Currencies: Sterling Heavily Sold After A Dark CEBR Report On The UK Economy

Daily Forex Fundamentals | Written by KBC Bank | Oct 12 09 07:49 GMT |

Sunrise Market Commentary Global bonds sell off, as bond investors are spooked by a 'hawkish' speech of Bernanke On Friday, the downward correction that started after Thursday's US 30-year bond auction accelerated following news reports about a 'hawkish' speech of Bernanke and tests of reverse repos in the US spooked the market. Today, trading may be more quiet, as Japanese and US markets are closed and the calendar is devoid of market moving data. Sterling heavily sold after a dark CEBR report on the UK economy The dollar made a rebound on Friday which continues today. Comments on the exit strategy by Bernanke might have played a role, but probably was no more than a trigger for an overdue correction. Sterling is in the limelight though as it is under heavy selling pressure following a very black CEBR report on the UK. The Sunrise Headlines On Friday, US Equities ignored Bernanke's comments and extended their impressive rally supported by a first batch of positive corporate earnings reports. Dow/S&P rose by 0.80% / 0.56%. This morning, most Asian shares start the week in positive territory after Singapore raised its 2009 economic forecasts. St Louis Fed President Bullard said on Sunday that it was hardly to accurately measure the gap between what the economy is producing and its full potential and added that any medium-term inflation threat is negligible even in the face of extraordinarily accommodative monetary policy. Royal Philips Electronics NV, Europe's biggest consumer-electronics producer, unexpectedly posted a profit in the third quarter. Third-quarter net income totaled 174 million euro, while analysts had predicted a loss of 44.7 million. British interest rates will stay at 0.5% until 2011 and will not rise to 2% until 2014, the Centre of Economics and Business Research reported this morning. South Korea's persistent house price rise is a top concern for the government, but it realizes that the recent spate of lending controls to calm the market could cause wider problems, according to senior officials. On Friday, crude oil ($72.47) climbed to its highest level in three weeks after the International Energy Agency increased its global consumption forecast for a third month. Today, US and Japanese markets are closed. EUR/USD On Friday, the US dollar made a limited come-back against the euro. We think that technical reasons were the main driver behind the dollar rebound, but cannot exclude that the comments of Bernanke on the exit strategy, or at least the interpretation the news agencies gave to it (see bond piece) played some role too. EUR/USD dropped from about 1.48 in the opening to 1.47 during Asian trading. In the European morning session, the pair first stabilized, maybe due to very strong French and Italian production data, in a tight 1.4720-40 range before moving again higher to 1.4775 in the run-up to the US session. Later in that session, the downside was retested, but followed by a recovery that left EUR/USD at 1.4732 in the close, down about 60 ticks from the 1.4794 close on Thursday. The US trade deficit came out somewhat lower than expected, due to a surprise drop in oil imports, not a very sustainable factor, and therefore it couldn't help the dollar in a sustainable way. So, we think that chart-technical factors and the oversold character of the dollar explains its rebound. The trade weighted dollar had re-tested the recent lows on Thursday, but couldn't break it, setting the stage for a dollar rebound. A similar picture was visible in EUR/USD (1.4844 resistance) and other crosses. Overnight and today. Traders pushed EUR/USD down towards Friday's lows, but the attempt failed and the pair trades again close to the opening levels. The US markets are closed for Columbus Day and the calendar is empty. That leaves traders with little guidance for the day. In thin trading, we might see the theme of a possible earlier-than-expected tightening of US monetary policy keeping traders busy and convincing some to trim dollar short positions. So the correction of the dollar may continue today, but without much momentum or without deeper longer-term significance. EUR/USD: ST highs near, but scope for some corrective action? Support comes in at 1.4690 (break-up hourly), at 1.4682 (Bollinger midline/ MTMA), at 1.4582 (last week low) and 1.4553 (Bollinger bottom) and at 1.4517 (uptrendline). Resistance stands at 1.4743 (today high), at 1.4812/18 (Bollinger top/Thursday spike), 1.4845 (Reaction high), at 1.4867 (Sep 2008 high). The pair is in overbought territory USD/JPY Global context: recently, the swings in risk appetite/risk aversion were the obvious drivers on the currency markets. In this context, improving investor sentiment towards risk is still considered a good reason to sell the US dollar. On top of that, in this low yield environment, the dollar has become (or is at least perceived to have become) the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs, some international debate the status of the dollar and the Fed's intention to run an expansionary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other currencies. This has put the dollar in a vulnerable position. We don't see many reasons to turn dollar positive before it becomes clear that the Fed will start tightening monetary policy. We don't expect the Bernanke comments point to a turnaround in policy in the near and not so near future. Any correction on the stock markets might still have some impact on EUR/USD. In this respect, the earnings season is coming in full swing this week and as the US indices are near the cycle top and close to key resistance, it may be break of make week for equities this week. Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 improved the picture. The pair extensively tested the key 1.4719 December high and even set a new minor high (1.4844). However, there was no followthrough action on this 'break' yet. Following a correction, that narrowly missed the 1.4438/50 break-up area, put forward as offering a good opportunity to step in again, the pair closed again in on the 1.4844 resistance last week, but again the move missed momentum. If the stock market would take out key resistance, the 1.5021 target (2nd target double bottom of 1.3739) might come again in the picture and the technical picture would get yet another EUR bullish upgrade. If equities fail to break higher this week and fall a prey to profit taking, EUR/USD may again slid lower in the range with 1.4438/50 still major support. On Friday, USD/JPY rebounded sharply and closed the session at 89.78, up from Thursday's close at 88.39. The move started in early Asian trade and continued until the closure in New York, interrupted only once. Overnight the up-move of the pair continued and it changes hands now at 90.24. The Japanese (and US) markets are closed and therefore, trading is thin. We would qualify the recent moves corrective in nature. We are aware that an eventual change towards a tighter monetary policy would be a major positive for the dollar generating a huge re-positioning in favour of the dollar. It would end all talk about the use of the dollar as a carry funding currency. However, that looks premature to us. Therefore, as we were waiting on a correction to install new yen longs, we would indeed act if the correction brings the pair again in the 92/93 area. Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite positive global investor sentiment, the dollar could not hold on to its gains against the yen. The link between USD/JPY and global investor risk aversion/risk appetite became less tight and sometimes it had even reversed. The dollar (and not the yen) was said to have become the preferred funding currency for carry trades. So, the price action in USD/JPY more or less joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. However, recently, we turned more cautious on USD/JPY shorts on technical considerations. On top of that, the change in talk from the Japanese authorities also slowed the ascent of the yen. So, the situation in USD/JPY has become a bit paralysed. We still look to sell USD/JPY in case of a more pronounced up-tick. The 87.10 (year low) area remains the next high profile target on the downside for this pair. Even as we have a longterm yen positive bias, we would not go yen long at the current levels as Japanese authorities will most probably continue to use verbal interventions to prevent a to swift rise of their currency. The 92/93 area might be a good entry point if the correction would go that far. USD/JPY: Correction time Support is seen at 88.90 (break-up hourly), at 88.23/15/01 (reaction low/Bollinger bottom/week low), and at 87.10 (Year low). Resistance comes in at 90.19/28 (Bollinger mid-line/today high), at 90.42 (30 Sep high) and 92.14 (Bollinger top) . The pair is in oversold conditions EURGBP On Friday, the sterling sell-off resumed with quite some vengeance. Sentiment remains very bearish as more and more people are convinced that the UK needs a weaker currency to rebalance its unbalanced economy. Especially, the huge fiscal deficit and the need to take draconic measures to turn it around sent shivers through the market, as it also suggests that the BoE will be one of the last if not the last Central bank to leave its ultra-loose monetary policy stance. The speech of the shadow chancellor at the party Congress of the Conservatives was very clear on the subject as were projections of IFS. Overnight, the CEBR said that it expects British interest rates to stay at 0.5% until 2011 and will not rise to 2% until 2014. The consultancy added that sterling could fall to below parity versus the euro and to 1.40 versus the dollar. Following the publication, sterling selling flared up driving it to EUR/GBP 0.9302, a new high (previously 0.93004). So, an important technical test is ongoing. Today, the calendars are empty on both sides of the pond. So the technicals will be in the driving seat. Tentatively, we would think that this plays in favour of sterling and prevent a break higher today. However, the longer term outlook remains clearly sterling negative. Global context: Since early August sterling sentiment deteriorated again. The August BoE decision to raise the asset purchase program to £175B and Governor King's call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged period of time. This triggered a new sterling selling wave. At the September meeting, the BoE took no additional policy steps. Nevertheless, the (monetary) picture stays sterling negative and more BOE talk on the positive effects of sterling weakness for the UK economy reinforced investors' feeling that the BOE was quite happy with the course of events. We have a long-standing sterling negative view and don't feel any need to change it. However, recently we advocated some caution on the recent steep EUR/GBP rise. Last week, there was a temporary unwinding of overextended sterling short positions. Recently, we were looking for a correction to go add/reinstall EUR/GBP long positions. The 0.9080 area (previous high) has already been tested twice. So, its might become a hard nut to crack. A break above the 0.93-area could reinforce the EUR/GBP ascent EUR/GBP: test highs following CEBR report Support comes 0.9252 (STMA), at 0.9182 (Friday's low), at 0.9197 (MTMA) and at 0.9140 (week low). Resistance is seen at 0.9315 (today's high), at 0.9353 (Bollinger top), at 0.9417 (March high). The pair is in overbought conditions. News US: Trade deficit narrows The trade deficit unexpectedly narrowed in August to $30.7 B from $31.9 B previously. However, it was only a partial reversal from the widening of previous months. The 3-month average widened still slightly to $30B from $28.5 B. Exports rose by a meagre 0.2%, but imports dropped 0.6% M/M. The decline in imports was due to crude and aircraft, while cars rose still strongly (effect cash for clunkers). We wouldn't draw many conclusions from this report. EMU: Italian and French production surge French industrial production rose a much faster-than-expected 1.9% M/M in August, following an upwardly revised 0.3% M/M in July, earlier reported at 0.1% M/M. It was the fourth consecutive monthly rise that suggests that activity in the industrial sector is reviving. Production stands so far 3.4% above Q2 average pointing to a strong Q3 GDP growth, well above the current BdF estimate of 0.3% Q/Q. Italian production showed a similar upbeat picture, as output rose by 7% M/M in August after increasing 2.4% M/M in July. This brings the Q3 average so far 5.9% above Q2, virtually securing that Italy will report growth in Q3, which would be the first quarterly gain since Q1 of 2008 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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US Bank Earnings Holds USDs Fate

Daily Forex Fundamentals | Written by AC-Markets | Oct 12 09 08:38 GMT |

Market Brief The USD was able to claw back some losses in the Asian session, as regional equity markets failed to keep risk appetite afloat. Last week's USD selloff stems from the belief that the need for safe haven assets has declined, causing participants to search for risk premium. This week, risk appetite will be left in the hands of US bank earnings (JPMorgan, Citibank, GS and BofA) and rhetoric from central banks officials. Market will be intensely listening for any signal that officials are looking to reigning risk correlated trades and limit USD selling. Comments from the Fed continued uninterrupted over the weekend. Former Vice-Chairman Kohn held his normal hawkish note, and highlighted the importance of anchoring inflation expectations, while he rejected the theory that central banks should stay accommodating longer when emerging from a recession. In Singapore, the MAS announced that it would maintain its current neutral policy stance and zero-appreciation path. There will be no shift in the width of the policy band and current center. Officials stated that the MAS will continue to watch over macro developments, including the risk of stronger global inflationary pressures. With a light economic calendar today, investors will look ahead to this week's BoJ policy decision. No change in the base rate is universally expected; instead the markets focus will be on comments regarding the JPY relative strength. The minutes from FOMC September meeting are due on Wednesday and will also capture the markets' attention. These will be closely watched, as markets seek transparency on the Fed's current standing on exit strategies. 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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Daily FX Report

Daily Forex Technicals | Written by Varengold Bank | Oct 12 09 08:52 GMT |

Good morning from very rainy Hamburg and welcome to our first Daily FX Report of this week. The USD fell against its most counterparts but could recover against the EUR. However, we wish you a successful start in this week Markets review The USD fell against 10 of its 16 major counterparts on speculation that retail sales fell in September and factory output cooled last month, adding to signs the U.S. is likely to trail other countries in emerging from recession. The USD reached against the EUR 1.4738. In the U.S. are speculations that the USD may fall versus the EUR before the U.S. reports this week that they are set to show the recovery in the world`s largest economy will be slowing, backing the case for the Federal Reserve to keep interest rates low. The EUR was close to a two week high against the JPY and reached 132.42 before a German report may show tomorrow that the investor confidence could rose to the highest level in three and a half year. The USD fetched 89.86 against the JPY. The GBP dropped against the USD to 1.5915. The GBP made also losses versus the EUR and reached 92.68. Furthermore the GBP posted a weekly drop against the EUR as a report showed that the producer prices jumped last month more than economists predicted Technical analysis GBP/USD Since the beginning of September, the GBP has been trading in a bearish trend against the USD. Now, the GBP touches its support line at 1.5825 and it seems that the support is strong enough. When the currency pair reached its support two times before, it could recover. Also the RSI may indicate a rising trend so that the GBP could start a bullish phase versus the USD EUR/NZD During the last two month, the EUR has been trading in a bearish trend channel against the NZD. Right now, the EUR reaches the upper line from the trend channel. Whenever it touched or crossed the upper line for a brief moment, the prices rebounded. Also it seems that the Momentum will cross the signal line from above which may indicate a continuing bearish trend. The next support could be around 1.9885. Pivot Points - Daily FX Support and Resistance Levels Varengold Bank IMPORTANT NOTIFICATION TO BE READ IN CONJUNCTION WITH THE CONTENTS OF THIS DOCUMENT This document is issued and approved by Varengold WPH Bank AG. The document is only intended for market counterparties and intermediate customers who are expected to make their own investment decisions without undue reliance on the information set out within the document. It may not be reproduced or further distributed, in whole or in part, for any purpose. Due to international laws/regulations not all financial instruments/services may be available to all clients. You should have informed yourself about and observe any such restrictions when considering a potential investment decision. This electronic communication and its contents are intended for the recipient only and may contain confidential, non public and/or privileged information. If you have received this electronic communication in error, please advise the sender immediately, and delete it from your system (if permitted by law). Varengold does not warrant the accuracy, completeness or correctness of any information herein or the appropriateness of any transaction. Nothing herein shall be construed as a recommendation or solicitation to purchase or sell any financial product. This communication is for informational urposes only. Any market or other views expressed herein are those of the sender only as of the date indicated and not of Varengold. Varengold reserves the right to consider any order sent electronically as not received unless it is confirmed verbally or through other means.

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Forex Technical Analysis

Daily Forex Technicals | Written by DeltaStock Inc. | Oct 12 09 08:43 GMT |

EUR/USD Current level-1.4692 EUR/USD is in a broad consolidation, after bottoming at 1.2331 (Oct.28,2008). Technical indicators are neutral, and trading is situated above the 50- and 200-Day SMA, currently projected at 1.4134 and 1.3523. The pair is still in the downtrend from 1.4817 and keeping in mind that Friday's attempt to break above 1.4780 resistance failed, the bias should be considered negative for 1.4615, en route to 1.4478. Nevertheless, we continue to think, that current slide is just a part of the consolidation pattern below 1.4842 and is expected to hold above 1.4410-44 dynamic support on the daily frame. Intraday resistance comes at 1.4725, followed by the crucial 1.4775. Resistance Support intraday intraweek intraday intraweek 1.4775 1.50+ 1.4696 1.4444 1.4842 1.6040 1.4650 1.3746 USD/JPY Current level - 90.40 A short-term bottom has been set at 87.12 and a large consolidation is unfolding since. Trading is situated below the 50- and 200-day SMA, currently projected at 94.86 and 94.84. Friday's sell from 90.50 resistance failed to break below 88.01 and bottomed at 88.62. This confirms, that a bottom is already in place at 88.01 and that level is the end of the downtrend from 97.79. The pair has entered a larger corrective phase, that will target 92.10-40 resistance area. Current intraday bias is positive with nearest support at 89.90 and risk limit below 89.48. Resistance Support intraday intraweek intraday intraweek 90.76 92.40 89.90 88.01 91.50 97.79 89.48 83.53 GBP/USD Current level- 1.5766 The pair is in a downtrend after peaking at 1.7042. Trading is situated between the 50- and 200-day SMA, currently projected at 1.6454 and 1.5258. The downtrend from 1.6130 resistance accelerated and broke below 1.5855 'trigger' point. The consolidation pattern above 1.5766 is already completed on the daily frame, so current focus is set at 1.5352. Resistance comes at 1.5798 and crucial is 1.5884. Resistance Support intraday intraweek intraday intraweek 1.5798 1.6130 1.5712 1.5352 1.5887 1.6468 1.5612 1.50+ DeltaStock Inc. - Online Forex & Securities Broker www.deltastock.com RISK DISCLAIMER: These analyses are for information purposes only. They DO NOT post a BUY or SELL recommendation for any of the financial instruments herein analyzed. The information is obtained from generally accessible data sources. The forecasts made are based on technical analysis. However, Delta Stock’s Analyst Dept. also takes into consideration a number of fundamental and macroeconomic factors, which we believe impact the price moves of the observed instruments. Delta Stock Inc. assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person's reliance upon the information on this page. Delta Stock Inc. shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation, losses or unrealized gains that may result. Any information is subject to change without notice.

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Singapore Raises 2009 Economic Forecast Amid Recovery

By Shamim Adam

Oct. 12 (Bloomberg) -- Singapore raised its 2009 economic forecast after gross domestic product expanded for a second consecutive quarter, strengthening a regional recovery that has prompted policy makers to consider ending stimulus measures.

The economy will shrink 2 percent to 2.5 percent this year, less than an earlier forecast for a contraction of 4 percent to 6 percent, the trade ministry said in a statement today. GDP expanded an annualized 14.9 percent last quarter from the previous three months, the second consecutive expansion.

Singapore’s central bank said today it will maintain a zero appreciation stance in its currency policy, after opting for a de-facto devaluation of the Singapore dollar in April to help reverse a collapse in exports. Central banks around the world have begun to indicate a willingness to raise interest rates as inflation returns with economic recovery.

“Asian economies are recovering so we may see a slow withdrawal of fiscal and monetary stimulus because they can’t go cold turkey,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore. “The export outlook is improving but there are still potential speed bumps such as unemployment and we may see a prolonged recovery process.”

Australia last week became the first among the Group of 20 nations to raise borrowing costs since the height of the global financial crisis, and U.S. Federal Reserve Chairman Ben S. Bernanke said the Fed is prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently.”

Stocks Rise

Singapore’s benchmark stock index rose 0.6 percent as at 9:55 a.m. The measure has surged 52 percent this year as a rebound in manufacturing helped the nation emerge from its worst recession since independence in 1965.

“A clear but modest recovery is under way globally,” the trade ministry said today. “One-off factors such as restocking activities and fiscal stimulus measures will continue to support growth in the near term.”

Asia is leading the world’s recovery from its economic slump after the region’s policy makers slashed interest rates to unprecedented lows and governments announced more than $950 billion of stimulus.

“Singapore is always the first in the region to provide a reliable GDP report so a strong reading would be a positive sign for other outcomes in the region,” said Matthew Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore. “The worst of global economic turmoil is behind us,” reducing the need to further ease monetary policy, he said.

Exchange Rate

The Singapore dollar fell 0.5 percent to S$1.4001 against the U.S. currency as at 9:55 a.m. The Monetary Authority of Singapore, known as MAS, maintained a neutral stance in its twice-yearly currency policy review today, favoring neither appreciation nor depreciation against its trade-weighted basket of currencies.

The central bank, which uses its exchange rate rather than interest rates to control inflation, said the strength of the economic recovery may ease after an “initial uplift,” and GDP growth in 2010 is expected to be slower than in previous post- recession periods.

Singapore is forecast by economists including JPMorgan’s Hildebrandt to delay any change in its currency policy until April. The government is due to say this week if it will extend a program that pays companies to retain workers.

“Singapore’s economy is extremely volatile” and the boost to growth from companies rebuilding inventory and government stimulus is starting to fade, said Hildebrandt. “Because of this uncertainty, we do not expect the MAS to change its monetary policy stance. The risk to inflation is still low so the MAS has no need to tighten policy.”

Inflation Forecast

The central bank expects inflation to be about zero this year, before accelerating to a range of 1 percent to 2 percent in 2010, it said in a statement today.

Singapore’s $182 billion economy grew 0.8 percent in the third quarter from a year earlier, the first expansion in more than a year. The government has raised its 2009 economic forecast twice this year from an April prediction for a contraction of as much as 9 percent.

“Uncertainties over the pace of the withdrawal of monetary and fiscal stimulus measures pose an additional risk” globally, the trade ministry said. “While these factors may dampen growth in the second half of 2010 and result in an uneven recovery, the likelihood of a return to recessionary conditions is low in the absence of further financial shocks.”

Drugs, Chips

Manufacturing, which accounts for about a quarter of the economy, rose 8.3 percent from a year earlier last quarter, after sliding a revised 1.1 percent in the three months through June.

Improving demand for pharmaceuticals and electronics has prompted companies including Chartered Semiconductor Manufacturing Ltd. to predict sales will increase. Singapore’s exports fell the least in almost a year in August.

The island’s services industry declined 2.4 percent last quarter from a year earlier, after falling 4.8 percent in the previous three months. The construction industry gained 12.4 percent as real-estate developers including Frasers Centrepoint Ltd. built homes, hotels and office towers.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

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Kuwait Cuts November Oil Price on Reduced Asia Demand

By Yee Kai Pin

Oct. 12 (Bloomberg) -- Kuwait Petroleum Corp. cut its official selling price for November crude oil, reflecting reduced demand from refineries in Asia.

The state-owned company decreased its price to 70 cents a barrel below Persian Gulf benchmark Oman and Dubai grades, from a 55-cent discount for October, according to an official who asked not to be identified because of company policy.

Refiners in Japan and South Korea usually expand output before the winter to produce more kerosene for heating. Nippon Oil Corp., Japan’s largest refiner, said Sept. 30 it plans to produce 10 percent less fuel in October. Cosmo Oil Co. also said it will cut throughput because of weak domestic demand.

Kuwait, a founding member of the Organization of Petroleum Exporting Countries, pumped 2.2 million barrels a day of crude oil last month, according to a Bloomberg News survey. It has the capacity to produce 2.65 million barrels a day.

To contact the reporter on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net

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N.Z. Will Begin Raising Rates in July, JPMorgan Says

By Tracy Withers

Oct. 12 (Bloomberg) -- New Zealand’s central bank will wait until July before starting an “aggressive” series of increases in the benchmark interest rate, said JPMorgan Chase & Co.

Governor Alan Bollard is likely to hold the official cash rate at 2.5 percent until July, then raise it to 4 percent by the end of 2010, Sydney-based economist Helen Kevans said in an e-mailed report. She expects a 50 basis point increases in July and September to start the tightening cycle. A basis point is 0.01 percentage points.

“The Reserve Bank will avoid stunting recovery with a premature tightening,” Kevans said. “Delaying the first rate hike will mean the bank will have to be more aggressive when the tightening cycle begins.”

Bollard on Sept. 10 said he doesn’t plan to raise borrowing costs until the “latter part” of 2010 because the recovering economy needs further stimulus. Since that statement, reports have shown business confidence reached a 10-year high in September and third-quarter consumer confidence was the highest since 2005, bolstering domestic demand, Kevans said.

“The Reserve Bank will shift to a neutral policy stance early in 2010, paving the way for the first hike to be delivered in July,” she said. “By then, the Reserve Bank should be confident that the withdrawal of policy stimulus will not stunt the recovery.”

Seven of 11 economists surveyed by Bloomberg News last week expect Bollard will raise the cash rate by at least a quarter point before June 30. Traders expect the rate will be 4 percent by October next year, according to an index calculated by Credit Suisse based on swaps trading.

JPMorgan said New Zealand’s economy will grow 2.8 percent next year, faster than the 2.3 percent it previously forecast.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

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India’s Output Surges, Policy Tightening More Likely

By Kartik Goyal

Oct. 12 (Bloomberg) -- India’s industrial production rose the most in 22 months, suggesting the central bank may have scope to make an early exit from emergency stimulus measures.

Output at factories, utilities and mines jumped 10.4 percent in August from a year earlier after gaining a revised 7.2 percent in July, the statistics agency said in New Delhi today. Economists were expecting a 9.7 percent increase.

Manufacturing across Asia is showing signs of recovery, prompting policy makers to consider when they can begin to withdraw the monetary and fiscal stimulus initiated to protect their economies from the global recession. Central bank Governor Duvvuri Subbarao last week said India may need to act ahead of advanced economies due to “incipient” inflation pressures.

“With doubts over the durability of India’s upswing fading all the time, and inflation pressures already high, policy rates look certain to move up soon,” said Kevin Grice, an economist at Capital Economics Ltd. in London. “We still expect a first hike in January but the possibility of a first move at the Oct. 27 monetary policy meeting now looks close to a 50:50 call.”

Benchmark 10-year bonds declined, pushing yields to the highest in a month. The yield on the most-traded 6.90 percent note due 2019 added one basis point, or 0.01 percentage point, to 7.36 percent. The rupee was little changed, trading at 46.595 a dollar at 12:30 p.m.

Foreign Investors

India’s benchmark stock index has more than doubled from a three-year low in March as foreign inflows rebounded and demand improved for cars, air conditioners, refrigerators and homes.

The central bank cut interest rates six times between October and April and the government reduced taxes on consumer products and imports, together providing a stimulus worth more than 12 percent of India’s gross domestic product.

At its last meeting on July 28, the Reserve Bank held its reverse repurchase rate at 3.25 percent and maintained the repurchase rate at 4.75 percent. The cash reserve ratio was kept unchanged at 5.0 percent.

Manufacturing, accounting for about 80 percent of industrial output, rose 10.2 percent, compared with a 7.4 percent gain in July, today’s report showed. Mining increased 12.9 percent in August from 9 percent in the previous month and electricity gained 10.6 percent from year ago period.

Industrial production data show signs of economic recovery, Finance Minister Pranab Mukherjee told reporters in New Delhi today. Growth may accelerate in the second half of the fiscal year ending March, he said. The trend in factory output is likely to continue in September, Finance Secretary Ashok Chawla said separately.

‘Sure Signs’

India’s industrial production probably continued to improve last month. The Purchasing Managers’ Index compiled by HSBC Holdings Plc and Markit Economics increased for a sixth straight month in September, according to an Oct. 1 report. The gauge rose to 55 last month from 53.2 in August.

“There are sure signs of a durable manufacturing recovery,” said Sonal Varma, an economist at Nomura Securities Co. in Mumbai. “The downside is clearly behind us and we think India and China will lead the recovery in the Asia-Pacific.”

Factory output is improving across Asia as close to $1 trillion in government stimulus and record-low interest rates help the region lead the world economy out of the worst global recession since the 1930s.

China’s industrial production rose 12.3 percent in August from a year earlier, the most in 11 months. Malaysian output fell the least in 10 months.

Tax Revenue

Indian factory output may rise by more than 10 percent in the coming months as indicated by tax-collection figures and companies’ sales, according to Nomura’s Varma.

Reliance Industries Ltd., India’s most valuable company, paid 11.6 billion rupees ($249 million) in advance taxes in the quarter to Sept. 30, 69 percent more than the April-June period, the finance ministry said Sept. 22. State Bank of India paid 18.3 billion rupees and Oil & Natural Gas Corp. provided 17.96 billion rupees. Higher tax payments indicate rising sales.

Bajaj Auto Ltd., India’s second-largest motorcycle maker, sold 14 percent more vehicles in September from a year earlier and Tata Motors Ltd., India’s biggest maker, reported a 5.8 percent increase in sales in the month.

Policy makers will have to “strike a balance” in setting interest rates and shouldn’t compromise on growth in order to tame inflation, Finance Minister Mukherjee said Oct. 8.

India’s economic growth accelerated in the June quarter for the first time since 2007, with GDP increasing 6.1 percent from a year earlier. The central bank expects the $1.2 trillion economy to expand 6 percent in the year to March 2010, slower than the 8.7 percent average growth in the previous four years.

“Growth is recovering fast,” said Chetan Ahya, an economist at Morgan Stanley in Singapore. There’s “more than an even chance” the Reserve Bank in this month’s monetary policy statement will increase its cash reserve ratio by 50 basis points, he added.

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

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Crude Oil Rises a Third Day as Equities Spur Recovery Hopes

By Grant Smith and Yee Kai Pin

Oct. 12 (Bloomberg) -- Crude oil rose for a third day in tandem with European equities amid increasing signs that the global economy is emerging from recession.

Oil touched a three-week high earlier as Singapore, Southeast Asia’s fourth-largest economy, raised its 2009 economic forecast. European stocks advanced, following the surge of U.S. equity markets on Oct. 9 to their highest in a year.

“The continued strength of equities when many people had been expecting a relapse is behind oil’s surge through $70,” said Christopher Bellew, senior broker at Bache Commodities Ltd. “Demand does seem to be on the mend, particularly in Asia.”

Crude oil for November delivery climbed as much as 81 cents, or 1.1 percent, to $72.58 a barrel in electronic trading on the New York Mercantile Exchange. The contract was at $72.38 as of 9:20 a.m. London time. Futures have gained 63 percent this year. Japan and the U.S. are closed for public holidays and there will be no Nymex floor trading today.

Oil rose to $71.77 a barrel on Oct. 9, the highest settlement since Sept. 18, after the International Energy Agency raised its 2010 demand forecast for a third month, citing higher-than-expected consumption in Asia and the Americas.

Prices rose for a second week as the Standard & Poor’s 500 Index rallied and the Dollar Index slipped to a one-year low, bolstering the investment appeal of commodities including gold.

“We are looking at an international economy that is going to be stronger in 12 months’ time,” said David Moore, a commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. “There’s that conviction that things are going to be better down the track,” even when some data is not “especially supportive,” he said.

‘Suitable’ Price

Oil has traded about $5 on either side of $70 a barrel since August as traders weigh the prospects for a rebound in demand against concern ample supply will put pressure on prices.

“What’s going to limit any further pricing gains for oil is inventories,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “The extended weather forecasts for this winter coming out of both the U.S. and Japan were for a mild winter, so it’s likely the distillates inventories may portend some trouble ahead for oil.”

U.S. stockpiles of distillate fuel, including heating oil and diesel, have climbed to their highest since January 1983, according to Energy Department data. Gasoline inventories jumped by 2.94 million barrels to 214.4 million as refiners boosted output, the department said Oct. 7.

Drag of Distillates

“Gasoline demand seems to have steadied, but the distillate demand still seems very weak,” Moore said. “It draws into question just how the U.S. economy is really going.”

Hedge-fund managers and other large speculators increased their net-long position in Nymex oil futures in the week ended Oct. 6, according to the U.S. Commodity Futures Trading Commission. Speculative long positions, or bets prices will rise, outnumbered short positions by 50,006 contracts, the Washington-based commission said in its Commitments of Traders report.

Brent crude oil for November settlement rose as much as 80 cents, or 1.1 percent, to $70.80 a barrel on the London-based ICE Futures Europe exchange. It was at $70.63 a barrel at 9:20 a.m. in London. The contract gained 0.3 percent to $70 a barrel Oct. 9, the highest settlement since Sept. 22.

To contact the reporter on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.netGrant Smith in London at gsmith52@bloomberg.net

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Latvia Will Seek Agreement to Appease Bailout Donors

By Ott Ummelas and Aaron Eglitis

Oct. 12 (Bloomberg) -- Latvia will seek to strike a last- minute agreement on budget cuts today to satisfy bailout terms in the latest round of brinkmanship that has tested the patience of the country’s international loan donors.

Prime Minister Valdis Dombrovskis has signaled his Cabinet will agree on an additional 175 million lati ($362 million) in cuts at a meeting today to satisfy the International Monetary Fund, the European Union and Sweden. Coalition members are due to meet at 12 noon in Riga. European Union Monetary Affairs Commissioner Joaquin Almunia will visit Riga tomorrow.

“They’re in the clear for the time being, but similar temporary disagreements will likely recur,” said Richard Segal, a fixed-income desk strategist at Knight Libertas U.K. “There is a history of Latvian politicians becoming complacent and trying to sneak in lower budget cuts, which the EU and IMF notice at the last minute. I wouldn’t rule this out in future.”

The IMF, the EU and Sweden agreed to give Latvia a 7.5 billion-euro ($11 billion) loan in December and urged the government to adopt tougher austerity measures. Swedish PrimeMinister Fredrik Reinfeldt, who holds the EU presidency, on Oct. 5 said Latvia “must correct” its deficit while Riksbank Governor Stefan Ingves has said the country risks being “left in the cold.”

‘Fruitful’

International admonitions grew more strident in tone after Latvia said it could achieve a targeted 8.5 percent deficit of gross domestic product in 2010 by cutting 325 million lati off the budget, 175 million lati less than the IMF, the EU and Sweden had demanded.

Latvian coalition parties are ready to discuss a tax on real estate, which Parliament voted against sending to committee stage on Sept. 17, the Diena newspaper reported today. All coalition parties agreed to introduce the tax when they signed agreements with the EU and IMF.

Sweden’s banks are the biggest in the Baltic states. Stockholm-based Swedbank AB, the region’s biggest lender, rose 7.5 percent to 68.25 kronor in Stockholm as of 10:53 a.m. in Stockholm. SEB AB rose 2 percent to 46.1 kronor. The krona slipped 0.1 percent against the euro.

The yield on Latvia’s 5.5 percent government bond due March 2018 rose 6 basis points today to 7.31 percent. The OMX Riga stock index fell 2.7 percent as of 11:31 a.m. trading today, and the lats was little changed at 0.7095 per euro. Credit default swap spreads on Latvian five-year debt rose to 594 basis points from 587 on Friday, according to CMA DataVision prices in London.

‘Fruitful’

The IMF on Oct. 9 said it concluded a visit to Latvia that included “fruitful” discussions about the loan program. An IMF staff team visited Latvia as part of a technical mission in consultation with the European Commission and plans to return in November, together with the EU, for a review of the program, it said in a statement.

Finance Minister Einars Repse said if the bailout program is suspended, Latvia will be forced to balance its budget next year and “live hand to mouth.”

In the event of a suspension, Moody’s Investor’s Service will cut the Baltic country’s credit rating, and the country may have to repay part of its loan early, depleting its reserves, Repse said in an interview on national television broadcast last night.

Billionaire George Soros called on the EU to ease its budget-cut demands to slash budget spending in an interview with Swedish public radio on Oct. 10.

‘Wrong Kind’

“The pressure for them to reduce government spending when the problem is in the private sector is a wrong kind of policy that ought to be avoided,” said Soros. “I think the European Union countries are in a position and ought to help Latvia more than they are currently doing,” he said. Soros said he had no currency positions in the Baltics.

Less severe loan terms might have saved both sides some pain, Knight’s Segal said, adding that Latvia, which pegs the lats to the euro, and its creditors would benefit from making agreements more flexible, with policy requirements contingent on economic developments.

Dombrovskis is trying to limit the pain the budget cuts are inflicting on the economy through legislative changes. The premier on Oct. 6 asked his civil servants to investigate the option of capping mortgage holders’ liability, a move perceived by some investors as a first step toward shielding the internal economy from a devaluation.

Little Impact

According to Segal, the proposal “would not have as much of an impact as a lot of people seem to think.”

Swedish lenders would suffer the deepest blow from the plan, which would swell loan losses. The krona dropped as much as 1.5 percent against the euro on Oct. 7, after investors learned the news. Stockholm-based Swedbank AB, the region’s biggest bank, lost 2.4 percent the same day.

Investors need to take loan losses at Swedbank and SEB AB, the second-biggest Baltic lender, into account when assessing the potential harm the mortgage proposal may inflict, Segal said.

“The impact of any plan on the future value of the Swedish banks in Latvia has to be compared with what they have already written down and I think a lot of commentators have overlooked that,” he said.

Swedbank’s gross provisions for Latvian loans were 4.5 billion kronor in the first half, or 12.77 percent of total lending, the bank said on July 17. SEB, which doesn’t provide country-specific figures for the region, said net credit losses in the Baltics for the same period were 4.93 percent. That compares with Swedbank’s 7.36 percent loss ratio for the region.

‘Bottom Occurred’

“Clearly the bottom of the economic cycle has occurred, we couldn’t have said this three or four months ago and therefore I’m pretty sure that a compromise will happen sooner or later,” Segal said.

The $34 billion Latvian economy “probably bottomed out during the second and third quarter,” Dombrovskis said on Oct. 2, citing Economy Ministry forecasts. Fitch Ratings on Oct. 6 forecast a 4 percent output contraction next year after an 18 percent slump in 2009. Swedbank expects Latvia’s GDP to shrink 2 percent next year, it said on Sept. 29.

To contact the reporters on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

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Iceland Shrinks 8% as Prices Increase 11% in Deepest Recession

By Chad Thomas and Omar Valdimarsson

Oct. 12 (Bloomberg) -- Arni Hallgrimsson lost his job as a public relations consultant when Iceland’s three biggest banks collapsed last year, putting him out of work for the first time since 1980. After a stint cleaning the docks at a whaling station during the summer hunt, he’s unemployed again.

“Nightmares come to an end when you wake up, but this one just goes on and on and on and on,” the 53-year-old father of three said at his home in Reykjavik, Iceland’s capital. “I’ve applied for many jobs that fit my profile. Sometimes I’ve been on the short-list, but eventually not been offered the job.”

A year after the banking crisis brought Iceland to the brink of bankruptcy, the island nation is mired in the deepest recession among advanced economies. The stock market has lost 97 percent of its value, and more than 780 companies have buckled under the weight of foreign currency loans as the krona plunged. Consumers refuse to borrow at Europe’s highest interest rates, and international banks reject requests for new financing.

Prime Minister Johanna Sigurdardottir, who took office in February, pinned hopes for a recovery on the International Monetary Fund after Kaupthing hf, Landsbanki Islands hf and Glitnir Banki hf racked up $80 billion in debt, 16 times Iceland’s economic production. Now she says the economy may implode again as a dispute over Icelandic savings accounts held by overseas depositors delays a promised $5.1 billion bailout.

“It’s been a year since all hell broke loose and there hasn’t actually been much done to ease the situation,” said Almar Gudmundsson, secretary general of the Federation of Icelandic Trade, which represents importers, exporters, wholesalers and retailers. “We don’t think that we as a nation are doing enough to make the wheels get going again.”

Worst Recession

Iceland’s economy will shrink 8.5 percent this year and consumer prices will climb 11.7 percent, both the worst performances among the world’s 33 advanced economies, according to the IMF’s latest forecasts. As the rest of the world begins to recover, Iceland’s recession will stretch into next year, with the economy contracting 2 percent, more than any developed nation except Ireland.

Unemployment will rise to 8.6 percent this year, from less than 1 percent in December 2007, the IMF estimates. Iceland will still trail the eurozone average of 9.9 percent and Spain’s 18.2 percent jobless rate, the highest in the developed world.

One of the hardest-hit industries has been construction, where 202 companies filed for bankruptcy in the 11 months after the crash, 67 percent more than in the same period a year earlier, according to data compiled by Statistics Iceland.

Construction First to Go

Hallgrimsson’s firm primarily helped builders sell their projects and persuade the public that all environmental concerns were being met.

“The contractors were the first to go bust,” he said. “They couldn’t secure financing, meaning they completely threw out marketing and PR. Before we knew it, there wasn’t a single contractor on our list of clients.”

The crash followed four years in which the economy grew at an average annual rate of 4 percent following the sale of Icelandic banks to private investors from 1998 to 2002. The banks and investors, including Jon Asgeir Johannesson’s Baugur Group hf, went abroad to escape the shackles of a nation of 320,000 people. The expansion was financed by international investors who bought bonds paying as much as 10 percent. They defaulted as the credit crisis dried up financing.

Reintroducing the Banks

The chief executive officers of New Kaupthing hf, Islandsbanki hf and Landsbankinn hf, the state-owned successors of the failed banks, said they’re still trying to win the trust of overseas lenders and as yet are unable to obtain foreign- currency loans. The CEOs, all brought in after the collapse, said the banks no longer have global ambitions.

“We are starting with just introducing ourselves,” said Islandsbanki CEO Birna Einarsdottir, who worked at Royal Bank of Scotland Group Plc in Edinburgh for six years before returning to Iceland in 2004, in an interview. “What we do internationally is going to be very, very focused.”

The krona’s official exchange rate has declined 53 percent against the dollar since Nov. 2, 2007, making it the laggard of 175 currencies tracked by Bloomberg.

Iceland’s benchmark stock index plunged 77 percent on Oct. 14, 2008, when it resumed trading after a three-day suspension. It is the world’s worst-performing equity index since reaching its high in July 2007, according to data compiled by Bloomberg. Listings have dropped to 10 from 22.

The central bank left its benchmark rate unchanged last month at 12 percent, the highest in Europe. Only Pakistan and Lebanon, at 13 percent, have higher rates among the 58 central banks tracked by Bloomberg. The European Central Bank’s benchmark rate is 1 percent.

‘People Aren’t Buying’

Companies are struggling as the krona’s decline and high interest rates wipe out consumer demand on the North Atlantic island, which imports about 70 percent of the products it uses, including raw materials such as lumber and oil.

“People aren’t buying flat screens, they aren’t buying furniture, they aren’t traveling abroad or buying luxury goods,” said Bogi Thor Siguroddsson, owner of Johan Roenning hf, an importer and retailer, who says his sales volume has dropped 50 percent. “What is selling now is food, drugs and gasoline.”

Before the crash, Hallgrimsson and his wife were reducing their debts and making extra payments on their mortgage. That became harder and harder because the loans were indexed to inflation. Now he says he worries about every krona.

“Recently my daughter asked if she could take a drama class and we had to think hard about whether or not we could afford it,” Hallgrimsson said. “Eventually we decided to let her go, and I’m glad we did because she loves it, but just the fact that we had to think about it is a little sad.”

Office Waterfall

Borrowing rates charged by New Kaupthing, Islandsbanki and Landsbankinn remain at a prohibitive level of about 15 percent, New Kaupthing CEO Finnur Sveinbjoernsson said in an interview.

“Credit will be more expensive and less abundant,” he said at the bank’s waterfront offices, which sport a glass wall covered by a waterfall, warehouse-style furnishings and a coffee bar, all built during the boom. “A more responsible fiscal attitude will have to be the norm going forward.”

The government of former Prime Minister Geir Haarde, whose Independence Party oversaw the privatization of the banks, crumbled in January. Voters in April elected a coalition of Social Democrats and Left Greens, who have promised more welfare and bigger government.

IMF Debate

Sigurdardottir, 67, said this month that more transparency and tighter financial regulations are needed. She also plans to pursue European Union membership and possible adoption of the euro to protect Iceland against swings in the krona.

IMF funding hinges on efforts to settle the claims of overseas depositors who had accounts with Icesave, a unit of Landsbanki Islands. The U.K. and Dutch governments have stalled funding until Iceland agrees to cover the claims. Opposition politicians say the demands are unfair, and members of the Left Green Movement are split on the issue, threatening to leave Sigurdardottir’s government in the minority.

The government estimated Oct. 1 that Iceland will post a deficit of 182.3 billion kronur ($1.5 billion), or 14 percent of gross domestic product this year. The proposed 2010 budget includes new energy, environment and natural resources taxes.

“If the government is taxing its way through the fiscal problem, it will just prolong the crisis,” said Gudmundsson, the head of the trade federation. “We think heavy cost cuts in the expenditures of the government are necessary.”

Political Comeback

Some of those in power during the good years are beginning to make a comeback. Former Prime Minister and central bank Governor David Oddsson was named editor-in-chief of Iceland’s oldest newspaper, Morgunbladid, last month. The day before the announcement, 40 of 100 employees were fired.

Oddsson, 61, was Iceland’s longest-serving prime minister, holding office for 13 years after he was first elected in 1991. He became foreign minister in 2004 and was central bank governor in 2005. He refused to step down after the economy collapsed, so parliament passed a law that removed him from office.

Thus far no one has been charged with a crime in connection with Iceland’s economic failure. Gunnar Andersen, director of Iceland’s Financial Supervisory Authority, said Aug. 5 that 20 cases of banking malpractice have been sent to a special prosecutor, and the FSA is investigating another 20 cases.

Truth Commission

A commission, created by parliament to “seek the truth” about events that led to the banks’ downfall, is scheduled to announce its findings Nov. 1. Chairman Pall Hreinsson, a Supreme Court judge, has said that never before has any group had to break such bad news to the Icelandic people.

Icelanders have already taken it upon themselves to punish those they think are responsible, spray painting the homes of Hreidar Mar Sigurdsson and Bjarni Armannsson, the former CEOs of Kaupthing and Glitnir. A Hummer owned by Bjorgolfur Thor Bjorgolfsson, the former chairman of the Straumur investment bank, was doused with red paint.

Baugur Chairman Johannesson, 41, whose firm owned 32 percent of Glitnir, blamed the collapse on the global recession.

“Due to the size of the banks in comparison with the economy, due to a worthless currency and way too little reserves, the central bank had a limited ability to provide the banks with short-term loans or assistance,” he wrote in a letter published Dec. 29 in Morgunbladid. “The owners of all three banks didn’t have the financial capabilities to increase the banks’ capital following difficult times and recent losses, as was also the case in many places abroad.”

Baugur Claims

The banks’ freewheeling activities dragged down companies that received cheap money to speculate on financial derivatives or borrowed against shares in one business to buy stock in another. Others failed as payments on foreign-currency loans soared after the krona’s plunge.

One example was Baugur, which bought retailers in London and New York during a 10-year acquisition spree. Baugur filed for bankruptcy in March with debts that exceeded assets by 148 billion kronur. Johannesson didn’t respond to messages seeking comment.

Erlendur Gislason, an attorney with the Logos law firm in Reykjavik, has spent the past six months piecing together the financial picture at Baugur. His conclusion: little of any value is left to pay 158 claims made by 60 unsecured creditors.

“Most of the assets in Baugur were mortgaged before the bankruptcy,” Gislason said. “It’s quite a meager piece of assets that are left.”

Gambling Iceland’s Reputation

Landsbankinn took control in February of Baugur’s U.K. unit, which had stakes in department store chain House of Fraser Plc, Iceland Foods Ltd. and jewelry chain Goldsmiths.

Hekla, a 76-year-old car dealer and importer in Iceland, is now owned by New Kaupthing.

Standing in Hekla’s showroom, marketing manager Brynjar Oskarsson is surrounded by new Volkswagens and Audis. There are no customers, and Oskarsson doesn’t expect any.

People aren’t buying cars because prices have risen 66 percent in the past two years as the krona slumped in value, Oskarsson said. He estimates that just 2,100 vehicles will be sold this year in Iceland, down from a peak of 18,058 in 2005. Hekla has cut its staff to 160 workers from a high of 250.

“I feel disappointed with how a few individuals ruthlessly gambled with many of our best companies and, without blinking, used Iceland’s reputation and good image as their best weapon,” Oskarsson said.

Fishing and Tourism

The only winners in Iceland’s collapse are companies paid in foreign currency.

Along the waterfront, the smell of fish pervades the headquarters of HB Grandi hf, Iceland’s largest fishing company. Grandi hauls in 12 percent of the island’s annual catch, including cod, halibut and haddock, and exports all of its fish.

The company hasn’t laid off any of its 650 workers and employees received a raise this year.

“In today’s business world in Iceland, that’s all good news,” said CEO Eggert Gudmundsson, 45, who joined the company five years ago from a Silicon Valley technology firm, after he and his family decided to return to their native Iceland.

It’s been even better for the tourism industry as the krona’s decline makes Iceland a bargain for foreign travelers. A record 353,110 people visited the country in the first eight months of the year, selling out hotels, filling restaurants and inundating tour companies such as Ishestar travel, where a sign outside the office door reminds visitors to take off their boots after visiting the stables for Icelandic ponies.

“This difficult year has been by far our best,” said owner Einar Bollason, adding that he’s had to turn away customers because he didn’t have the capacity to serve them. “Of course, this is a wonderful problem to have.”

Smaller Banks

As for the banks, Iceland’s financial industry will probably get smaller, with consolidation likely, the CEOs said.

Johann Bergthorsson lost his part-time job at Landsbankinn’s predecessor when the lender was nationalized. He has since founded Dexoris, which is creating video games for Apple Inc.’s iPhone and iPod Touch.

“When the whole economy of the country collapses, you just have to change your plans,” said Bergthorsson, a 22-year-old mathematician. “When the bank went overboard, the decision was made. I decided to do something different, something more creative.”

The ownership of Islandsbanki, formerly Glitnir, and New Kaupthing will be determined this month when creditors decide whether to exchange debt for stakes in the banks. Landsbankinn’s future is less certain because of the Icesave talks.

‘Burned Many Bridges’

Eventually, the banks plan to sell shares to the public, the CEOs said. Such a move is probably years away, and requires rebuilding the trust of investors, they said.

“I don’t expect them to forget what happened,” Landsbankinn CEO Asmundur Stefansson, said at the bank’s wood- paneled headquarters in Reykjavik’s old downtown. “I mean, what happened was terrible. We have obviously burned many bridges in the process. We cannot deny that.”

Hallgrimsson said he can’t move on because he’s struggling to pay his bills and waiting to see whether the whaling station will hire him as a maintenance worker this winter.

“Nobody seems to have learned a thing,” he said. “Instead of dealing with the enormous tasks at hand, politicians are playing the blame game. I’m not optimistic.”

To contact the reporters on this story: Chad Thomas in Reykjavik via the Helsinki newsroom at cthomas16@bloomberg.net; Omar Valdimarsson in Reykjavik at valdimarsson@bloomberg.net.

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Dollar Reaches Breaking Point as Banks Shift Reserves

By Ye Xie and Anchalee Worrachate

Oct. 12 (Bloomberg) -- Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

Sliding Share

The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Englander concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification.

America’s currency has been under siege as the Treasury sells a record amount of debt to finance a budget deficit that totaled $1.4 trillion in fiscal 2009 ended Sept. 30.

Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell to 75.77 last week, the lowest level since August 2008 and down from the high this year of 89.624 on March 4. The index, trading at 76.489 today, is within six points of its record low reached in March 2008.

Foreign companies and officials are starting to say their economies are getting hurt because of the dollar’s weakness.

Toyota’s ‘Pain’

Yukitoshi Funo, executive vice president of Toyota City, Japan-based Toyota Motor Corp., the nation’s biggest automaker, called the yen’s strength “painful.” Fabrice Bregier, chief operating officer of Toulouse, France-based Airbus SAS, the world’s largest commercial planemaker, said on Oct. 8 the euro’s 11 percent rise since April was “challenging.”

The economies of both Japan and Europe depend on exports that get more expensive whenever the greenback slumps. European Central Bank President Jean-Claude Trichet said in Venice on Oct. 8 that U.S. policy makers’ preference for a strong dollar is “extremely important in the present circumstances.”

“Major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy with a view to upholding stability of international financial markets,” China President Hu Jintao told the Group of 20 leaders in Pittsburgh on Sept. 25, according to an English translation of his prepared remarks. China is America’s largest creditor.

Dollar’s Weighting

Developing countries have likely sold about $30 billion for euros, yen and other currencies each month since March, according to strategists at Bank of America-Merrill Lynch.

That helped reduce the dollar’s weight at central banks that report currency holdings to 62.8 percent as of June 30, the lowest on record, the latest International Monetary Fund data show. The quarter’s 2.2 percentage point decline was the biggest since falling 2.5 percentage points to 69.1 percent in the period ended June 30, 2002.

“The diversification out of the dollar will accelerate,” said Fabrizio Fiorini, a money manager who helps oversee $12 billion at Aletti Gestielle SGR SpA in Milan. “People are buying the euro not because they want that currency, but because they want to get rid of the dollar. In the long run, the U.S. will not be the same powerful country that it once was.”

Central banks’ moves away from the dollar are a temporary trend that will reverse once the Fed starts raising interest rates from near zero, according to Christoph Kind, who helps manage $20 billion as head of asset allocation at Frankfurt Trust in Germany.

‘Flush’ With Dollars

“The world is currently flush with the U.S. dollar, which is available at no cost,” Kind said. “If there’s a turnaround in U.S. monetary policy, there will be a change of perception about the dollar as a reserve currency. The diversification has more to do with reduction of concentration risks rather than a dim view of the U.S. or its currency.”

The median forecast in a Bloomberg survey of 54 economists is for the Fed to lift its target rate for overnight loans between banks to 1.25 percent by the end of 2010. The European Central Bank will boost its benchmark a half percentage point to 1.5 percent, a separate poll shows.

America’s economy will grow 2.4 percent in 2010, compared with 0.95 percent in the euro-zone, and 1 percent in Japan, median predictions show. Japan is seen keeping its rate at 0.1 percent through 2010.

Central bank diversification is helping push the relative worth of the euro and the yen above what differences in interest rates, cost of living and other data indicate they should be. The euro is 16 percent more expensive than its fair value of $1.22, according to economic models used by Credit Suisse Group AG. Morgan Stanley says the yen is 10 percent overvalued.

Reminders of 1995

Sentiment toward the dollar reminds John Taylor, chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, of the mid-1990s. That’s when the greenback tumbled to a post-World War II low of 79.75 against the yen on April 19, 1995, on concern that the Fed wasn’t raising rates fast enough to contain inflation. Like now, speculation about central bank diversification and the demise of the dollar’s primacy rose.

The currency then gained 26 percent versus the yen and 25 percent against the deutsche mark in the following two years as technology innovation increased U.S. productivity and attracted foreign capital.

“People didn’t like the dollar in 1995,” said Taylor, whose firm has $9 billion under management. “That was very stupid and turned out to be wrong. Now, we are getting to the point that people’s attitude toward the dollar becomes ridiculously negative.”

Dollar Forecasts

The median estimate of more than 40 economists and strategists is for the dollar to end the year little changed at $1.47 per euro, and appreciate to 92 yen from 90.13 today.

Englander at London-based Barclays, the world’s third- largest foreign-exchange trader, predicts the U.S. currency will weaken 3.3 percent against the euro to $1.52 in three months. He advised in March, when the dollar peaked this year, to sell the currency. Standard Chartered, the most accurate dollar-euro forecaster in Bloomberg surveys for the six quarters that ended June 30, sees the greenback declining to $1.55 by year-end.

The dollar’s reduced share of new reserves is also a reflection of U.S. assets’ lagging performance as the country struggles to recover from the worst recession since World War II.

Lagging Behind

Since Jan. 1, 61 of 82 country equity indexes tracked by Bloomberg have outperformed the Standard & Poor’s 500 Index of U.S. stocks, which has gained 18.6 percent. That compares with 70.6 percent for Brazil’s Bovespa Stock Index and 49.4 percent for Hong Kong’s Hang Seng Index.

Treasuries have lost 2.4 percent, after reinvested interest, versus a return of 27.4 percent in emerging economies’ dollar- denominated bonds, Merrill Lynch & Co. indexes show.

The growth of global reserves is accelerating, with Taiwan’s and South Korea’s, the fifth- and sixth-largest in the world, rising 2.1 percent to $332.2 billion and 3.6 percent to $254.3 billion in September, the fastest since May. The four biggest pools of reserves are held by China, Japan, Russia and India.

China, which controlled $2.1 trillion in foreign reserves as of June 30 and owns $800 billion of U.S. debt, is among the countries that don’t report allocations.

“Unless you think China does things significantly differently from others,” the anti-dollar trend is unmistakable, Englander said.

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Englander’s conclusions are based on IMF data from central banks that report their currency allocations, which account for 63 percent of total global reserves. Barclays adjusted the IMF data for changes in exchange rates after the reserves were amassed to get an accurate snapshot of allocations at the time they were acquired.

Investors can make money by following central banks’ moves, according to Barclays, which created a trading model that flashes signals to buy or sell the dollar based on global reserve shifts and other variables. Each trade triggered by the system has average returns of more than 1 percent.

Bill Gross, who runs the $186 billion Pimco Total Return Fund, the world’s largest bond fund, said in June that dollar investors should diversify before central banks do the same on concern that the U.S.’s budget deficit will deepen.

“The world is changing, and the dollar is losing its status,” said Aletti Gestielle’s Fiorini. “If you have a 5- year or 10-year view about the dollar, it should be for a weaker currency.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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