New Zealand Consumer Confidence Falls to Record Low

By Tracy Withers

July 7 (Bloomberg) -- New Zealand consumer confidence has fallen to a record low as the economy faces a recession and unemployment rises, according to a survey.

Forty nine percent of 1,119 people surveyed in the two weeks ended June 29 said it was a bad time to a major household item buy, up from 45 percent in a poll completed two weeks earlier, research group Roy Morgan said in a statement on its Web site. Thirty five percent said it was a good time to buy.

New Zealand's economy contracted in the three months ended March 31 and eight of 13 economists surveyed by Bloomberg News expect a contraction in the second quarter, putting the economy in its first recession since 1998. Record-high interest rates are crimping confidence and spending, say retailers.

``The deterioration in confidence bodes ill for retail spending,'' said Shamubeel Eaqub, economist at Goldman Sachs JBWere Ltd. in Auckland. ``Current confidence levels match the lows seen in the early 1990s' recession.''

Sixty four percent of consumers expect the economy will deteriorate over the next year and 58 percent said they are financially worse off than a year earlier, Roy Morgan said. A record-high 33 percent of people expect to be worse off in a year.

Roy Morgan's overall confidence rating fell to 82 from 87.6 in mid-June.

Profit Outlook

Employment fell by the most in 19 years in the three months ended March 31, while the jobless rate increases to 3.6 percent from 3.4 percent. The central bank expects the jobless rate will rise to 4.6 percent by the first quarter next year.

Warehouse Group Ltd., New Zealand's biggest discount retailer, last month cut its profit forecast 10 percent, citing a slump in spending as food and fuel costs soar.

``I don't think there's a household in the country that's not under pressure financially from the burden of these higher food and petrol costs,'' Chief Executive Officer Ian Morrice said in a June 27 interview.

Reserve Bank Governor Alan Bollard said last month that slow growth means it is ``likely'' he will cut the official cash rate from a record 8.25 percent this year. Twelve of 13 economists surveyed by Bloomberg News predict a rate reduction by September.

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



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Japan Should Take Steps to Attract Sovereign Funds

By Shigeru Sato and Tomoko Yamazaki

July 7 (Bloomberg) -- Japan should adopt measures aimed at attracting more of the almost $3 trillion managed by sovereign wealth funds, a trade ministry report said.

The nation must welcome state funds that ``have no political purposes and invest for the long term,'' said a document to be released on July 9 by a trade ministry advisory panel, a copy of which was obtained by Bloomberg News. Any measures should conform to guidelines being drawn up by the International Monetary Fund, the report said.

Japan is seeking to rebound from the first drop in stock ownership by foreigners in five years, as investors including the California Public Employees' Retirement System question corporate governance in Asia's largest economy. Sony Corp. and Cosmo Oil Co. are among Japanese companies that received investments from sovereign funds in the past year.

``An increase in funds that will provide risk money bears significance,'' said Naka Matsuzawa, chief strategist at Nomura Holdings Inc. in Tokyo.

Japan will demand state-run funds increase transparency in line with frameworks being developed by the IMF and the Organization for Economic Cooperation and Development, the report said. The nation won't seek to develop its own set of codes, according to the report.

The trade ministry postponed publication of the report until June 9, it said today.

Code of Conduct

Sovereign wealth funds may oversee more than $10 trillion seven years from now, up from $2.9 trillion now, according to the report. Concerns among U.S. lawmakers that their investments are motivated by politics appear to be unfounded, it said.

``Japan needs to come up with measures in cooperation with the IMF and OECD to attract more sovereign wealth funds that will benefit the nation as a whole,'' the report said. ``Investments made by global sovereign wealth funds have caught international attention and Japan needs to examine them from various angles.''

In May, the IMF held a first meeting in the U.S. as part of plans to produce guidelines for state investment pools. A draft of the code will be ready in October, Mohsin Khan, IMF regional director for the Middle East and Central Asia, said May 12.

The working group includes representatives from several developed economies and the countries that run some of the largest investment funds, such as Norway, China, Kuwait, Russia and Singapore.

China's New Fund

Sovereign wealth funds, state-sponsored pools from governments including the United Arab Emirates, invested $58 billion in the first quarter, more than they spent from 2000 to 2005, according to a report by Cambridge, Massachusetts-based Grail Research, a unit of consulting firm Monitor Group.

Record oil prices have boosted revenue for Middle Eastern nations, Russia and Norway, swelling their coffers. Meanwhile, China's runaway trade surplus pushed its foreign reserves higher, leading last year to the creation of the $200 billion China Investment Corp.

Much of this year's investment by sovereign funds has been directed at global banks such as Citigroup Inc. and UBS AG that are battling to repair balance sheets savaged by writedowns on credit market holdings. Financial firms worldwide have raised $321 billion since U.S. mortgage defaults triggered a global credit crunch a year ago, data compiled by Bloomberg show.

Japan, meanwhile, is struggling to attract more funds into what European Union Trade Commissioner Peter Mandelson in April called the developed world's ``most closed'' market.

Sony, Cosmo

Foreign direct investment in Japan was about 3 percent of gross domestic product at the end of 2007, according to the Cabinet Office. That compared with 45 percent in England, 14 percent in the U.S. and 8.8 percent in South Korea.

The government will review corporate taxes as part of a push to make Japan more competitive, according to a draft of its economic and fiscal policy released last month. Japan is seeking to boost foreign investment's share of GDP to 5 percent by 2010.

Dubai International Capital LLC, the $13 billion fund manager whose investors include the emirate's ruler, bought shares in Sony, the world's second-largest consumer electronics maker, last year in its first investment in a Japanese company.

Abu Dhabi's International Petroleum Investment Co. bought a more than 20 percent stake in Cosmo Oil Co., Japan's fourth- largest refiner, in October for about 90 billion yen ($843 million). Government of Singapore Investment Corp. bought the Westin Tokyo hotel from Morgan Stanley in February.

Japan's Own Fund

The trade ministry joins the nation's Financial Services Agency in making clear its wish to open up for sovereign funds. In February, Yoshimi Watanabe, Japan's minister for financial services, said Japan would welcome investment by China's CIC after meeting the head of the fund, Gao Xiqing.

Meanwhile, legislators are debating whether Japan should set up its own sovereign wealth fund.

A panel of the ruling Liberal Democratic Party is set to submit its proposal to Prime Minister Yasuo Fukuda for the creation of a state fund with 10 trillion yen in assets, using money drawn from the nation's pension reserves.

To contact the reporters on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net; Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net.



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Taiwan's Export Growth Probably Slowed, Inflation Accelerated

By James Peng and Chinmei Sung

July 7 (Bloomberg) -- Taiwan's June export growth probably slowed as demand from the U.S. and Europe faltered while inflation probably accelerated to its highest this year on fuel and food costs.

Overseas shipments rose 16.5 percent from last year, slowing from May's 20.5 percent, while June's consumer prices climbed 4.05 percent, quickening from May's 3.71 percent, according to the median estimate of economists surveyed by Bloomberg News. Both reports are scheduled for release at about 4 p.m. today in Taipei.

Slower exports add to the economic woes faced by central bank Governor Perng Fai-nan, who last month raised the key interest rate for the 16th consecutive quarter to quell inflation that the government expects to accelerate to a 13-year high this year. Slower global growth is reducing demand for electronics from Taiwan and Singapore and vehicles from Japan and South Korea.

``We expect slowing shipments of electronics and possibly another month of year-on-year sales contraction to the U.S. as well as weaker shipments to Europe,'' said Tony Phoo, an economist at Standard Chartered Bank in Taipei.

China and the U.S. are Taiwan's two biggest overseas markets. Overseas shipments are equivalent to about 50 percent of the island's gross domestic product. Sales of electronics to the world's fastest growing major economy have helped Taiwan weather the fallout from slowing U.S. economic growth, which has cut demand for Asian exports.

Taiwan's trade and investment with China, which regards the island as one of its provinces, are improving. The first direct flights took Chinese tourists to the island last week, ending a six-decade ban that deprived Taiwan of visitors from its closest neighbor.

First-Quarter Growth

China's economy expanded 10.6 percent in the first quarter, compared with 11.9 percent for the whole of last year, an easing its central bank described last week as ``moderate.''

``Slower export growth is widely expected because the U.S. still shows no significant sign of a recovery,'' said Johnson Hsu, an economist at Jih Sun Securities in Taipei. ``The market is expecting government spending in the second half to offset the shortfall in U.S.''

Imports rose 17.5 percent in June, accelerating from May's 17.6 percent increase, according to the economist survey.

Taiwan's economy grew in the first quarter by a faster-than- expected 6.06 percent, bolstered by overseas shipments and a pickup in consumer spending. The island joined Japan, Hong Kong and Malaysia in reporting economic growth that exceeded expectations.

Many Taiwanese electronics makers ship parts to China that are re-exported as finished products to other markets. More than 85 percent of Taiwan's computer products are made in China.

Export orders from China and Hong Kong combined advanced 15.3 percent in May from a year earlier. Orders are indicative of actual shipments over the next one to three months.

Consumer Prices

Central bank Governor Perng last month made a surprise increase in the amount of cash banks must put aside for the first time since 1989, sending the island's benchmark Taiex index to a five-month low.

``Consumer prices will probably stay high in the coming months because of fuel prices and that will prompt the central bank to keep raising rates in September,'' said Hsu of Jih Sun Securities.

The statistics bureau last month boosted its 2008 inflation forecast to 3.29 percent, which would be the fastest rate since 1995, up from a February projection of 1.98 percent.

Taiwan's central bank raised its benchmark discount rate on 10-day loans to banks by 12.5 basis points to 3.625 percent on June 26, the highest since May 2001. It also asked the banks to increase the amount of passbook deposits it sets aside by 1.25 percentage points to 11.025 percent.

The following table shows estimates for consumer prices from a year earlier:

--------------------------------------------
                                       CPI
Firm                                    YoY%
--------------------------------------------
Median                                  4.05%
Average                                 4.08%
High                                    4.51%
Low                                     3.81%
Number of Estimates                      12
Prior                                  3.71%
--------------------------------------------
Action Economics                       4.10%
CIMB-GK Research                       3.90%
ChinaTrust Commercial Bank             4.10%
DBS Group                              4.00%
HSBC                                   4.00%
ING Groep NV                           3.90%
Japan Center for Intl Finance          3.90%
Polaris Securities                     4.10%
SinoPac Holdings                       4.51%
Standard Chartered Bank                4.50%
Taiwan Securities Investment Adv       3.81%
Thomson IFR                            4.10%
--------------------------------------------


To contact the reporter on this story:
[bn:PRSN=1] James Peng [] in Taipei at
jpeng7@bloomberg.net;
[bn:PRSN=1] Chinmei Sung [] in Taipei at
csung4@bloomberg.net.

                  

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Hu, Fukuda Warm China-Japan Ties, Shifting Strategic Balance

By Dune Lawrence and Bradley K. Martin

July 7 (Bloomberg) -- When Hu Jintao arrives on Hokkaido island today as a guest of the Group of Eight leaders, it will be his second time on Japanese soil in two months -- after a decade in which China's top leader stayed away.

Since Hu's May meeting with Prime Minister Yasuo Fukuda, a Japanese warship docked in China for the first time since World War II, the two nations agreed to jointly develop a disputed gas field and China invited Japanese rescuers to aid victims of the Sichuan earthquake.

The developing relationship between Asia's largest economies has implications for their neighbors and around the world. ``Most countries in Asia are somewhat uncomfortable with China's reemergence,'' says Steve Tsang, a fellow in modern Chinese studies at St. Anthony's College, Oxford, U.K. ``If the Chinese can actually make China-Japan relations stable, it's very successful diplomacy.''

Reassuring Asian nations that China's rise needn't pose a security threat might also call into question the need for a U.S. counterweight. About 80,000 U.S. troops are stationed in South Korea and Japan to provide a buffer against North Korea and China, both of which have nuclear weapons.

``Good relations with China, then with South Korea, then with North Korea, that would change the international situation surrounding Japan's security policy,'' says Koichi Kato, a lawmaker for the ruling Liberal Democratic Party and a former defense minister. ``That would have very strong implications for U.S.-Japan relations.''

Partners, Not Rivals

During his May visit, Hu, 65, urged the nations to strive for mutual strategic trust. ``Japan and China should recognize each other as partners, not as rivals,'' he said in a speech at Tokyo's Waseda University.

They have much to gain from a thaw. The two countries' economies are increasingly interdependent: China is already Japan's largest trading partner, with bilateral commerce surpassing 27 trillion yen ($253 billion) last year. Japan's exports to the world's fastest-growing major economy have more than tripled since 2000.

In addition, China's outreach reflects the government's desire to use the Olympic Games in Beijing next month to showcase its peaceable credentials, which were tarnished by its suppression of March demonstrations in Tibet and disruptions to Olympic torch ceremonies in London and Paris.

`Tentative'

So far, the improvement in relations remains ``tentative,'' says Ezra Vogel, the former head of Harvard University's Asia Center and now a professor emeritus. ``I don't think we're yet at the stage where there is popular support in China for good relations with Japan, or confidence in Japan that relations are stable and completely trustworthy.''

Still, any improvement is noteworthy, as much because of the two nations' shared, tortured history as because of their economic importance.

Japan occupied China between 1931 and 1945, a brutal period epitomized by the Nanjing massacre of 1937, when Japanese troops sacked the city for six weeks. The Chinese government estimates that more than 300,000 people were slaughtered; a 1948 war-crimes tribunal in Tokyo concluded that at least 155,000 people died.

As recently as a year ago, a group of lawmakers from Japan's ruling Liberal Democratic Party stirred a diplomatic dispute when they said they were ``unable to confirm the facts of a massacre'' and called on China to remove photos displayed at war museums in Nanjing and elsewhere.

Loath to Apologize

Such incidents have cemented in the Chinese mind an image of Japan as a nation loath to acknowledge and apologize for its conduct -- an image reinforced for decades by the Communists who came to power in China in 1949.

``Japan was demonized in state education as a way of shoring up the sagging legitimacy of the Communist Party, which took credit for defeating the invaders,'' says Jeffrey Kingston, director of Asian studies at Temple University in Tokyo.

The chapter on the occupation in a Chinese high-school history study guide first published in 2004 has a section entitled ``Japanese Soldiers' Heinous Crimes.'' It ends by noting, ``Guarding against the revival of Japanese militarism and fascism remains one of the most important problems that we face.''

In April 2005, tens of thousands of Chinese marched on Japan's Shanghai consulate, hurling rocks and paint bombs, to protest new Japanese textbooks they said glossed over wartime atrocities. A September 2006 Pew Global Attitudes survey found that 81 percent of Chinese respondents said Japan hasn't apologized enough for its World War II conduct.

Impediment

China's leaders, though, may see such attitudes as an increasing impediment to their plans for developing the economy and increasing the nation's international influence.

``There's a growing sense in China that Beijing needs a good relationship with Japan to do what it wants,'' says Brad Glosserman, executive director of Pacific Forum CSIS, a Honolulu-based research institute. ``A more congenial leadership in Japan, one that doesn't deliberately offend Chinese sensitivities, makes that possible.''

China has found some of that congeniality in Fukuda. Unlike his predecessors, the 71-year-old prime minister has promised not to visit Tokyo's Yasukuni shrine, where convicted war criminals are among those memorialized, and which China and South Korea say symbolizes Japan's militaristic past. During a trip to China in December, Fukuda said the two countries had a ``historic opportunity'' to improve relations.

Soccer and Basketball

Last month's five-day visit by the Japanese destroyer ``Sazanami'' to the southern Chinese port of Zhanjiang yielded news accounts of sailors playing tug-of-war, soccer and basketball with crew members from the Chinese warship ``Shenzhen.''

Of more substance was the June 18 accord to jointly develop natural-gas fields in the East China Sea, setting aside a four-year argument between Asia's biggest energy consumers over who owned the reserves. Japan had complained that efforts by Cnooc Ltd., China's biggest offshore oil producer, to tap the Chunxiao field would have siphoned off gas from its side of a boundary line.

While it's hard to gauge public reaction in China's controlled society, not everyone is thrilled about the rapprochement. Hours after the gas accord was announced, a person identified as ``Deliberate Blogger'' on the Sina.com Web portal declared ``This is not only giving in, it's a mistake and a humiliation in the long course of history of our generation.''

Unworthy of Respect

Another blogger, Gelu 1989, said in a June 20 post: ``I oppose Japan in my bones, because a country that doesn't respect history isn't worth my respect.''

Kenneth Lieberthal, who was director for Asia on the White House National Security Council during Bill Clinton's presidency, says the U.S. has an interest in improved Chinese- Japanese relations -- to a point.

While the U.S. wants to promote regional stability and a united front in dealing with North Korea, a resolution of all outstanding differences might allow China and Japan to combine to limit American influence in Asia, he says.

Lieberthal, now an Asian scholar at the University of Michigan in Ann Arbor, sees little chance of that happening. ``This is not about to become a warm and fuzzy relationship,'' he says. ``That degree of closeness is not in the cards.''

A panel of Chinese and Japanese scholars, set up in 2006 in an attempt to reconcile their versions of history, may provide a barometer. Shinichi Kitaoka, a professor of diplomatic history at the University of Tokyo who heads the Japan team, says the group plans to publish a report by the end of August that presents each side's account of historical events and counter-critiques.

``We never expected to come to an agreement on our interpretations in this first round,'' Kitaoka said in an interview in Tokyo. ``We agreed to disagree, which in itself is a success.''

To contact the reporters on this story: Dune Lawrence in Beijing at dlawrence6@bloomberg.netBradley K. Martin in Tokyo at bmartin18@bloomberg.net or



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Australian Job Vacancies Drop by Most in 19 Months

By Victoria Batchelor

July 7 (Bloomberg) -- Australian job-vacancy advertisements declined by the most in almost two years in June, adding to signs employers will pare hiring as economic growth slows.

Jobs advertised in newspapers and on the Internet fell 3 percent from May to an average of 262,075 a week, the biggest drop since November 2006, according to an Australia & New Zealand Banking Group Ltd. report released in Melbourne today.

The central bank raised interest rates to a 12-year high in March to engineer a slowdown in the economy and cool inflation that is running at the fastest pace in almost two decades. Governor Glenn Stevens left borrowing costs unchanged for a fourth month last week, saying there are ``tentative signs'' the jobs market is easing and domestic demand is moderating.

``This report is consistent with a softening in the labor market,'' said Sally Auld, co-head of economics at ANZ Bank in Melbourne. ``Employment growth should ease modestly over the next six months.''

The Australian dollar traded at 96.17 U.S. cents at 11:35 a.m. in Sydney from 96.20 cents before the report was released. The two-year government bond yield fell to 6.74 percent from 6.82 percent on July 4.

Employers cut 19,700 workers in May, ending a record 18 months of job gains, the government reported on June 12.

Economy Slows

Other figures suggest the economy's expansion is losing momentum after the central bank raised its benchmark interest rate to 7.25 percent in March.

The construction industry contracted for a fourth month in June as rising borrowing costs reduced demand for houses and factories, the Australian Industry Group said today.

Qantas Airways Ltd., Australia's largest carrier, said in June that it will slash services to Japan, shift other Asian routes to low-cost unit Jetstar and cut jobs in response to surging fuel costs.

The number of jobs advertised in newspapers fell 3.5 percent in June, today's report showed. Vacancies on the Internet declined 2.9 percent.

To contact the reporter on this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net.
Last Updated: July 6, 2008 21:52 EDT



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TIPS Flunk Inflation Test as Fuel, Food Overtake CPI

By Sandra Hernandez

July 7 (Bloomberg) -- Treasury Inflation Protected Securities aren't living up to their name for bond investors who say they can't trust the way the U.S. government calculates the rising cost of consumer goods.

Morgan Stanley, the second-biggest securities firm, and FTN Financial, a unit of Tennessee's largest bank, are telling clients to pare holdings of TIPS, whose principal amount rises with the Labor Department's consumer price index. Morgan Stanley says derivatives tied to inflation expectations are a better bet, while FTN recommends corporate and agency bonds because the index doesn't reflect the actual rate of U.S. inflation.

The $500 billion TIPS market's 5 percent returns this year have beat a 2.2 percent gain for Treasuries, according to Merrill Lynch & Co. indexes. TIPS should pay more, because the consumer price index downplays the 39 percent increase in gasoline and a 133 percent rise in corn in the past year, investors say. Yields on TIPS relative to Treasury debt, a gauge of traders' inflation bets, barely changed over the past 18 months even as consumer expectations for prices climbed to 3.4 percent, the highest since 1995.

``The consumer price index underestimates inflation,'' said Jeremy Wolfson, who oversees $8.5 billion as chief investment officer at the City of Los Angeles Department of Water and Power Pension Fund. ``Whether TIPS are adding a true inflation hedge, that's arguable based on the CPI component of it.''

TIPS pay a lower coupon than Treasuries because investors expect the inflation adjustment on the principal to make up the difference. Traders who expect inflation to increase bet that the gap, or spread, between yields on TIPS and Treasuries will widen. The bigger the so-called breakeven rate, the greater traders' expectations that prices will go up.

`Barely Budged'

TIPS ``haven't paid off'' because the breakeven rate has ``barely budged'' over the past 18 months, said George Goncalves, chief Treasury and agency bond strategist with Morgan Stanley in New York.

TIPS due in two or more years show traders see inflation slowing from its current level. In contrast, U.S. consumers expect it to climb to 5.1 percent a year from now, a monthly survey by the University of Michigan showed. Consumer prices rose at a 4.2 percent annual pace through May, more than double the rate as recently as August, according to the Labor Department.

Ten-year TIPS yield 2.61 percentage points less than Treasuries of similar maturity, up 0.31 percentage point since the start of 2007. This year's high of 2.68 percent on March 13 remains below a record of 2.78 percent in March 2005, when inflation increased at a 3.1 percent annual rate. TIPS were first sold by the U.S. government in 1997.

`Out Of Favor'

``They have fallen out of favor with us,'' said Thomas Atteberry, a partner at Los Angeles-based First Pacific Advisors, who manages $3.5 billion in bonds. ``CPI understates what's really going on in the economy from an inflation standpoint,'' he added.

Some analysts say CPI overestimates inflation. The measure overstates changes in living costs by 0.9 percentage point per year, according to a 2003 report by Federal Reserve economists David Lebow and Jeremy Rudd.

Treasuries posted the worst returns since 2004 in the second quarter, losing 2.1 percent before interest, on speculation policy makers will raise borrowing costs this year to curb inflation. The Fed left the benchmark U.S. interest rate unchanged at its June 25 meeting, halting a series of seven cuts since September. Rising energy prices, unemployment, and financial-market ``stress'' may weigh on the economy, though inflation should ``moderate'' later this year, Fed officials said.

`Not the Answer'

Economic growth probably slowed to 0.5 percent last quarter, based on the median forecast from economists surveyed by Bloomberg on June 12. Inflation will probably fall to 2.9 percent by the first quarter of 2009, a separate survey the same day showed, with projections ranging from 2.4 to 5 percent.

TIPS are ``doing better than a lot of things at hedging out that inflation, but it's still not the answer,'' said William Chepolis, who oversees $9 billion in fixed income at DWS Scudder, a unit of Deutsche Bank AG. ``Now the interest has morphed into, `OK, if I buy a TIPS fund, am I offsetting some of the extra money that I have to lay out at the gas pump or the grocery store?'''

Investors should purchase derivatives that exploit concerns about inflation more efficiently than TIPS, Morgan Stanley advises. So-called swaptions allow investors to buy the right to purchase an inflation swap, in which one party agrees to pay a fixed rate in exchange for the inflation rate. Even if the CPI doesn't immediately rise, the instrument gains value on expectations for future increases.

Inflation Derivatives

One-year inflation swaptions returned about 0.3 percentage points in April and May, the most recent period for which data is available, according to Morgan Stanley. That compares with a 2 percent loss by TIPS of all maturities, according to Merrill Lynch.

Derivatives are contracts whose value is derived from assets like stocks or linked to events like inflation and the weather. Swaptions are options on interest-rate swaps.

``We've seen pretty good development of the derivatives market and so certainly there's a lot more hedging of inflation with that,'' said Chris McReynolds, managing director of U.S. dollar inflation trading at Barclays Plc in New York, the biggest TIPS dealer.

Many investors prefer TIPS because they're backed by the government, while derivatives depend on the credit quality of the firm that issues them, he said.

A `Cheat'

William Fleckenstein, president of Fleckenstein Capital Inc. in Seattle and co-author of ``Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve,'' isn't one of those investors.

``One reason why I've never owned TIPS is because I knew the CPI was a cheat,'' he said.

Criticisms of the CPI center on the practice of understating price increases to account for quality improvements in goods like cars and computers. The government also changes the basket of goods it uses to calculate CPI, replacing more expensive products with cheaper ones.

``I figured somewhere along the way people would revolt over these bizarre calculations and maybe someday TIPS would offer some value,'' Fleckenstein said. ``So far they don't.''

To contact the reporter on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net.



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Australia's Construction Index Shrinks for Fourth Month in June

By Victoria Batchelor

July 7 (Bloomberg) -- Australia's construction industry contracted for a fourth month in June as lending rates at a 12- year high reduced demand for houses and factories.

An index measuring construction edged up to 40.3 points last month from 36.9 in May, according to a report by the Australian Industry Group and Housing Industry Association released in Sydney today. A reading below 50 indicates the construction industry is declining.

Slowing building work will further cool an economy that grew at the weakest pace in almost two years in the first quarter. Reserve Bank Governor Glenn Stevens left Australia's benchmark interest rate unchanged at 7.25 percent last week, saying four increases since August are working to moderate domestic demand and damp inflation pressures.

``The outlook remains subdued, with further weakness in activity likely to persist over coming months,'' said Tony Pensabene, an associate director of economics at the Australian Industry Group. ``Falling demand, weaker economic conditions and increased competition for work are cited by firms for the continued falloff in activity.''

Today's survey is based on responses from about 120 construction companies on sales, new orders, deliveries, employment and input costs.

To contact the reporter on this story: Victoria Batchelor in Sydney at vbatchelor@bloomberg.net.



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Australia June Job Advertisements: Summary (Table)

By Daniel Petrie

July 7 (Bloomberg) -- Following is a summary of Australia's June job advertisements according to the monthly report published by the Australia & New Zealand Banking Group Ltd. in Melbourne.

==============================================================================
                   June      May    April    March     Feb.     Jan.     Dec.
                   2008     2008     2008     2008     2008     2008     2007
==============================================================================
               ---------------------------- MoM% ----------------------------
Total              -3.0%    -1.7%     3.1%    -0.7%    -2.1%     0.8%     4.9%
Newspaper         -3.5%   -13.5%    16.1%   -10.5%    -0.1%    -9.0%     2.4%
Internet          -2.9%    -0.7%     2.2%     0.1%    -2.2%     1.7%     5.1%
               ---------------------------- YoY% ----------------------------
Total               6.2%     9.5%    20.8%    20.8%    24.3%    30.7%    31.0%
Newspaper        -17.9%   -16.0%    -0.4%   -15.0%    -3.8%    -4.7%     3.5%
Internet           8.3%    11.8%    22.8%    24.4%    27.2%    34.4%    33.9%
               --------------------------- Number ---------------------------
[bn:WBTKR=AULFANTJ:IND] Total []            262,705  270,751  275,326  267,041  268,795  274,430  272,137
[bn:WBTKR=AULFANZJ:IND]  Newspaper []        16,593   17,196   19,870   17,115   19,118   19,139   21,026
==============================================================================
                   June      May    April    March     Feb.     Jan.     Dec.
                   2008     2008     2008     2008     2008     2008     2007
==============================================================================
               --------------------------- Number ---------------------------
[bn:WBTKR=AULFANIJ:IND]  Internet []        246,112  253,554  255,456  249,926  249,677  255,291  251,111
==============================================================================

Note: Historical figures may have been revised since the previous release.

Source: Australia & New Zealand Banking Group Ltd

To contact the reporter on this story: Daniel Petrie in Sydney at dpetrie5@bloomberg.net

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Euro Declines to One-Week Low Before German Production Report

By Kosuke Goto and Stanley White

July 7 (Bloomberg) -- The euro fell to the lowest in more than a week against the dollar before a central bank report today that economists forecast will show German industrial production growth slowed in May.

The dollar also rose versus the yen on speculation leaders from the Group of Eight nations will signal they favor a stronger U.S. currency. Cooling economic expansion may deter the European Central Bank from increasing borrowing costs, diminishing the allure of euro-denominated assets.

``The sentiment on the euro is bad,'' said Kenichi Nishii, manager of the foreign-exchange trading department at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's biggest publicly traded lender. ``Faced with a worsening economic outlook, the ECB won't be able to raise rates anytime soon. The markets are also wary of any comments on dollar weakness from the Group of Eight summit.''

The euro fell to $1.5627 against the dollar, the lowest since June 25, before trading at $1.5636 as of 6:48 a.m. in London, compared with $1.5706 on July 4 in New York. It traded at 167.77 yen from 167.73. The dollar rose to 107.32 yen, the highest since June 26, from 106.80.

The South Korean won snapped two days of losses, rising 0.8 percent to 1,041.90 per dollar, after the government pledged ``stern action'' to stabilize the currency.

South Korea, India and Vietnam will fail to halt declines in their currencies by using intervention because their economies are slowing and trade deficits widening, said Morgan Stanley, the second-biggest U.S. securities firm.

`No Bias'

The 15-nation currency declined last week after ECB President Jean-Claude Trichet said he has ``no bias'' following the decision to raise the main refinancing rate by a quarter- percentage point to 4.25 percent.

Annual growth in German industrial production slowed in May to 3.5 percent, from 4.8 percent the prior month, according to the median forecast of 27 analysts surveyed by Bloomberg News. That would be the slowest since August 2005. The Bundesbank in Frankfurt will release the data at noon today.

U.S. President George W. Bush, on the first day of his five- day trip to Japan, said yesterday the U.S. will continue to pursue a strong dollar.

``The U.S. believes in a strong dollar policy,'' Bush said at a news conference with Japanese Prime Minister Yasuo Fukuda in Tokyo yesterday. The economy of the U.S. remains fundamentally strong even as growth has slowed, he said.

Pound Drops

The British pound weakened to a one-week low against the dollar on speculation U.K. industrial production fell 0.1 percent in May, after a 0.2 percent increase in April, according to the median forecast of analysts surveyed by Bloomberg News.

``Should industrial production data due today turn out to be weaker, that would raise concern over the U.K. economy further and lead to a decline in the pound,'' Tohru Sasaki and Junya Tanase, currency strategists at JPMorgan Chase & Co. in Tokyo, wrote in a research note today.

JPMorgan, the third-largest U.S. bank, predicted the Bank of England will keep borrowing costs on hold ``for the time being,'' a change from its previous estimate for higher rates in August.

The pound slid to $1.9753 against the dollar, the lowest since June 26, from $1.9823 on July 4. It may fall to $1.94 by the end of September, Sasaki said, confirming the research note.

Dollar Weakness

The Australian dollar bought 96.12 U.S. cents, near a 25- year high of 96.68 cents, before data that may show employment rebounded last month.

Australian job-vacancy advertisements declined by the most in almost two years in June, according to an Australia & New Zealand Banking Group Ltd. report released in Melbourne today.

Gains in the dollar may be limited by speculation industry reports this week will show U.S. home sales declined and consumer confidence fell to a 28-year low.

``The trend is for the dollar to weaken,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co. ``The data simply don't paint a favorable picture of the U.S. economy and that makes the dollar unattractive.''

The dollar may fall to $1.5730 per euro today, he forecast.

Pending home resales fell 2.5 percent in May following a 6.3 percent advance the previous month, according to a Bloomberg News survey of economists. The National Association of Realtors will release the data tomorrow at 10 a.m. in Washington.

The University of Michigan will say July 11 that its index of consumer sentiment fell to 55.5 this month, the lowest since May 1980, from 56.4 in June, according to a separate survey.

Credit Suisse Group AG, Merrill Lynch & Co. and Barclays Plc are telling investors to sell the peso in a bet Argentine President Cristina Fernandez de Kirchner will stop driving up the currency as the country's five-year-old expansion falters. The peso will drop 4 percent in the next year to 3.2 per dollar from 3.08, according to the median estimate of 13 analysts in a Bloomberg survey. It last stood at 3.0810.

``A slowing economy will pressure the government into letting the peso weaken,'' said David Beker, a currency strategist at Merrill Lynch in New York. He forecasts the peso will slide to 3.25 by year-end.

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net



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Fernandez Peso Gambit May Backfire as Argentina Slows

By Lester Pimentel and Drew Benson

July 7 (Bloomberg) -- Argentine President Cristina Fernandez de Kirchner's bid to use the peso as a weapon to quell striking farmers may be on the verge of failing.

The country sold about $2.6 billion of foreign currency reserves in the past two months, breaking a five-year policy of buying dollars and sparking a 3.4 percent peso rally, the biggest since 2003. While the gains cut into profits of farmers who had caused food shortages to protest higher export taxes, they also added to the woes of manufacturers from leather-goods maker ZH SA to yarn producer TN & Platex.

Credit Suisse Group AG, Merrill Lynch & Co. and Barclays Plc are telling investors to sell the peso in a bet Fernandez will stop driving up the currency as Argentina's five-year-old expansion falters. The peso will drop 4 percent in the next year to 3.2 to the dollar from 3.08, according to the median estimate of 13 analysts in a Bloomberg News survey.

``A slowing economy will pressure the government into letting the peso weaken,'' said David Beker, a currency strategist at Merrill Lynch in New York. He forecasts the peso will slide to 3.25 by year-end.

Argentina will suffer the ``sharpest'' economic slowdown in Latin America, Merrill said in a June 27 report to clients. The firm cut its 2008 growth forecast for the country to 6.8 percent from 7.5 percent and its 2009 projection to 3.1 percent from 4.2 percent. The median estimate in a central bank survey of 57 economists published last month was for expansion of 7.5 percent this year and 5.5 percent in 2009.

`A Disaster'

Industrial output growth slowed to 5.9 percent on average in the four months through May from 10.5 percent the previous four months, according to the government.

Buenos Aires-based TN & Platex, the country's biggest yarn and thread maker, furloughed 400 workers, or 18 percent of its staff, last week after the peso rally diminished profit margins already hurt by rising costs, said company President Teddy Karagozian. BPGroup SA, a Buenos Aires-based auto-part exporter, said it lost $120,000 of international sales orders in recent weeks after the peso's gains pushed up costs in dollar terms.

``The exchange rate is a disaster,'' BPGroup President Alberto Borga said. ``We're all suffering because they want revenge on the farmers.''

The farmers have yet to back down. Miguel Calvo, vice president of the Argentine Soy Chain Association, said last week that the farmers may resume the strike if Congress passes a bill that converts Fernandez's tax increase into a permanent law.

Record Exports, Reserves

``The government has been unable to weaken and defeat the farmers,'' said Daniel Kerner, a Latin America analyst at the Eurasia Group, a New York-based firm that analyzes political risk for businesses. ``The cost for the government has been huge. They have alienated the industrial sector, which has been a strong supporter of the government.''

Fernandez's predecessor, her husband, Nestor Kirchner, had kept the peso weak to help fuel an export-led expansion.

The economy grew 8.8 percent on average over the past five years, rebounding from a $95 billion debt default in 2001 and its worst recession on record.

Exports, which account for about 14 percent of the country's gross domestic product, jumped to a record $63.4 billion in the 12 months through May. The peso held between 3.0345 and 3.1795 -- a range of less than 5 percent -- in the two-year period through March as the central bank purchased dollars. The bank's foreign reserves reached an all-time high of $50.5 billion on March 27.

Fernandez, 55, said in a speech last month that her husband's weak peso policy helped make the agricultural industry ``the most profitable'' in the country. Argentina is the world's second-largest corn exporter, third-biggest soybean exporter and fifth-largest supplier of wheat.

Cement Shortage

The central bank reversed tack in April after the farmers went on strike across the Pampas that surround Buenos Aires.

Upset that Fernandez raised a tax on soybean and sunflower seed exports in March, the farmers blocked roads and withheld products. The protests sparked shortages of everything from cooking oil to cement and contributed to an inflation rate that Merrill estimates is 25 percent.

Merrill, like other banks, does its own Argentine inflation calculation after the employees union at the National Statistics Institute said last year that a Kirchner appointee forced statisticians to break from standard data-gathering procedures. Fernandez says the institute's consumer price index, which registered annual inflation of 9.1 percent in May, is accurate.

`Greedy' and `Confused'

Fernandez has called the farmers ``greedy'' and ``confused'' for opposing a tax increase that she says will fund food subsidy programs. Her approval rating sank to 20 percent last month from 57 percent in January, a month after she took office, according to a June 19 poll of 1,000 people by Buenos Aires-based Poliarquia Consultores.

Demand for dollars soared as investors pulled money out of the country on concern the strike would trigger the second government default this decade. Yields on benchmark inflation- linked bonds due in 2033 jumped on May 14 to 11.7 percent, the highest since they were issued three years ago, according to Citigroup Inc. The bonds yielded 5.95 percent a year earlier.

The run on the peso eased within weeks, yet the central bank kept selling dollars, driving up the currency. It touched 3.0085 on June 24, the strongest since December 2005.

``It became noticeable by mid-May that the central bank was using intervention as a form of punishment for currency speculators and the farm sector,'' said Daniel Bou Kahir, a currency trader at Banco de la Pampa in Buenos Aires.

No Profit Growth

Raul Zylbersztein, who runs ZH, a Buenos Aires-based leather-goods maker founded in 1945, said the government is hurting ``its own troops.''

The manufacturers ``are the defenders of this model and the government knows it can't bomb us,'' Zylbersztein said. The company has had no profit growth in the past four years as its local costs climbed. ``You have to make more to get the same'' returns, he said.

Karagozian, the president of TN & Platex, said he had tried to avoid furloughing the 400 workers.

``We had been putting off the decision but we couldn't any longer,'' Karagozian said. The peso rally made ``the situation worse. The government will have to make changes soon.''

To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net; Drew Benson in Buenos Aires at abenson9@bloomberg.net




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Banking Crisis May Cause $1.6 Trillion in Losses, Sonntags Says

By Oliver Biggadike

July 7 (Bloomberg) -- The global credit-market crisis will cause $1.6 trillion in losses at financial companies, the SonntagsZeitung said on its Web site, citing a confidential study from hedge-fund manager Bridgewater Associates Inc.

There will probably be an ``avalanche'' of distressed securities and financial institutions may not be able to raise enough new capital to cover their losses, the Zurich-based German-language newspaper said, citing the report.

The contraction in credit markets has saddled banks and brokerages with more than $400 billion in writedowns since the beginning of last year, according to data compiled by Bloomberg. Financial companies have raised $321 billion in capital over the same period, Bloomberg data show.

Capital is a buffer that insulates depositors at a bank from losses.

To contact the reporter on this story: Oliver Biggadike in Tokyo at obiggadike@bloomberg.net.



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Chile and Colombia: Latin America Bond and Currency Preview

By Jamie McGee and Andrea Jaramillo

July 7 (Bloomberg) -- The following events and economic reports may influence trading in Latin American local bonds and currencies today. Bond yields and exchange rates are from a previous session.

Chile: Economic activity expanded at a 2.1 percent annual rate in May, compared with a 4.8 percent pace the prior month, according to the median forecast of 11 economists surveyed by Bloomberg News.

The trade surplus widened to $1.5 billion in June, compared with $993 million a month earlier, according to the median forecast of 9 economists surveyed.

The central bank is scheduled to release the growth and trade data at 8:30 a.m. New York time.

The peso weakened 0.5 percent to 511.92 per dollar on July 4, from 509.23 yesterday.

The yield for a basket of five-year peso bonds in inflation-linked currency units fell 8 basis points to 2.76 percent, according to Bloomberg composite prices.

Colombia: The central bank's board discussed the need to ``bolster'' its reputation for fighting inflation at its June meeting as food and oil prices pushed consumer price increases above its annual target, according to minutes released July 4.

Policy makers announced at the June 20 meeting that the central bank would buy $20 million a day in the currency market through competitive auctions to accumulate foreign reserves. Banco de la Republica also left its key rate unchanged at a six- year high of 9.75 percent.

Because of the July 4 U.S. Independence Day holiday, Colombia's currency and government debt market operated in the so-called next-day market, in which payment and delivery are made the following trading day. The peso rose 2.2 percent on July 3 to 1,746.9 per dollar.

The yield on Colombia's benchmark 11 percent bonds due in July 2020 was little changed at 12.68 percent, according to Colombia's stock exchange.

To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net.


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Medvedev May Repair Frayed Ties, Seek Economic Influence at G-8

By Henry Meyer

July 7 (Bloomberg) -- Russian President Dmitry Medvedev, joining his first summit of world leaders today, likely will try to repair ties frayed by predecessor Vladimir Putin's confrontational tactics.

``Medvedev is playing the role of a good cop after Putin to improve Russia's image in the West,'' said Yevgeny Volk, an analyst in Moscow for the Washington-based Heritage Foundation. ``He's a polite person, an educated and intelligent guy.''

The new president will use his softer touch to push for greater weight in the global financial system. In doing so, he will open a new front in a campaign for influence begun by Putin, who mainly focused on expanding Russia's geopolitical clout.

``Russia today is a global player,'' Medvedev told an investment forum in St. Petersburg in May. ``We must recognize its responsibility for the destiny of the world and we want to participate in shaping the new rules of the game.''

Fundamental disagreements remain between the East and West, and there is little chance the new president will resolve them at this week's summit of the Group of Eight industrialized nations in Hokkaido, Japan.

Russia, the world's biggest energy exporter, is challenging the U.S. and its European allies on a range of fronts. It opposes NATO's eastward expansion, Kosovo's independence and U.S. plans for a missile-defense system in former Soviet satellite states.

Medvedev, Putin's handpicked successor, has avoided the former president's aggressive tone since his May 7 inauguration. During his eight years as president, Putin threatened to point nuclear missiles at U.S. allies in eastern Europe.

`Frightening Monster'

Now that he has established a new center of power as prime minister, Putin has continued railing against the U.S. In a Le Monde interview on May 30, the 55-year-old former KGB colonel called the country a ``frightening monster.''

Medvedev, a 42-year-old lawyer, already has made strides toward mending relations. He earned positive reviews from European Commission President Jose Manuel Barroso, 52, after meeting European leaders in Siberia last month. They began talks on an agreement defining all future cooperation between the two sides.

``I hope to have very good working and, if possible, personal relations with President Medvedev,'' Barroso said.

In Japan, the Russian president plans to meet President George W. Bush today for the first time as leaders at 11:30 a.m. The two met in April while Medvedev was president-elect.

Meeting Brown

Medvedev also will hold talks with U.K. Prime Minister Gordon Brown, the first encounter between the two countries' leaders since the 2006 radiation-poisoning murder in London of dissident ex-KGB agent Alexander Litvinenko. Russian authorities refused to extradite a former KGB bodyguard wanted for the crime, sending bilateral ties to a post-Cold War low.

The talks will be a ``step forward,'' Medvedev aide Arkady Dvorkovich said July 3.

The two leaders likely will discuss BP Plc's battle with a group of Russian billionaires for control of TNK-BP, a joint oil-production venture. London-based BP and the Russians each have a 50 percent stake in the company, which provides a quarter of BP's total output and a fifth of its proved reserves.

BP is resisting efforts by the Russians to replace management. The case has prompted warnings from the U.K. and the European Union that the row may damage foreigners' confidence in the security of investing in Russia.

On financial issues, Medvedev wants to translate Russia's economic might into greater influence. Russia has more than $500 billion of currency reserves and is the G-8's fastest-growing economy.

Seeking Balance

The world's financial structure ``should be based on a balance between leading economies,'' Medvedev told reporters from G-8 nations in an interview released July 3.

Medvedev said in the same interview the global financial crisis showed that no single country or currency can guarantee stability. The Russian ruble should become one of the world's reserve currencies, he said.

``The West shaped most of the global financial and economic architecture in its own interests,'' Russian Foreign Minister Sergei Lavrov said June 20. ``Now, with the rapidly growing emerging economies of China, Russia, India and Brazil experiencing a burst in their financial and economic potential, this system's inadequacy is becoming clear.''

Russia's past attempts for a greater say in such matters have been thwarted. Last year, it proposed former Czech prime minister and central bank Governor Josef Tosovsky to head the International Monetary Fund, a post the EU traditionally selects. The EU's candidate, former French Finance Minister Dominique Strauss-Kahn, won the post.

``Russia sees the current balance of forces as transitional,'' said Fyodor Lukyanov, an analyst at the Council on Foreign and Defense Policy in Moscow. ``It is readying itself for a new world order.''

To contact the reporter on this story: Henry Meyer in Toyako, Japan through the Moscow newsroom at hmeyer4@bloomberg.net



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Asian Currencies: Korean Won Advances on Central Bank Support

By David Yong and Judy Chen

July 7 (Bloomberg) -- South Korea's won rose, leading gains across the region, after the government said it will take ``stern action'' to stabilize the currency, including using foreign-exchange reserves to stem its decline.

The currency gained the most in almost three weeks as the central bank also pledged similar action in a statement released today in Seoul. The won has weakened 10.2 percent this year, the second-worst performer of the 10 most-active currencies in Asia outside Japan. China's yuan traded near the highest level since a dollar link was scrapped in July 2005 after the government said fighting inflation will be a ``preeminent'' economic policy.


``The Bank of Korea and Ministry of Finance will do everything to stabilize the market,'' said Jeff Kim, a currency dealer at Korea Exchange Bank in Seoul. ``Currency interventions will follow.''

Korea's currency gained 0.8 percent to 1,042 versus the dollar as of 12:19 p.m. local time, according to Seoul Money Brokerage Services Ltd.

``We will closely watch the won's movement and will take strong necessary measures if the imbalance seems excessive,'' the central bank said today. Finance ministry official Choi Jong Ku said in Seoul that the authorities would consider using foreign-exchange reserves to stabilize the currency market.

Central banks intervene in currency markets by buying or selling foreign exchange. South Korea has purchased about $7 billion of won since the end of May to support its currency, JoongAng Ilbo newspaper reported July 1.

`Preeminent'

The yuan rose to 6.8559 per dollar from 6.8589 at the end of last week, according to the China Foreign Exchange Trade System, extending a six-week rally. Premier Wen Jiabao said yesterday the government's fight against inflation will have a ``preeminent'' role to ensure inflation remains tolerable.

``The currency will rise as the central bank relies on appreciation to control imported inflation,'' said Liu Dongliang, a foreign-exchange analyst in Shenzhen at China Merchants Bank Co., the country's sixth-largest lender. ``The financial authorities may raise interest rates after the Olympics, which will ease their dependence on the currency tool.''

China has allowed its currency to gain 6.5 percent this year, helping to curb the price of imports, as the nation battles to slow consumer-price increases. Vice Premier Wang Qishan said the country will tighten monetary policy, the Shanghai Securities News reported today.

Central bank Governor Zhou Xiaochuan said on June 30 he won't rule out an interest-rate increase to curb inflation near the fastest in 12 years. The People's Bank of China hasn't raised its one-year lending rate after seven increases in 2007.

Malaysian Ringgit

Malaysia's ringgit halted a two-week slide after crude oil prices fell as much as 1.1 percent today, easing concern inflation will accelerate. Some 15,000 people rallied outside the capital Kuala Lumpur yesterday to protest last month's 41 percent increase in gasoline prices at pumps.

``Lower oil prices will give some soothing impact to oil- sensitive economies,'' said Suresh Kumar Ramanathan, a rates and currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. The improved sentiment may help support the currency after it ``risked falling off the radar'' of overseas investors due to the increase in political uncertainty, he said.

The ringgit traded at 3.2667 per dollar, compared with 3.2670 at the end of last week, according to data compiled by Bloomberg. The currency fell 0.1 percent last week.

Malaysia has allowed gasoline and diesel prices to rise seven times since May 2004 to help reduce its subsidy payments and ease the pressure on its budget deficit.

Elsewhere, Indonesia's rupiah was little changed at 9,213 per dollar from 9,212 last week. The Philippine peso fell 0.1 percent to 45.475, Singapore's dollar gained 0.1 percent to S$1.3617 and the Thai baht lost 0.2 percent to 33.59.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net; Judy Chen in Shanghai at xchen45@bloomberg.net.


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Korea, India, Vietnam Intervention to Fail, Morgan Stanley Says

By Patricia Lui

July 7 (Bloomberg) -- South Korea, India and Vietnam will fail to halt declines in their currencies by using intervention because their economies are slowing and trade deficits widening, said Morgan Stanley, the second-biggest U.S. securities firm.

The three central banks have ``repeatedly'' been buying and selling currencies, said Morgan Stanley, as the won, rupee and dong have slipped at least 5 percent in 2008, threatening to accelerate inflation by increasing import costs. Korea, the world's sixth-biggest holder of foreign-exchange reserves, pledged today ``stern action'' to stabilize the won.

``Their intervention will ultimately fail,'' wrote Stewart Newnham, a Hong Kong-based research analyst at Morgan Stanley. ``The best they can hope for, in our view, is to engineer an orderly decline through a `smoothing operation'. And maybe Vietnam cannot even achieve that.''

The won has dropped 10.5 percent this year, Asia's second biggest loser after the Thai baht, to 1,041.75 against the dollar according to Seoul Money Brokerage Services Ltd. India's rupee has lost 8.7 percent to 43.1 per dollar and the dong has slipped 5 percent to 16,847 per dollar.

``By far, the strongest pressure is on the Vietnamese dong'' due to its limited foreign-exchange reserves, wrote Newnham. Morgan Stanley forecasts Vietnam's reserves at $27 billion, compared to India's $302 billion, the world's fourth biggest and South Korea's $258 billion.

Newnham forecasts Vietnam will be forced to ``realign'' the dong. Traders are pricing in an 18 percent fall in the coming year to 20,500, according to offshore 12-month non-deliverable forwards.

`Not Sufficiently Tight'

Accelerating inflation has pushed so-called ``real rates,'' which are interest rates accounted for inflation, towards zero or negative levels because ``interest rate stances are not sufficiently tight,'' wrote Newnham. He confirmed the report by telephone.

Korea's benchmark rate is at 5 percent and Vietnam's at 14 percent, compared to inflation of 5.5 percent and 26.8 percent respectively. India's policy rate is at 8.5 percent, compared to its wholesale price index at 11.63 percent.

``Their interest-rate and exchange-rate policies are not internally consistent for currency intervention to be regarded as credible,'' Newnham said in his note.

Banks in the three countries are ``showing signs of discomfort and this could feed through into foreign exchange weakness,'' Newnham wrote, citing high loan-to-deposit ratios, a shortage of dollars onshore and property loans.

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net



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HSBC Private Bank Favors the Yuan, Ringgit, Rupiah (Update1)

By Lilian Karunungan

July 7 (Bloomberg) -- HSBC Private Bank, which manages $494 billion of client's assets, favors the Chinese yuan, the Malaysian ringgit and the Indonesian rupiah as rising export revenue bolsters their economies and attracts foreign investment.

The yuan will advance 8.4 percent to 6.33 per dollar in the next 12 months as the central bank seeks a stronger currency to curb inflation, Arjuna Mahendran, head of Asia investment strategy at HSBC Private Bank in Singapore, said in an interview. His forecast is more bullish than the median in a Bloomberg survey of analysts. The Malaysian and Indonesian currencies may gain 2 to 3 percent because price gains for commodities including palm oil will boost export revenue, he said.

``I'm fairly confident that they'll keep moving up against the dollar because of capital flows,'' he said. ``Stronger countries, like China, Singapore, Malaysia and eventually Indonesia, if they can control inflation, will surge ahead.''

The yuan and the rupiah are the best-performing in the past month among Asia's 10 most-active currencies outside of Japan. The yuan traded at 6.856 per dollar at 11:34 p.m. in Shanghai and has gained 21 percent since the central bank ended a dollar peg two years ago as increased exports drove the trade surplus to a record. The ringgit was at 3.2655 and the rupiah at 9,213.

The median estimate of 25 economists is for the yuan to reach 6.46 in the second quarter of 2009. The ringgit is expected to gain about 4 percent and the rupiah to advance more than 2 percent, according to separate surveys of 22 economists.

Interest, Exchange Rates

China's foreign-exchange reserves have swelled to $1.68 trillion, a quarter of the amount held by central banks worldwide, as investors bought Chinese stocks and property.

China's central bank will seek currency appreciation to curb import prices and ``will raise rates at some point,'' Mahendran said July 3. China and Indonesia increased fuel prices in the past two months to reduce subsidies that have become costlier because of soaring international crude oil prices.

Central banks around the region are boosting borrowing costs or bolstering exchange rates to cool consumer price growth that's accelerating after oil and food prices jumped to records. China's inflation probably slowed in June for a second month, after reaching the fastest in almost 12 years in April.

Indonesia on July 3 boosted borrowing costs for the third month in a row as inflation reached 11 percent in June, the most in 21 months. Malaysia's Bank Negara has kept its overnight policy rate at 3.5 percent, spurring speculation the central bank has been buying ringgit to stem consumer price gains.

Malaysia, Southeast Asia's largest oil and gas exporter and the world's No. 2 palm oil seller, is benefiting from surging commodity prices. Crude oil in New York reached a record $145.85 a barrel on July 3 and palm oil has climbed 19 percent this year.

Export Growth

Indonesia is the world's biggest producer of palm oil and the largest thermal coal exporter. Its total sales abroad increased 31 percent in May from a year earlier, swelling the trade balance to $3.2 billion, double the amount in April, the government said last week.

Malaysia's overseas sales rose 22 percent in May from a year earlier to 60.6 billion ringgit ($18.6 billion), the Trade Ministry said last week. Malaysia had a current-account surplus of $23.8 billion in March, near the widest since 1999.

The ringgit dropped to a five-month low last week amid calls for Prime Minister Abdullah Ahmad Badawi to resign. Malaysian police in the past week confirmed investigations of Deputy Prime Minister Najib Razak and former Deputy Prime Minister Anwar Ibrahim. Both have called claims against them fabrications intended to destroy their political careers.

Political Risks

``You will have to wait for next year to see the upside'' in the ringgit, Mahendran said. ``Malaysia has a current account surplus. Despite the political uncertainties, the basic structure of the economy is quite strong.''

Indonesia's currency posted its first monthly gain since February in June as the central bank sold dollars and raised its benchmark rate three times this year, boosting investor confidence. Foreign-exchange reserves were at a record $59.5 billion in June.

``They have very adequate foreign currency reserves so they can defend the rupiah,'' Mahendran said. ``And I think Bank Indonesia has to raise rates again in the second half of this year.''

He forecast Indonesia will increase its borrowing benchmark by another half a percentage point by year's end to 9.25 percent.

The rupiah will also gain as oil prices may soon reach their peak, Mahendran said. Indonesia's aging oil fields and declining production have forced Southeast Asia's largest economy to import about a third of its oil needs. Its government subsidizes the fuel to make it affordable to many consumers.

``I see oil prices peaking at $150 in the next three months and then I think they'll move down to just above $100 because of demand destruction,'' Mahendran said.

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net



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Gold Falls for Third Day After Dollar Gains, Crude Oil Falls

By Feiwen Rong

July 7 (Bloomberg) -- Gold fell for a third day in Asia as the dollar traded near the highest in one week against the euro and crude oil declined, eroding the appeal of the precious metal as a hedge against inflation.

The euro traded at $1.5660 against the dollar at 8:54 a.m. before a report today that economists forecast will show growth in German industrial production slowed in May. Crude oil fell $1.23 a barrel to $144.06 a barrel at the same time, down more than 1 percent from its record $145.85 on July 3.

Bullion for immediate delivery fell $2.75, or 0.3 percent, to $930.50 an ounce at 8:59 a.m. in Singapore. Silver was little changed at $18.06 an ounce.

``Fresh funds are expected to be coming from large speculators'' as some hedge funds start their new financial year and may ``increase volatility'' in the market, William Kwan, bullion director at Gold Capital Management Pte in Singapore, said in a report today.

Gold for August delivery fell 0.2 percent to $932.20 an ounce in after-hours electronic trading on Comex at 9 a.m. Singapore time.

``Comex gold is trying to establish an upward trending mode with bullish factors coming from higher inflation and a weak U.S. economy,'' Kwan said. ``Heavy resistance'' was met around the $935 to $950 range, he said.

Gold for June 2009 delivery fell 0.3 percent at 3,226 yen a gram ($939 an ounce) on the Tokyo Commodity Exchange at 10:04 a.m. local time.

To contact the reporter for this story: Feiwen Rong in Singapore at frong2@bloomberg.net



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Oil Trades Below $144 as Iran Plans to Maintain Nuclear Program

By Nesa Subrahmaniyan and Christian Schmollinger

July 7 (Bloomberg) -- Crude oil traded below $144 a barrel in New York on concern that a standoff over Iran's nuclear program may lead to a military conflict, disrupting supplies from the Middle East.

Iran signaled it will maintain its uranium enrichment, giving a negative response to the international community's offer a day after positive talks with the European Union, the Financial Times reported on its Web site today. Oil reached a record $145.85 on July 3 on speculation any attack on Iran may disrupt exports from OPEC's second-biggest producer.

``The concerns for an attack are quite high and clearly the ramifications for a potential attack is a key driver for prices,'' Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne, said in a Bloomberg Television interview. ``Prices have been driven by most notably security of supply issues.''

Crude oil for August delivery traded at $143.74 a barrel on the New York Mercantile Exchange at 12:51 p.m. in Singapore. It fell as much as $1.66 to $143.63 a barrel earlier today.

On July 4, the contract dropped as low as $1.59 to $143.70 a barrel in electronic trading. Contracts from July 4 will be settled under today's trades because of the U.S. Independence Day holiday.

Oil's 50 percent gain this year is causing consumer prices to surge and crimping profits for airlines as costs rise. Korean Air Lines Co., South Korea's largest carrier, said today it will report a loss for the second quarter because of a surge in jet fuel prices.

Close Strait

Iran's nuclear policy hasn't changed, state news agency IRNA reported July 5, citing Iranian government spokesman Gholam- Hossein Elham a day after the country's response to proposals on its nuclear work.

The government in Tehran has prepared and presented its reply ``with a focus on common ground and a constructive view,'' Iran state television cited Saeed Jalili, secretary of Iran's Supreme National Security Council, as saying in a telephone call with European Union foreign policy chief Javier Solana.

Iran will close the Strait of Hormuz, through which the bulk of Middle East oil is shipped, if the country is attacked, state- run Fars news agency reported July 5, citing a military commander.

``All countries should know that if Iran's interests in the region are ignored, it is natural that we will not allow others to use'' the waterway, Fars cited Armed Forces Chief of Staff Hassan Firouzabadi as saying.

The Straits of Hormuz waterway alongside Iran is used to channel 20 percent of world oil supply. Other Middle East producers that use the straits to ship oil include Saudi Arabia, the world's biggest oil producer, Iraq and Kuwait.

Bush Pressure

An attack on Iran would ``provoke an unimaginably fierce response'' and ``oil prices would climb to unpredictable records,'' Oil Minister Gholamhossein Nozari said, according to the Oil Ministry's official news agency, Shana, yesterday.

Brent crude oil for August settlement was at $144.40 a barrel, down 2 cents, on London's ICE Futures Europe exchange at 12:36 p.m. Singapore time. Futures climbed to $146.69 on July 3, a record intraday price.

President George W. Bush said yesterday the U.S. will keep pressing Iran to stop enriching uranium. Iran must heed ``the just demands of the world to verifiably suspend its enrichment program,'' Bush said in Toyako, Japan.

European governments have joined the U.S., Russia and China in offering economic and technology incentives in exchange for Iran suspending work on developing material that can be used to build a weapon or fuel a nuclear power reactor.

Iran has said it's developing nuclear technology to generate electricity.

U.S. Gasoline Demand

The fewest Americans in three years likely traveled over the July 4th weekend as record gasoline prices and a slowing economy force consumers to curtail spending, according to AAA, the largest U.S. motoring group. The number of people taking trips of at least 50 miles (80 kilometers) from home over the holiday weekend will fall 1.3 percent to 40.5 million, AAA said.

The AAA survey marks the first time this decade travel was expected to decline over consecutive holidays, following a projected drop for Memorial Day in May.

The number of air travelers over July 4th will probably fall 2.3 percent to 4.5 million, AAA said.

Unrelated to Supply

Chakib Khelil, who heads the Organization of Petroleum Exporting Countries, said yesterday he doesn't expect prices to fall anytime soon because of ``big demand'' in India and China.

Record oil prices weren't related to supply and they have surged mostly because the ``U.S. Federal Reserve lowered interest rates to boost the American economy, which weakened the dollar,'' said Khelil, who is also Algeria's oil minister.

French President Nicolas Sarkozy said the leaders of the Group of Eight major industrial nations meeting in Japan should encourage oil-producing countries to boost output to prevent an oil-driven economic slowdown.

``Oil is over-priced relative to the other commodities but no one is calling the top,'' said John Lee, principal of Mau Capital Management, at a conference today in Singapore. ``The longer oil stays above $130 a barrel, the less likely it will drop below $100 a barrel.''

To contact the reporters on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net; Christian Schmollinger in Singapore at christian.s@bloomberg.net.


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U.S. Stocks Now Worth Less Than Rest of G-8: Chart of the Day

By Lee J. Miller

July 7 (Bloomberg) -- As President George W. Bush meets with counterparts from the Group of Eight nations, he faces a new deficit: U.S.-traded stocks have declined to less than the combined value of those from the rest of the G-8, according to data compiled by Bloomberg.

The combined value of companies traded on equities exchanges in Japan, the U.K., France, Canada, Germany, Italy and Russia was $15.16 trillion at the end of trading on July 4. Market value in the U.S. totaled $14.95 trillion, the data show.

The chart of the day compares the value of U.S.-traded shares and the capitalization in the seven other G-8 nations. Values are in dollars to account for currency shifts. The U.S. has trailed its seven counterparts since June 21.

``A sharp reversal began in early June,'' Goldman Sachs Group Inc. said in a report from Tokyo. ``Housing prices continue to decline rapidly, the credit crunch is becoming increasingly evident in lending data, oil is marking new highs, and -- last but not least -- the labor market is unraveling,'' the report said.

The market capitalization of the rest of the G-8 nations first exceeded the U.S.'s on Nov. 7, 2007, when Washington Mutual Inc., the largest savings and loan, plunged the most in 20 years. The dollar also fell to the lowest in 30 years against a basket of six major currencies that day. The value of U.S.- traded shares then regained the top position most of the time through March, show the data, which date back five years.

Leaders of the U.S., Japan, Germany, the U.K., France, Italy, Russia and Canada are meeting from today to July 9 in Toyako, Japan. It will be Bush's final G-8 summit as president.

``The U.S. believes in a strong dollar policy,'' Bush said at a news conference with Japanese Prime Minister Yasuo Fukuda yesterday. The economy of the U.S. remains fundamentally strong even as growth has slowed, he said.

DBS Group Holdings Ltd. said in a report today to ``expect lots of comments regarding the world's growing concern about the weakness of the U.S. dollar, especially its link in driving up oil prices and fanning global inflation.''

To contact the reporters on this story: Lee J. Miller in Bangkok at lmiller@bloomberg.net



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Profits in U.S. Probably Fell Again, Led by Citigroup, Merrill

By Meg Tirrell

July 7 (Bloomberg) -- Profits at U.S. companies probably shrank for the fourth consecutive quarter, the longest losing streak since 2002, as Citibank Inc. and Merrill Lynch & Co. suffered more losses from the collapse of the mortgage market.

Earnings of Standard & Poor's 500 Index companies may have dropped 11 percent in the second quarter from a year earlier, according to data compiled by Bloomberg. Profit fell 16 percent in the first quarter, 23 percent in the fourth quarter of 2007 and 2.5 percent in the third.

Financial industry profits probably plunged 60 percent, according to Bloomberg data. Banks and brokerage firms worldwide have posted more than $400 billion in writedowns and credit losses tied to the housing slump since the start of 2007.

``It continues to be financial stocks and write-offs in the credit market,'' said Tim Ghriskey, who oversees $2 billion as chief investment officer of Solaris Asset Management LLC in Bedford Hills, New York. ``That's the issue out there, really, in terms of earnings.''

The last consecutive profit declines spanned five quarters and ended in March 2002, as the U.S. was emerging from an eight- month recession. A drop in second-quarter earnings would be the first for that period in seven years.

The S&P 500 fell 3.2 percent in the latest period, extending its losing streak to three quarters, the longest since the nine months ended September 2002. The index dropped 8.6 percent in June, the most since September 2002. It declined 13 percent in the first half.

Growing, Except Financials

Excluding the financial industry, U.S. earnings may have increased 7.1 percent, according to Bloomberg data.

``If you exclude the financials, you're actually seeing an economy that, while not robust, continues to grow,'' Ghriskey said in a July 1 telephone interview.

Energy company profits probably increased 25 percent, the most of any industry, Bloomberg data show. The group, including Exxon Mobil Corp. and Schlumberger Ltd., made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as crude oil prices surged past $100 a barrel. Oil topped $145 July 3.

Estimates for second-quarter profits at Citigroup and Merrill Lynch were cut by analysts at Goldman Sachs Group Inc., Sanford C. Bernstein & Co. and Oppenheimer & Co. in the last two weeks on expectations of additional writedowns from the U.S. subprime mortgage market collapse.

Goldman Report

``The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought,'' Goldman analyst William Tanona said in a report June 25.

Citigroup, the biggest U.S. bank, may post a second-quarter loss of 20 cents a share excluding some costs, the average estimate of 14 analysts surveyed by Bloomberg. The company recorded profit of $1.24 on the same basis a year earlier. Merrill Lynch, the third-biggest U.S. securities firm, may have a loss of $1.30 excluding some costs, the average of 18 analyst estimates. That compares with a $2.24 profit in the year-ago period.

Profit at companies that depend on consumers' discretionary spending may have tumbled 24 percent, led by the automobile industry and retailers, according to the Bloomberg data. Tax- rebate checks aimed at stimulating spending may have come too late in the quarter to have their full impact, Ghriskey said.

`Tapped Out and Burned Out'

``The average consumer is tapped out and burned out,'' billionaire investor Wilbur Ross said in a Bloomberg Television interview July 1. ``By the time November comes, there's only going to be two issues: jobs and houses.''

U.S. employers cut 62,000 jobs in June, the sixth straight monthly decline, the Labor Department said July 3. Unemployment held at 5.5 percent after rising the most in two decades in May.

June sales plunged 18 percent at General Motors Corp., 21 percent at Toyota Motor Corp. and 28 percent at Ford Motor Co., the three biggest auto retailers in the U.S., as consumers facing $4-a-gallon gasoline bypassed fuel-thirsty trucks in favor of small cars.

J.C. Penney Co., the third-largest U.S. department-store chain, said June 25 it will open fewer stores next year and reduce capital spending, citing ``challenging'' times for consumers. Analysts predict J.C. Penney's profit for the second quarter, ending in July, will sink to 38 cents a share before some costs, the average of 17 estimates in a Bloomberg survey. A year ago, profit on the same basis was 78 cents.

``There is little driving consumer spending other than staples,'' Michael Niemira, chief economist of the International Council of Shopping Centers, said in a July 1 statement.

As rebate-check spending ebbs in the second half, economic stability will depend at least in part on banks, according to Ghriskey.

``Do banks begin to lend more, take the chains off their lending practices to help the economy begin to grow again?'' he said. ``We're not looking for a huge amount of economic strength in the second half, but we are looking for stability.''

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net.



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