent from 12.39 percent.

The following is a list of important events in Turkey next week:

Event                                                  Date
Industrial output data                                 June 8
Capacity utilization data                              June 10
Current-account figures                                June 10

To contact the reporter on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net.

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Medvedev Tells Executives Russia to Rebound Fast

By Yuriy Humber and Paul Abelsky

June 8 (Bloomberg) -- President Dmitry Medvedev says the Russian economy will rebound faster than expected. An audience of government officials and executives meeting at the weekend mainly agreed, while demurring on the shape of the recovery.

“I expect the Russian economy, as one of these rapidly developing markets, to overcome its problems more quickly than had perhaps been expected,” Medvedev said at the St. Petersburg Economic Forum, an annual gathering in Russia’s former imperial capital that closed on June 6.

Citigroup Inc. Chief Executive Officer Vikram Pandit and Jim Mulva, head of ConocoPhillips were among 3,500 business people, along with five heads of state, who attended the meeting, at which companies signed deals worth “several tens of billions” of dollars, Economy Minister Elvira Nabiullina said.

Foreign observers including the World Bank, which has consistently forecast a deeper recession for Russia than its government, found reasons to be “guardedly optimistic.”

An 85 percent surge in Russian stocks this year, the best performance of any benchmark index bar Peru after their worst year on record in 2008, can’t be ignored as the rally may “anticipate developments” in the economy, said Klaus Rohland, the Washington-based lender’s chief representative in Russia.

The world’s biggest energy exporter faced a more upbeat outlook at the opening of last year’s gathering as crude oil surged to a then-record by jumping $10 on the eve of the forum.

Severe Contraction

Russia’s economy contracted an annual 9.5 percent in the first quarter after oil prices slumped by more than 50 percent from a peak of $147.27 in July and companies struggled to repay debt and fund projects. Gross domestic product may fall as much as 8 percent this year, Nabiullina says, after 10 years of expansion averaging almost 7 percent.

The government has earmarked 3 trillion rubles ($97 billion) in stimulus spending and the central bank cut the main interest rates three times in six weeks to spur bank lending.

“We think that the worst is behind us, and that we should see a slowing in the coming months of the downturn and a beginning of the upturn,” said John Lipsky, first deputy managing director at the International Monetary Fund. “There has been a sharp response in terms of fiscal stimulus, monetary action and of course, more recently, the general outlook globally has improved, the price of oil has come back up.”

Medvedev is handling this financial crisis better than his predecessor Boris Yeltsin did in 1998, according to Union Bancaire Privee, a privately held Swiss bank.

‘Event-Driven’

“Russia is coming out of this crisis very well” even as the country still has some “fundamental, event-driven” problems to solve, said Gregg Robins, UBP’s head for Russia and eastern Europe.

Still, some participants appeared far from a consensus on the likely course of a recovery and the severity of the downturn, the country’s worst since the 1998 default on $40 billion of domestic debt.

“We have not yet reached the bottom, it is clear,” Russian Finance Minister Alexei Kudrin said. “After some improvement we are going to see another turn for the worse.”

The slump in manufacturing and plunging consumer demand may trigger a “second wave” of problems for banks as companies fail to repay loans.

The share of overdue debt in Russian banks’ portfolios is likely to exceed 10 percent of the total this year, Kudrin said, a level the government has termed a critical “threshold.”

Not Optimistic

“I wouldn’t be seriously, exceedingly optimistic,” said Vasily Titov, deputy chairman of VTB Group, Russia’s second biggest bank. “I am confident we are yet to see the second wave of the crisis, this time the crisis of bad debt.”

The most important question left unanswered in St. Petersburg may be what contours the aftermath of the crisis will take, not the timing of the economic recovery.

Any perception that the crisis is easing may deflect Russia from overhauling management and restructuring the economy, said Troika Dialog Chairman Ruben Vardanian, founder of Russia’s oldest investment bank, in an interview.

“It’s a shame” so many officials and business leaders think the crisis is over because it removes the incentive to reform, he said. “A crisis forces you to change many ineffective things. It’s impossible to say if we’ve hit the bottom of the crisis. That would be pure speculation.”

To contact the reporters on this story: Paul Abelsky in St. Petersburg at pabelsky@bloomberg.net; Yuriy Humber in St. Petersburg via the Moscow newsroom at yhumber@bloomberg.net.

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Bernanke Conundrum Threatens Housing on Mortgage Rate

By Liz Capo McCormick and Dakin Campbell

June 8 (Bloomberg) -- The biggest price swings in Treasury bonds this year are undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing rates and pull the economy out of the worst recession in five decades.

The yield on the benchmark 10-year Treasury note rose to 3.90 percent last week as volatility in government bonds hit a six-month high, according to Merrill Lynch & Co.’s MOVE Index of options prices. Thirty-year fixed-rate mortgages jumped to 5.45 percent from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.

Government bond yields, consumer rates and price swings are increasing as the Fed fails to say if it will extend the $1.75 trillion policy of buying Treasuries and mortgage bonds through so-called quantitative easing, traders say. The daily range of the 10-year Treasury yield has averaged 12 basis points since March 18, when the plan was announced, up from 8.6 basis points since 2002, according to data compiled by Bloomberg.

“Volatility has increased dramatically and it seems to get more each day,” said Thomas Roth, head of U.S. government-bond trading in New York at Dresdner Kleinwort, one of the 16 primary dealers of U.S. government securities that trade with the Fed. “A lot of that has to do with uncertainty about whether the Fed will increase purchases of Treasuries. The market is looking for some change in the Fed’s plan.”

Greenspan’s Conundrum

The rise in borrowing costs in the face of record low interest rates, Fed purchases and a contracting economy is the opposite of the challenge Bernanke’s predecessor, Alan Greenspan, confronted when he led the Fed.

In February 2005, Greenspan said in the text of his testimony to the Senate Banking Committee that a decline in long-term bond yields after six rate increases was a “conundrum.” At the time, he was trying to keep the economy from overheating and sparking inflation. Now, Bernanke may be facing his own.

“The Fed is stuck in a very difficult place,” said Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $7.5 billion. “You can’t have it both ways. You can’t say I’m going to stimulate my way out of this problem with trillions of dollars in borrowing and keep rates low by buying through the other. I don’t think that is perceived by anyone as sound policy.”

The yield on the benchmark 3.125 percent 10-year Treasury due May 2019 ended last week at 3.83 percent, up from the low this year of 2.14 percent on Jan. 15, according to BGCantor Market Data. Last week’s 37-basis-point surge equaled the most since the increase of 37 basis points, or 0.37 percentage point, in the period ended July 17, 2003. The yield rose five basis points today to 3.88 percent as of 7:51 a.m. in London.

‘Don’t Do Anything’

Bernanke and other Fed officials say the improved economic outlook and rising federal budget deficit are the catalysts for higher borrowing rates, and see no need to increase purchases of bonds. Plus, the Fed has succeeded in shrinking the gap between 10-year Treasury yields and 30-year mortgage rates to 1.77 percentage points from 3.37 percentage points in December.

“To the extent yields are going up because the economic outlook is brighter, the answer would be, don’t do anything,” Federal Reserve Bank of New York President William Dudley said in a transcript of an interview with the Economist last week.

U.S. payrolls fell by 345,000 last month, the least in eight months, the Labor Department said June 5. The economy will likely expand 0.5 percent in the third quarter, according to the median forecast of 63 economists surveyed by Bloomberg.

Wider Deficit

The deficit should reach $1.85 trillion in the fiscal year ending Sept. 30 from last year’s $455 billion, according to the Congressional Budget Office. Goldman Sachs Group Inc., another primary dealer, estimates that the U.S. may borrow a record $3.25 trillion this fiscal year, almost four times the $892 billion in 2008.

While rising, 10-year yields are below the average of 6.49 percent over the past 25 years, and will likely remain below 4 percent through at least the third quarter of 2010, according to the median estimate of 50 economists surveyed by Bloomberg. The Fed’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.

Higher rates may deepen the two-year housing slump helped trigger the recession and sideline consumers planning to refinance or buy their first home. The median sale price for a U.S. home dropped in April to $170,000, down 26 percent from a record $230,000 in July 2006, according to the National Association of Realtors.

Refinancing Index

The number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, largely on cheaper financing costs, according to the realtors group. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan fell 16 percent to 658.7 in the week ended May 29 as borrowing rates climbed.

“The more rates go up, the more we need home prices to go down to equalize consumers’ payments,” said Donald Rissmiller, chief economist at New York-based Strategas Research Partners. “It’s those payments that have brought about a level of stability” in home sales, he said.

Rising volatility, which exposes investors to bigger potential losses, risks pushing up rates on everything from mortgages to corporate bonds. Norfolk Southern Corp., the fourth-largest U.S. railroad, sold $500 million of 5.9 percent debt on May 27. The coupon was higher than on the $500 million of 5.75 percent notes due in 2016 that the Norfolk, Virginia- based issued in January.

‘The Big Question’

“When the Treasury market is moving around a lot more it becomes more risky to step in,” said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, another primary dealer.

Outside of Dudley’s remarks, the Fed has largely refrained from public statements about bond purchases. Traders find that confusing from Bernanke, a former economics professor at Princeton University who published research on central bank transparency and pushed for greater openness at the Fed.

“The big question is what the Fed does. Do they increase quantitative easing?” Caron said. “Do they buy more Treasuries or mortgages? That is why there is a lot more uncertainty.”

Investors are reining in the average maturity of their Treasury holdings to guard against higher yields. That may increase costs for the government, which intends to extend the average maturity of its debt after committing $12.8 trillion to thaw frozen credit markets and snap the longest economic slump since the 1930s. The Treasury will sell $65 billion in notes and bonds next week.

Shorter Durations

Over the past month, money managers overseeing about $100 billion shortened the durations of their portfolios, according to Stone & McCarthy Research Associates in Skillman, New Jersey.

Duration, a reflection of how long the debt will be outstanding, dropped to 100.9 percent of benchmark indexes in the week ended June 2, the lowest in almost four months and down from 102 percent in the week ended May 5. The ratio was as high as 103.7 percent in the period ended March 10.

Shorter-term Treasuries, whose lower duration means price swings are smaller relative to longer-maturity debt for the same change in yield, have performed better this year with the Fed keeping its target rate for overnight loans between banks at a range of zero to 0.25 percent.

Two-year notes have lost 0.4 percent, including reinvested interest, compared with losses of 11.5 percent on 10-year securities and 27.9 percent for 30-year bonds, according to Merrill Lynch index data.

‘Predictable Ways’

The Fed probably won’t make any adjustments to the size of the Treasury purchase program before its next policy meeting on June 23-24, in part to avoid reinforcing perceptions policy is reacting to swings in yields, according to Jim Bianco, president of Chicago-based Bianco Research LLC.

“The Fed wants to operate in predictable ways,” Bianco said. “They are also trying to not just look arbitrary, which makes people think ‘I can’t ever go to the bathroom because there could be a press release that the Fed changed the buybacks.’ That’s been a real concern: ‘Wow, I just went to the bathroom and lost $2 million dollars.’”

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net; Dakin Campbell in New York at Dcampbell27@bloomberg.net

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