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Dollar recovers from 15-month low
The greenback rebounds from previous session's fall but remains weak as investors expect U.S. interest rates to stay exceptionally low into next year.
NEW YORK (Reuters) -- The dollar firmed Tuesday from the 15-month low touched in the prior session as investors saw Monday's fall as too far, too fast.
Analysts said investors lacked any catalyst to sell the dollar further after its recent sharp falls, but added the trend towards dollar weakness remained in place.
Sterling was one of the biggest decliners against the dollar on the day, falling after Fitch told Reuters the UK was the major economy most at risk of losing its AAA rating.
"There is a slight pullback in risk appetite overnight," said John Doyle, foreign exchange strategist at Tempus Consulting in Washington. "Yesterday, we might have moved a little too far, too quickly."
Midway through the New York trading day, the dollar index, the dollar's performance against six major currencies, rose 0.2% at 75.18. On Monday, it fell about 1% to a low of 74.93, its weakest since August 2008 and the biggest one-day drop since late July.
The euro fell down 0.3% to $1.4948, now over a cent from its 2009 high above $1.5060.
"The single currency is struggling to hold on to the $1.50 handle, and with the softer tone in the equity and commodity markets, the euro is likely to give up ground in New York trading," Brown Brothers Harriman analysts said in a note.
A weaker-than-expected German ZEW economic sentiment index showed that investors were more gloomy than at any time in the last four months.
Expectations that U.S. interest rates will stay near zero well into next year have encouraged investors to use the dollar to fund carry trades in higher-yielding assets, particularly when equity markets rally.
The Australian dollar, a relatively high yielder, was down 0.3% at $0.9269. Earlier, it had climbed well above the $0.93 level after strong Australian business confidence data, though it stopped short of a 15-month high.
Sterling slips
Sterling fell after Fitch Ratings said that of the four major economies with top-notch AAA status, the U.K. was the most at risk, sending the pound down sharply to shed as much as a cent and a half on the day against the dollar.
David Riley, co-head of global sovereign ratings at Fitch, said if there was another significant fiscal stimulus package in highly indebted Britain its rating would be at risk.
"The Fitch news was a reminder of the longer-term issues facing the U.K.," said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.
The pound slipped down to the $1.66 level, well below a three-month high reached on Monday, and fell to beyond 90.00 pence per euro.
In the New York session, it had pared some of those losses, but was still down 0.4% against the dollar at $1.6684, while the euro was up 0.1% at 89.57 pence.
A host of Federal Reserve officials were watched for clues on the outlook for interest rates and the eventual withdrawal of easy monetary policy measures.
Dennis Lockhart, president of the Atlanta Fed said that the U.S. economic recovery is under way and policymakers should now focus on ensuring it is a durable one.
Janet Yellen, president of the Federal Reserve Bank of San Francisco, said on Tuesday the U.S. economic recovery still faces many hurdles, including a persistently weak labor market and strained household budgets.
Elsewhere, the yen pared earlier losses against the euro , though it remained 0.5% lower at 134.36. The dollar edged down 0.1% to 89.85 yen.
Japanese Finance Minister Hirohisa Fujii said on Tuesday he supported U.S. Treasury Secretary Timothy Geithner's strong dollar policy. Fujii was speaking to reporters after meeting with Geithner in Tokyo.
Gold surges to a record high
The precious metal jumps to settle at an all-time high as the U.S. dollar declines.
NEW YORK (CNNMoney.com) -- Gold jumped to an all-time high Wednesday as the dollar depreciated, fueling demand for the metal as a hedge against the anemic greenback.
December gold climbed $12.10 to settle at a record high of $1,114.60 an ounce after hitting a record trading high of $1,118.60 an ounce earlier in the session.
"Overall we're still seeing strong investor interest," said Carlos Sanchez, precious metals analyst at CPM Group, adding that gold's recent rally has attracted many "short-term market participants."
Prices surged early in the session as the dollar weakened on expectations that U.S. interest rates will remain low for an extended period of time.
Gold pared gains later in the session as the dollar recovered some ground but remained near a 15-month low against rival currencies.
The dollar index (DXY), which gauges the greenback's value against a basket of currencies, was up 0.1% to 75.11.
Despite the dollar's modest rebound, the currency market remains focused on the bleak outlook for the U.S. currency.
"The dollar continues to weaken," Sanchez said. "That's because of concerns over loose monetary policy and fiscal stimulus that is increasing money flows into financial market and the economy."
A softer dollar makes commodities that are priced in dollars such as gold cheaper for investors using other currencies.
The weak greenback has also raised concerns among many foreign central banks, since the dollar is the traditional global reserve currency. As a result, some overseas monetary policy makers are said to be looking for ways to diversify away from the dollar.
Last week, the Indian central bank bought 200 metric tons of gold from the International Monetary Fund. That raised bets that more central banks could increase their holdings of the precious metal as an alternative to the dollar.
Gold prices are also being supported by concerns about inflation. While consumer prices remain subdued, some traders say U.S. monetary and fiscal stimulus policies could spur a bout of inflation in the future.
Tangible assets like gold tend to hold value better than other types of investments when inflation is a problem.
Dollar firms near 15-month low
The greenback edges higher but remains weak as investors seek higher-yielding assets and bet interest rates will stay low for a long time.
NEW YORK (CNNMoney.com) -- The dollar recovered some ground against rival currencies Wednesday after falling to a 15-month low on strong economic data from China and signs that U.S. interest rates will remain low.
The dollar index, (DXY) which gauges the greenback's value against a basket of currencies, was up 0.1% to 75.10.
The rebound came after the dollar failed to sink below certain technical levels against the euro. The greenback gained 0.2% versus the euro to $1.4961 after hitting a low of $1.5048.
The British pound fell broadly after Bank of England governor Mervyn King said his nation's economy faces a difficult recovery and hinted the central bank could buy more U.K. bonds.
The dollar rose 1.2% against the pound to $1.6547.
"We're seeing profit taking across the currency market," said Kathy Lien, director of currency research at Global Forex Trading. "It's a relatively quite trading day and the moves aren't big enough to call it anything else."
The dollar came under pressure early Wednesday after the Chinese government said factory output surged to a 19-month high in October, suggesting the world's third-largest economy has regained its footing.
"The developments out of China are encouraging a more optimistic view of the economy," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
The bullish economic news boosted the market's appetite for higher-yielding assets such as stocks and commodites, and undermined the dollar's safe-haven appeal.
The dollar is weak because ...
The greenback was also hurt by recent comments from Federal Reserve officials on Tuesday that suggested the central bank expects the U.S. economy to recover at a sluggish pace.
That reinforced a widely held expectation in the market that U.S. interest rates will remain at historic lows near zero.
Investors are also betting the Fed will keep rates low given the bleak outlook for the U.S. labor market. The government said last week that the nation's unemployment rate rose to 10.2% in October.
"Given last week's disappointing labor market report and the Federal Reserve's plan to keep monetary stimulus in place for the foreseeable future, there is little reason for traders to pile back into U.S. dollars," said Lien.
As the global economy stabilizes and overseas central banks move to raise interest rates, many analysts say the dollar has become a funding currency for the carry trade.
The carry trade, in which investors use the currency of a country with low interest rates to fund investments in more risky markets, has helped push the euro and the Australian dollar higher.
Meanwhile, the currency market largely overlooked comments from Treasury Secretary Tim Geithner in support of a stronger dollar.
"I believe deeply that its very important to the United States, to the economic health of the United States, that we maintain a strong dollar," Geithner said in a meeting with Japanese reporters at the U.S. embassy, according to Reuters.
Oil gains slightly on weak dollar
Crude prices step higher as dollar remains under pressure and and Chinese demand growth and factory output increase.
LONDON (Reuters) -- Oil rose modestly Wednesday, responding to a 15-month low in the dollar and robust Chinese demand growth and factory output.
Analysts said the gain was capped by weak demand elsewhere and a relatively quick recovery of the U.S. oil industry after storm disruption.
U.S. crude futures rose 10 cents to $79.15 a barrel.
"Only the dollar may push oil prices around. The Chinese manufacturing data was good, which is bullish. We are still in a hurricane aftermath, which is bearish," said Andy Sommer, senior oil analyst with EGL Group.
The dollar on Wednesday hit its lowest in 15 months against a basket of currencies.
China showed robust demand growth. Its October crude oil imports and refinery runs rose to near record highs while its industry output growth surged to a 19-month high.
Oil and natural gas companies operating in the Gulf of Mexico began returning workers evacuated ahead of Tropical Storm Ida and restoring shuttered output and ports. Oil prices have risen about 77% so far this year, but are still 46% off their high of more than $147 a barrel struck in July last year.
Globally, oil demand remains sluggish.
Producer group OPEC raised its forecast for world oil demand growth slightly in its report on Wednesday. But it said fuel consumption may not return to levels seen before the global economic slowdown, even if growth recovers.
The next clue for fundamentals will be released from top consumer United States on Thursday. Weekly oil figures from the Energy Information Administration (EIA) has been delayed by one day due to the Veterans Day holiday.
Analysts in a Reuters poll forecast the data would show a 600,000 barrel increase in U.S. crude inventories last week as refineries have been cutting back runs as weak demand batters margins.
Separate data from industry group American Petroleum Institute late Tuesday showed increases in crude, gasoline and heating oil inventories.
In Europe, crude oil inventories rose in October as refiners reduced operation rates to match falling demand.
Oil products, mostly heating oil, for which storage cannot found on land, are floating in ships at sea. The volume is now about 90 million barrels, said ICAP shipping brokers, more than the world's daily oil consumption.
October deficit $176 billion
For 13th month in a row, outlays trump receipts, adding to the federal government's red ink. Monthly interest: $22.8 billion.
NEW YORK (CNNMoney.com) -- October was another costly month for Uncle Sam. The U.S. Treasury reported on Thursday that federal coffers racked up a deficit of $176.4 billion for the month.
It was the 13th straight month of a reported monthly deficit.
Interest paid on the debt was $22.8 billion - or 7% of federal outlays for October, which is the first month of the new fiscal year.
On tackling debt, some say 'just do it'
For the month, the Treasury took in $135.3 billion from various sources and spent $311.7 billion.
At this reading, the Treasury is estimating the annual deficit for fiscal year 2010 to hit $1.5 trillion. That would top the $1.42 trillion registered for 2009, which was the highest annual deficit since 1945.
Banks leery of Treasury's small business lending plan
President Obama's plan would give community banks access to low-cost capital for small business loans, but banks are wary of taking TARP funds.
NEW YORK (CNNMoney.com) -- Small business lending has been in freefall since the recession began. Concerned about the obstacles that places in the way of economic recovery, President Obama recently proposed a new federal effort to give community banks access to ultra-cheap government loans, which they can then use to expand their local business lending.
One hitch: Bankers are lukewarm on the idea.
Obama's plan, announced Oct. 21, calls for letting banks with less than $1 billion in assets borrow money from the government at a 3% dividend rate. To qualify, banks will need to submit a plan illustrating how they'll use the borrowed money to expand their small business lending. The cash will come from the Treasury's Trouble Asset Relief Program (TARP).
That's raising red flags with banks that have previously borrowed from TARP.
For instance, Monadnock Community Bank CEO William Pierce took $1.8 million in TARP funding in December for his Peterborough, N.H., bank. He's not interested in another round.
"For a bank our size, it is too much extra regulation," Pierce said. "We have 25 full-time equivalent employees here, and most of them are working with customers and actually making loans, so to deal with the regulations is very taxing on a small organization."
Capital Pacific Bancorp in Portland, Ore., received TARP funds late last year totaling $4 million. The bank took the loan to boost its capital reserves and grow its balance sheet, but CEO Mark Stevenson is leery of the public backlash the program has sparked since then.
"TARP was advertised to healthy banks: an investment we would use for appropriate purposes," Mark Stevenson said. But now, "TARP has a negative stigma -- it is associated with 'bad bank, bailout.'"
The Treasury Department is still working out the details of Obama's proposed lending plan -- the coffers aren't open yet. Program specifics will be available "very soon," Treasury spokeswoman Meg Reilly said.
Even if the program terms are attractive -- and a 3% rate is pretty tough to beat, Stevenson acknowledged -- banks face another hurdle: Finding qualified borrowers. At many small businesses, sales are down, and the ongoing economic weakness has reduced the value of real estate, inventory and other assets business borrowers typically use as collateral against loans.
Capital Pacific's loan portfolio has been flat this year. Demand from existing clients is down, and the community bank has been working to shore up its balance sheet, cutting the credit lines of customers likely to default. But the bank is still issuing new loans to qualified borrowers: In the first nine months of this year, $26 million of the bank's $135 million in total lending went to brand-new customers.
"I don't know whether we would or we wouldn't [take more TARP], because our capital is still strong today," Stevenson said.
Shane Bell, CFO of First Bank in Strasburg, Va., is in a similar spot. "It is interesting what you hear on the news compared to what you hear on Main Street," he said. "There isn't a lot of loan demand."
First Bank borrowed $13.9 million from TARP in March. Even at lower rates, the bank might not go back for more money, Shane said. It already has enough capital on hand to meet the loan demand from the credit-worthy borrowers in its community.
"There is not a whole lot walking in the door right now," he said.
Rescue redux
Obama's new lending program could find itself caught in the same bind that has plagued another high-profile government effort to shore up small business lending: The America's Recovery Capital (ARC) loan program. Created in February as part of the Recovery Act and run by the Small Business Administration, the ARC program offers participating banks a 100% guarantee on small banks made to viable but struggling businesses.
It took four months for the government to create guidelines for the ARC program, and once it did, relatively few banks signed on. The program is a safe one for banks -- if the borrower defaults, the government will repay the loan -- but it carries heavy administrative overhead for a fairly scant profit. And because the government doesn't want to lose too much taxpayer money paying off loans that go bad, it set the qualification standards for ARC loans fairly high. The end result was a program that frustrated both borrowers and lenders.
As it crafts regulations for the new lending program, the Treasury will be hard-pressed to steer clear of similar pitfalls. An earlier Treasury program intended to add liquidity to the small business lending market by purchasing SBA-backed loans from banks stalled in part because small banks didn't want to tangle with TARP red tape.
They're right to be wary, said Monadnock Bank's Pierce. Two months after the first TARP loans went out, the Treasury placed executive compensation caps and other regulatory restrictions on banks that had accepted the funds. While his bank wasn't seriously affected by the changes, Pierce was annoyed to have the government changing the rules after the fact.
But the biggest hurdle will simply be finding qualified borrowers. Hit by rising defaults and determined to shore up their underwriting standards, many of the nation's biggest banks have scale back their small business lending. Community banks, traditionally more conservative, have been cautious as well.
"We are still lending if there is a business that meats our reasonable requirements for risk," said Shane of First Bank.
"A lot of the small businesses are holding back -- they are reluctant to make additional investments in their companies," Pierce said. "There is plenty of money around to loan. We would love to do it."
China's record debt has economists worried
The nation is taking on record levels of debt to keep its economy humming. Some say that can't last.
(Fortune Magazine) -- In a world still awash in economic worry, China has stood apart as the one country that has come through the global slump with only the briefest of hiccups.
Last quarter the nation grew at a brisk 8.9% rate, and many economists expect it to expand even faster over the remainder of the year. Profits at large, state-owned companies that have benefited from Beijing's aggressive stimulus program are up sharply.
Li Xiaochao, spokesman for the National Bureau of Statistics, summed up the zeitgeist in China these days: "The overall situation of the economy is good."
A lot of global CEOs, of course, are on the thank-God-for-China bandwagon, and it might seem a little churlish to question one of the world's few good-news economic stories. Yet a growing number of observers believe that China is creating its own bubble economy. And they have a case to make.
The U.S. fueled its housing and consumption bubbles by providing easy credit. China seems headed in the same direction, although the victims would be different this time.
In the first nine months of the year, Beijing has shoveled $1.27 trillion in new loans into the economy, up 136% from the same period last year. That money has gone to three main areas: infrastructure, manufacturing, and real estate.
According to a recent analysis by Monaco-based hedge fund Pivot Capital Management, China's total lending reached 140% of GDP at midyear. That kind of lending makes China an "outlier" compared with other BRIC (Brazil, Russia, India, and China) countries -- and is already well beyond the levels that "have led to sharp and brief credit crises in the past," the Pivot Capital report contends.
Moreover, an increasing number of Chinese loans are being funneled into projects unlikely to generate an attractive economic return. From 2000 to 2008 it took just $1.50 in new credit to generate $1 of GDP growth. Now that ratio is 7 to 1. (In the U.S., just before the financial crisis hit, the ratio was only 4 to 1.)
That's because the loans are creating huge amounts of manufacturing capacity -- which is unneeded in the bears' view. China's spare capacity in the cement industry, for example, equals the total annual consumption in the U.S., Japan, and India combined.
So where will the growth come from? China's export markets are tapped out. Its domestic consumption, stalled at around a third of GDP, hasn't yet started to rise significantly. Additional manufacturing investment would be crazy, leading arguably to a global deflationary bust of epic proportions.
Over the past decade China has spent massively on roads, bridges, and other infrastructure. Some economists believe China's infrastructure, already superior to that of many other developing economies, has now passed the point where more investment can contribute much to growth. China, in other words -- despite the rosy, headline GDP numbers -- might be stuck.
Those bullish on China say the government will keep spending no matter what to keep the economy humming, given its relatively healthy domestic balance sheet compared with that of the U.S. Skeptics reply that if the debt taken on by provincial governments is taken into account, China's fiscal health begins to look questionable.
The good news is that the authorities are well aware of the problems. Behind the scenes, Chinese officials are engaged in an increasingly rancorous debate about whether and how quickly to take away the credit-filled punch bowl. Lending has slowed a bit from the red-hot levels in the first half, and recently China's National Development and Reform Commission, a key government policymaking body, said it would begin to deal with excess capacity in key sectors of the economy by forcing mergers and in some cases ordering factories to close.
So, yes, Beijing may be working hard to keep its economy vibrant, but danger lurks out there. Avoiding an American-style meltdown is the economic test that's coming.