And the currencies seem to be recovering this morning too, from the recent go around in the ring with the risk aversion campers. The currencies (except yen), were last seen yesterday up against the rope, doing their best imitation of the rope-a-dope.

But… This morning… The markets are just giddy about two pieces of data from Europe… First, German Investor Confidence as measured by the think tank, ZEW, beat the forecasts, and came in at the highest level in 3 years! That’s right, not since 2006, as German Investor Confidence been this high… For those of you keeping score at home… The Confidence Index number soared to 56.1 from 39.5 the previous month! WOW!

Last week, I told you how the German GDP had posted a positive number, and therefore the economy had exited the recession. I don’t believe the German economy to be “out of the woods” yet though… There are still things that go bump in the night that could very well drag the economic growth down… But for now… The Eurozone’s largest economy is basking in the sun of not only exiting a recession but a strong Investor Confidence report.

The other piece of data that has the risk takers fighting back for ground that was lost last week, was the U.K. inflation data that printed at 1.8%… Now, that sounds pretty low right? Well… You might recall that the Bank of England (BOE) had forecast a fall to 1% of inflation in the 3rd QTR… The other thing that makes 1.8% more robust than it looks is that the BOE has an inflation target of 2%, so… It’s knocking at the door of 2%, eh? Can you hear me knocking? On the window… Can’t you hear me knocking? On the door…

So… As I said it “seems” that the currencies are fighting back… But the move has been smallish in nature, but at least the euro has gained back the 1.41 handle, and the Aussie dollar has gained back the 82-cent handle, and so on, and so on…

The TIC’s data for June that printed yesterday was quite strong… For Long-Term Treasuries, that is… The short end got ambushed and was so weak that the positive for the Long-Term Treasuries was wiped out by the selling on the short end…

This probably all those people that bought short term T-Bills last year in what they thought was a “flight to safety”… I’m sure they exited with some red in the numbers… They basically gave the Gov’t a loan, paid the Gov’t for that loan, and lost money… Great “flight to safety” I’d say… NOT! Safe Haven? What Safe Haven?…

There’s no information right now about what games the Gov’t played in these figures… I think that for now though we can believe in our heart of hearts that they are playing games, which means the question at heart is… When the Fed winds down their buying of Treasuries, what happens to yields… And in turn what happens to borrowing costs… And finally the economy. My opinion? It won’t be pretty… But neither will the monetizing of debt that the Fed keeps performing… So, it’s a case of pick your poison… I would prefer the quantitative easing / monetizing of debt to stop, and let’s take our lumps on the economy that the Gov’t has been so hell-bent in attempting to stop… Get it over with, and live to see another day, rather than prolonging all this bad stuff…

For instance, last week, I read an article that talked about how the Big Banks are still in trouble… That just stinks! See what I’m talking about here? If they had been told to close their doors a year ago, we would be probably be pulling our selves out from that mess now… But nooooooooo! Instead the Gov’t spent hundreds of Billions of dollars to prop them up, and a year later, they still have problems! That just stinks!

So far this year, and I know, these aren’t the Big Banks, but ones that have caused significant damage to the funds of the FDIC, there has been 77 banks close… 77 Banks folks! One of the banks that closed was sold to another bank, but with the Gov’t guaranteeing that the buying bank didn’t experience any losses… Well, that would be a big wouldn’t it? If the closed bank didn’t have losses, it wouldn’t be getting closed! My friend and excellent writer, David Galland, had this to say about these back door deals for closed banks…

“Note that bit about the government “agreeing to shield acquirers from certain losses on assets of the failed bank.” This sort of guarantee has become a popular backdoor way for the government to deal with various elements of this crisis, without the more overt method of writing a check to cover losses or, heavens forbid, actually letting the equity holders bear the brunt for having made a bad investment in a poorly run bank.

Instead, the government jiggers things to hand off the good assets of a bad bank to one of their buddies, while agreeing to shift the liability for the poor assets onto the backs of taxpayers – with the IOU due and payable at some point down the road.”

OK… Back to me… I would not want to go on from that last note without mentioning that EverBank who sponsors this letter, and is my employer, which is not taken lightly, is enjoying a very good run of deposit growth and earnings growth. We just posted the 2nd QTR numbers, and I’ll have them to give to you, as soon as the marketing people give me the details. I understand that they are quite good, once again!

The other piece of data that printed yesterday was the NAHB Housing Market Index, which printed a digit higher than the July print of 17… So, 18 is the index number, what does that mean to us? Well, first of all, the Index represents a survey of Home Builders of Single-Family detached homes, and is comprised of three surveys… 1. Present Sales 2. 6-month expectations 3. traffic of buyers. The index has a range between 1 and 100, with 1 being bad, and 100 being excellent… A figure above 50, suggests that survey participants are seeing good economic conditions for Home Sales.

So… Now that we’ve learned that in class today, who can tell me what an index reading of 18 represents? You, over there in the corner, please take the IPOD ear-phones out of your ears and answer the question! Yes… It means we have a LOOOOOOOONNNNNNGGGGG time to go before we get back to 50…

Today we’ll see Housing Starts data for July… And Building Permits for July… These too will probably show a small uptick in activity, but nothing close to what it should be. And… Let’s also keep in mind that the problem we have with Housing in this country is that we have a GLUT of inventory, and it continues to grow, given the record number of foreclosures that I talked about last week… So, what good does it do to have these two pieces of data print strong? Sure, somehow the builders are finding the money to keep building and employing people, but, I just don’t see why that’s a good thing overall… Given… The glut of inventory.

I just wanted to recap what we’ve seen in the past week… A very weak Retail Sales figure, that was supposed to be inflated with the Cars for Clunkers program sales, and was not! And we saw a huge drop in Consumer Confidence… No wonder stocks have taken it on the chin the last two trading days… And… You have to wonder where all those economists are now that claimed last week that the recession had ended! Ended? Over? It’s not over until we say it’s over!

Speaking of foreclosures… I would have to think that these days, these days I sit and think about all the things that I forgot to do, for you… No wait! I have no idea where that came from, well actually I do know who sang it, but I mean that I would just start typing that! UGH! Runaway fat fingers! Any way… I do think that these days, all those unemployed people that were losing their jobs all winter and spring are now having problems… That’s a sad thing, folks… Something that might have been at least delayed with savings… But, recall back to before this financial crisis began, savings rates in the U.S. had gone negative! That’s sad too… But has been turned around now that everyone sees how important it is to have a war chest of savings… Let’s hope we don’t ever get to the negative savings rate again!

At home, I use ATT-U-Verse which means my news when I log on, comes from YAHOO! Last night I logged in, and saw this on the front page of news items… So… I just had to click into it to see what it was all about…

“A USA TODAY/Gallup poll found that 57% of Americans think President Barack Obama’s economic stimulus either had no impact on the recession or made it worse, while 41% said the spending was good for the economy. More than three-quarters said they are “somewhat worried” or “very worried” that some of the stimulus money is being wasted.”

Hmmm…. Maybe there are more Pfennig readers out there than I imagined! Now, we need to make the other 41% see the error of their thinking, and get them to diversify a portion of their investment portfolio out of the dollar, and into the asset classes of currencies and metals!

And with that note… I think I’ll head to the Big Finish! No wait! I wanted to mention that the threat of hurricanes in the Gulf have pushed the price of Oil higher, and will continue to have an affect on Black Gold’s price!

Currencies today 8/18/09: A$ .8240, kiwi .6710, C$ .9050, euro 1.4120, sterling 1.6560, Swiss .9280, rand 8.05, krone 6.1410, SEK 7.26, forint 193.10, zloty 2.9525, koruna 18.14, yen 95, sing 1.45, HKD 7.7515, INR 48.75, China 6.8338, pesos 12.94, BRL 1.88, dollar index 79.18, Oil $67.75, 10-yr 3.50%, Silver $14.08, and Gold… $938

That’s it for today… My little buddy, Alex, has his first day of school today… He’s in the 8th grade this year… My, time has flown since he was just starting school! When I was a kid, we didn’t start school until after Labor Day… I remind him and my two other children that are both teachers, of that whenever August rolls around! My beloved Cardinals won a big game last night in Los Angeles… Of course I’m in bed sleeping by the time the 1st pitch is thrown! Keep it going, Cardinals… Just keep it going… I’m very glad that I was able to get in to a good orthopedic doctor and get that shot as quickly as I did… I wonder how long I would have had to wait, no… Never mind I’m not going there! It’s time to hit send… So… Let’s get going on that Terrific Tuesday!

Source: German Investor Confidence Soars!

U.S. S&P 500 equity futures were down 0.7 percent , which increased demand for those currencies which typically gain in times of risk aversion and weighed on higher risk currencies such as the Australian dollar.

Sterling pared earlier steep losses, however, after Bank of England minutes showed policymakers voted unanimously to maintain their quantitative easing target.

Analysts said Federal Reserve Chairman Ben Bernanke on Tuesday dented sentiment when he said U.S. interest rates would stay low for some time.

“The dollar has found a bit more of a stable footing, which is largely a function of what Bernanke said yesterday,” Bank of Scotland Treasury market economist Kenneth Broux said.

“There is no reason for the Fed to hasten its way out of QE, which should dampen some of the recent excitement on equity markets,” he added.

By 1208 GMT, the euro fell 0.5 percent to 132.55 yen , while it dipped 0.1 percent against the dollar at $1.4200 .

Traders reported hefty options activity in euro/dollar at $1.4200, set to expire later in the day. A holder of a digital option will get payout if spot is above $1.4200 at expiry, while other expiries at $1.4200 are thought to total 1 billion euros, market participants say.

On Tuesday the euro hit a seven-week high on Tuesday at $1.4278 , close to its peak for the year.

The dollar fell 0.3 percent against the yen to 93.36 yen .

Reaction in the euro was limited, however, after data showed euro zone industrial orders data unexpectedly fell 0.2 percent in May, compared with forecasts for a 1.9 percent rise month-on-month.

“It looks not really consistent with what we had seen for the euro area…so I have some doubts if we do not see a substantial revision of this May reading at a later stage,” said Juergen Michels, economist at Citigroup.

STERLING OFF LOWS

Sterling fell 0.2 percent against the dollar to $1.6410 , well above an earlier low around $1.6311.

The minutes from the Bank of England’s latest policy meeting showed a 9-0 vote to maintain the 125 billion pound asset-buying total and keep interest rates at 0.5 percent.

The market took this as a signal that UK quantitative easing could be at or near an end — suggesting the economy may be starting to recover — and sterling gained as a result.

“The MPC minutes should be bullish for sterling,” Bank of Scotland Treasury’s Broux said.

The Australian dollar fell 0.4 percent against the dollar to $0.8154 and by 0.4 percent against teh yento 76.14 , dented as oil prices fell below $65 per barrel.

“Levels look quite stretched for these big gainers,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

Investors awaited further comments from the Fed’s Bernanke later on Wednesday, this time before the Senate Banking Committee.

Bernanke will repeat his testimony before the Senate Banking Committee at 1400 GMT, and then take questions

July 22 (Reuters)

The ECB announced that it will cut its key lending rate to its lowest level ever and begin a form of “quantitative easing,” in which it will buy corporate debt in order to reduce commercial interest rates. Details to follow, it said. “Stops” are to central bankers what safety fuses are to electricians. You may take them out when you really want to get the juice flowing; but your house might burn down.

But thus did the European troops pull out the stops and get under-way. Reluctant allies, they set off to join the battle against capitalism…with no reliable maps…with insufficient supplies and a strategy elaborated by incompetents. Of course, the gods must have laughed at Napoleon too. His armies had been cut off and destroyed in Egypt. Then, his Peninsular Campaign was a disaster. But the plan to attack Russia topped them all; even the draft horses must have snickered.

It doesn’t seem to bother the Europeans that their American commander is the same fellow who failed to spot the biggest bubble in history until it blew up in his face. Nor that their field marshal has no idea of the lay of the land; nor that anyone on either side of the Atlantic seems to know where they are going; nor that, wherever it is, it will cost more to get there than they’ve got.

This week the Obama government revealed its new budget deficit. If nothing goes wrong, it will reach $1.84 trillion this year – nearly 400% of the record set last year. In 2009, the US government will borrow 50 cents for every dollar it spends. Accumulated deficits to 2019 will reach $7.1 trillion, says the forecast. Moody’s was so alarmed it warned that the US may lose its Triple-A bond rating, which it has had since 1917.

But even as bad as it looks, Obama’s budget map is still fanciful – its mountains are made of whipped cream and its rivers run with Scotch. It imagines a loss of only 1.2% of GDP in the current downturn…and a quick return to growth, with a 3% increase in 2010. Yet, the last report showed the US economy contracting at a 6% annual rate. As for growth in 2010…where would it come from? Consumer credit is falling at its fastest pace in 18 years. Consumer incomes are falling too – down 1.2% in the last 12 months. If there were any lasting consequences of this downturn, opines the New York Times, it is likely to be the “shift to savings” by the US consumer.

Meanwhile, businesses aren’t exactly hankering to spend either. Even if they had the money, businesses wouldn’t expand; they don’t have to. Spiders build their webs on America’s remaining assembly lines with little risk of being disturbed; one out of every three factories is quiet. Until existing capacity is put to work, businesses will have no power to raise prices and no need to add to their facilities.

And yet, Napoleon Bernanke is upbeat. The troops will be home “before Christmas,” he says. But the central banks’ calendars are no better than their maps. In 2004, Mr. Bernanke credited improved monetary policy with having created what he called “the Great Moderation” – the period of strong growth and low-inflation since the mid-’80s. Specifically, he was referring to the Fed’s policy of ‘inflation targeting,’ which presumes that the inflation numbers carry all the information the Fed needs to guide an economy.

This was the map the Fed was using seven years ago. Then, a tiny recession took GDP down to all of 0.2% over an 8-month period. The Fed panicked. Its emergency policy pushed the fed funds rate well below the rate of consumer price inflation and left it there for two years. This was not merely a slight miscalculation. It was a fatal strategic error, say professors Carr and Beese of the University of Akron. Not only did the Fed’s map fail to warn them; it actually sent the economy over a cliff:

The low interest rates signaled…that credit was inexpensive and readily available…[then] the Federal Reserve moved from a low accommodative interest rate policy to one of a steady and consistent increasing of interest rates between 2004 and 2007…and became a prime cause of the financial services mortgage crisis of 2008.

Today, central banks use the same computers, same theories, and same maps they had seven years ago. With these feeble instruments, they set out to go where no central bank has ever gone before – borrowing, inflating, and intervening on a scale that would have been unimaginable a few years ago. Where will they end up?

We will take a guess: this grande armee sets off on the road to recovery with the wind at its back; it will end up in Moscow with snow on its face.

Enjoy your weekend,

Bill Bonner

Source: On to Moscow!

The dollar was sharply lower against other major currencies Thursday in the wake of the U.S. Federal Reserve’s decision to aggressively pump liquidity into the financial system, but it was above session lows in late trading according to a MarketWatch report.

“The aggressive U.S. dollar sell-off came to an end following a last hurrah in early North American trading. Euro/dollar had rallied almost 5% in less than 24 hours following the Fed’s decision to embark on aggressive quantitative easing,” said Matthew Strauss, senior currency strategist at RBC Capital Markets.

The dollar had plunged Wednesday, after the Fed’s announcement that it would buy $300 billion worth of U.S. government debt in coming months.

“For the dollar, the sentiment shift came hard and fast, and it came at a time when the buck already looked due for a rest, technically speaking,” said John Ross Crooks of Black Swan Capital, an independent currency advisory and trading firm.

Stephen Gallo, head of market analysis at Schneider Foreign Exchange, said the move doesn’t necessarily spell the end of the dollar’s ability to rise on economic and financial turmoil. But he added that it does mark the start of a more level “playing field,” now that the Fed has joined the Bank of England, the Bank of Japan and other central banks in monetizing debt.

“We feel that the period of aggressive dollar strength is quickly coming to an end, but it doesn’t mean that the positive correlation between the dollar and risk aversion is no longer in play — although it will be interesting to see in future sessions just how much the dollar strengthens when equity markets slide,” Gallo said in a research note.

On the economic front, more bad news.

The number of people collecting state unemployment benefits jumped by 185,000 to a record seasonally adjusted 5.47 million in the week ending March 7, while new claims dipped by 12,000 to 646,000 in the week ending March 14, the Labor Department reported Thursday. The 185,000 weekly increase in continuing claims was the second largest in the past year.

Source: Dollar Continues To Fall

This from Byron:

Asset classes go up and down. Precious metals are, of course, another asset class. They move with the economic tides. In the past 30 years, gold has rocketed up and plummeted down.

At several points in the past 30 years, things were so bad that gold sellers were like the proverbial Maytag repairman. They led lives of quiet desperation about which no one cared. Because like the late Rodney Dangerfield, gold got no respect.

Heck, between 1999-2002, the British government sold a large amount of its national gold, nearly 395 tonnes (metric tons), for about $275 per ounce. The Bank of England used the proceeds to purchase (ahem) “high-yielding” assets, like bonds. I suppose it seemed like a good idea to somebody. But really. In hindsight, how dumb was that? The British used to fight wars for gold (remember the Boer War, anyone?) Now they’re selling gold to buy bonds? They used to hang people for lesser crimes.

Last March 2008, gold sold for over $1,000 per ounce. Then the price retreated 30% as oil rocketed from about $100 to $147 per barrel. But even though gold fell back in price, it was still selling, on average, for almost three times what the Brits took in less than a decade ago. You didn’t do that with bonds. So the lesson is that we have to keep our eyes open about cycles and trends, even with something like gold.

Just in the past six months, almost every nonprecious metal asset class has been headed down. The stock markets have been tanking. Prices for everything from aluminum to zircon are way down. Oil has been bottom-fishing. The world is sliding downhill into deep recession. It’s a long litany of bad news out there. Except for precious metals, which have held their own.

Lately, precious metals have been in a stealth rally. It was not front-page news, until last week when gold touched the $1,000 mark again. But the operating gold miners in the OI portfolio, hit lows in October 2008. And they’ve all been rising in the markets ever since.

What’s going on? It’s a worldwide trend. Investors have been flocking to gold and silver. There’s a money migration going on. And I mean BIG money is migrating. It’s like those herds of zebras or wildebeests or gazelles in Africa. When they migrate, the earth shakes and the ground is just a moving kaleidoscope of hides and footprints. The dust clouds blow high into the sky.

Yes, the world economy might be in a recession. People across the world are worried about their job and security for their family. But other people with big bucks are scooping up gold and silver. Those buyers are looking for investment safety.

Moneyed investors don’t trust the world’s governments or paper currencies. So they are going with gold and silver. The mines and mints are having trouble keeping up with demand. Exchange-traded funds (ETFs) are buying huge volumes of gold and silver. (And they ought to be buying more. At the margins, at least, it appears that even the ETFs are holding “paper” gold rights, as opposed to the real McCoy metal.)

Let’s look at silver. In January 2006, the total silver held in ETFs was about 40 million ounces. By January of this year, 2009, the total silver in ETFs exceeds 280 million ounces. That’s an increase by a factor of seven in just three years.

The story with gold is just as dramatic. Who ever heard of a gold ETF until just a few years ago? But by the end of 2008, gold holdings of ETFs reached a record level of 1,090 tonnes, according to the World Gold Council (WGC). Thus, ETF holdings now exceed those of Switzerland and many other large and important nations. (Check the listing below.) In the fourth quarter of 2008, investors purchased ETF gold interests representing 96 tonnes of gold. (Far more than the total gold reserves of Australia.) This followed the purchase of an unprecedented 145 tonnes (more than the reserves of Saudi Arabia) in the previous quarter, according to the WGC. These are astonishing levels of demand, where there was almost none just a few years ago.

Much of the gold in the vaults of the worlds’ central banks has accumulated over many decades. Much of the U.S. government gold reserve, for example, dates from the national gold confiscation of 1933 under President Franklin Roosevelt. Roosevelt had a compliant Congress to do his bidding. Eventually, even the Supreme Court backed him up. So what’s that old expression? “It CAN happen here.”

Many other countries of the world are currently buying gold, fresh from the mine. Today, China is the world’s largest gold-producing nation, and its central bank is buying and building reserves. Russia, too, has a tradition of holding gold and today is acquiring gold from its own mine output and via purchases on international markets. Or look at tiny Qatar, a small nation in the middle of the Persian Gulf. Qatar had only 8 tonnes of gold about three years ago. Now it has 12 tonnes, an increase of 50% in a very short time. What do the Chinese, the Russians or the Qataris know? They know that they want gold. They can buy it. They will hold it. And they are hoarding it.

I’ve mentioned on many occasions that I like holding precious metals. I like holding metals as an investment and I just like the feel of the stuff. At the “elementary” level (yep, that’s a pun), you can hold physical metals. If you’ve never felt the coolness and heft of a shiny gold $50 Eagle or a Canadian Maple Leaf in your hand – let alone a fine old specimen of a $20 coin from the days of old in the U.S. – you’ve missed something. Really, the only thing better than holding an Eagle or Maple Leaf is holding an entire roll of 20 of them.

When I was in South Africa last year, I visited a refining operation and actually picked up a gold brick. It was almost right out of the melting pot. The brick was still warm, and the darn thing weighed about 75 pounds. That’s what I call “useful weight gain.” Too bad I couldn’t bring it home with me. But the armed guards at the refinery might have objected.

I’ve never made a formal OI recommendation for buying a particular kind of gold or silver coin, or ingots from this mint or that or any such thing. Those kinds of gold purchases are too hard to track in a newsletter like this. So I’ve recommended gold and silver miners and their shares. But over the past couple of years, I hope you’ve had the chance to acquire some real metal for your portfolio. Agora Financial has been banging the golden drum for at least 10 years. If you have never bought any gold, it’s still not too late. I think that the recent visit to $1,000 is just the beginning of another great wave of gold buying. I won’t be surprised to see $3,000 gold.

Coins and ingots are the kinds of things you keep in your bank safe deposit box or in a well-hidden home safe. Some people keep them in their “second” home safe. Why a second safe? Well, the first safe is the one with a few hundred bucks of cash and some good-looking costume jewelry in it. You would open the first safe if a robber broke into your house and held a gun to your head. (Sorry, I’m not kidding. We live in a tough world.)

And for as much as I urge you to own some gold or ingots, you should never talk about it. OK, you might tell a few family members or maybe a trusted friend or two. But the fact that you have a stash of real gold is too valuable to broadcast or advertise. As I said above, “It CAN happen here.” It already has happened here. It might happen again, if things get too rough out there.

Source: Nothing Shines Like Gold

Teachers are supposed to make complex things simple. But these two guys are about as clear as mud, as they dance around monetary policy jargon like drunken nightclubbers.

I’ll get to Merv in a minute, since he had more dire things to say about the state of Britain’s economy this morning. First up, though, let’s wrestle with Mr. Bernanke’s latest explanation of current monetary policy…

What’s In A Name? A Lot If You Listen To These Guys

Let’s get one thing straight, folks… don’t call it “quantitative easing,” okay?

It’s “credit easing.”

Get it wrong and you’ll find yourself in detention with the guv’nors.

“Credit easing” is the term Bernanke uses to describe the Fed’s monetary policy, now that interest rates are practically at zero.

In “normal” times, banks use conventional methods like adjusting interest rates to control the flow of money into an economy. Low rates encourage consumers to buy more and financial institutions to lend more money. High rates are supposed to slow consumer buying and lending.

But these aren’t “normal” times. Simply put, there’s only so far you can go to make money cheap. And with rates cut just about as far as they can go, both the Fed and Bank of England have pretty much exhausted their traditional monetary policy tool. That’s when more drastic measures need to be considered.

Entering stage right… “quantitative easing.”

Or not.

If you listen to Messrs. Bernanke and King, they’re foxtrotting their way around the issue to avoid describing it this way.

Desperate Times Call For Quantitative Measures

Quantitative easing can include targeting the cash that commercial banks have with the central bank. But instead of using an interest rate, it sets a target on the balance that the banks have with the central bank. The central bank can then meet that target by purchasing the banks’ assets – which means cranking up the printing press and using new money to pay.

In theory, this boosts the amount of money that commercial banks have, who are then supposed to release it into the broader economy through increased lending, etc.

Trouble is… when that doesn’t happen, the policy is essentially a waste of time – as Japan discovered earlier this decade when the banks just kept the cash.

In a recent speech, Bernanke noted that the Fed’s current policy is “conceptually distinct” from quantitative easing. It’s called “credit easing” and involves not just buying assets like bonds from commercial banks, but from several markets.

This adds to the Fed’s own holdings and also boosts the overall liquidity flow, but despite Bernanke’s unnecessary semantics, the end goal is the same: To put more money into the financial system through quantitative measures.

Britain Braced To Go Deep In 2009

Over in Britain, Mervyn King is almost at the end of the monetary policy line, too.

After a series of heavy cuts, interest rates are now at 1% (down from 5% in October), and given the governor’s latest assessment of the economy this morning, it won’t be long before the Bank of England takes further action.

Warning that “the economy is in a deep recession,” with a 4% annual GDP contraction projected for the second quarter, King said the BoE will continue to use the “full range of instruments at its disposal” to tackle the situation. But he also said that the length and depth of the recession would hinge “to a significant extent” on the rest of the world (there’s that “globalization” thing gone awry again) and whether the coordinated measures to increase credit and spending are successful.

Despite having the power to boost the monetary base (and one option is through the quantitative easing mentioned above), there are uncertainties about whether it will work. Nevertheless, with King and his fellow bankers believing that the recent interest rate cuts are having less impact, they’re giving these extra measures a shot.

On the agenda: Buying assets to boost corporate spending, plus increasing the money supply. Loosely translated… “Crank up the printing presses, mate.”

But it also means, in King’s words, “unconventional policies,” too. Specifically, that means making purchases through the BoE’s Asset Purchase Facility, which means the money spent on assets will be matched by an equivalent amount of Treasury bills sold. Not so much quantitative easing, but matching. Nevertheless, these quantitative easing measures still exist. The BBC says the Bank of England’s additional stimulus efforts over the second half of 2008 increased its balance sheet by 160% and swelled the monetary base by 35%.

No matter what the governors call it, additional efforts like this to stimulate the U.S. and U.K. economies are still designed to “ease” more money into the financial system by printing it – just in a different, less well-known way.

But with interest rates at zero, we’re getting down to last resort-type measures here. If it doesn’t work, they’re going to have to work on some really flashy dance moves.

Source: Bernanke And King In The Last Chance Monetary Policy Saloon

As ECB President Jean-Claude Trichet announced the largest cut in the Eurozone’s 10-year history, he said that the region is bracing for negative growth next year.

“Global and euro-area demand are likely to be dampened for a protracted period of time,” Trichet said at a press conference in Brussels today, Bloomberg reported.

The ECB estimates average annual real gross domestic product (GDP) growth to be between 0.8% and 1.2% in 2008, between -1.0% and 0.0% in 2009 and between 0.5% and 1.5% in 2010.

The ECB’s rate reduction followed two other huge central bank cuts in Europe.

The Bank of England cut its rate by one percentage point to 2%, its lowest level since 1951. That cut followed its 1.5 percentage point cut to 3% less than a month ago. Sweden’s central bank also slashed a record 1.75 percentage points from its primary interest rate.

Meanwhile, France unveiled its own economic stimulus plan today – a $32.9 billion (26 billion euro) injection that will target infrastructure, support local authorities and help its own ailing auto industry. The goal is to increase its GDP by 0.6% next year and push its deficit to 3.9% of the GDP, Reuters reported.

Wrapping everything together, are the Eurozone’s latest economic statistics, also released today, that said that GDP shrank 0.2% in the second quarter, investment dropped 0.6% and household spending remained flat.

Holger Schmeiding, chief European economist at Bank of America in London, said Europe is facing a “very serious recession.”

“Despite a major monetary stimulus and some help from lower oil prices and a looser fiscal policy, we do not expect the economy to recover before late 2009,” Schmeiding told Bloomberg.

Outside the Eurozone, four other countries recently slashed their primary lending rate earlier this week.

• New Zealand reduced its interest rate by 1.5 percentage points to 5.0%, a five-year low.
• Indonesia made its first interest rate cut since December 2007, reducing its key interest rate by one-quarter of a percentage point to 9.25%, Reuters reported.
• The Bank of Thailand cut its main interest rate one percentage point to 2.75%, its biggest reduction in eight years and its first cut in 16 months.
• Australia also cut its lending rate by a full percentage point to 4.25%, a six-year low.

Source: Record Rate Cuts and Economic Props Light up Europe

Sterling took a much bigger hit, falling from $1.4916 to $1.4768, as the currencies are pressured by expectations for those big rate cuts by the European Central Bank and Bank of England today.

In the day’s hard numbers, bleak data continued piling up.

Non-manufacturing activity in the US contracted in November at the fastest pace on record, according to a survey of companies released by the Institute for Supply Management. The ISM index sank to 37.3% from 44.4% in October. That’s the lowest level since the survey began in 1997.

Also announced was that the US private sector shed 250,000 jobs in November, according to the ADP national employment index. That was the biggest job loss in seven years.

The ADP report precedes Friday’s government labor market figures for November, with analysts expecting nonfarm payrolls to decline by 350,000. If that happens, it would be the worst loss in more than 25 years.

Source: Dollar Holds Steady

A spate of interest rate decisions, including that of the European Central Bank on Thursday, are set to influence the currency markets, and key U.S. non-farm payrolls numbers will be released on Friday.

Spot gold slipped to $773.05/775.05 an ounce at 1000 GMT from $781.50 an ounce in New York late on Tuesday.

“This is a big week for news, and a lot of people will be on the sidelines ahead of that,” Afshin Nabavi, head of trading at MKS Finance, said. “This is going to be a very illiquid market.”

Gold is often bought as an alternative investment to the dollar and typically moves in the opposite direction to the U.S. currency. The dollar strengthened against the euro on Wednesday as traders bet on a euro zone rate cut.

The currency markets remain jittery ahead of rate announcements from the ECB, the Bank of England and the Reserve Bank of New Zealand on Thursday.

Gold shrugged off a move higher in oil prices, with inflation fears tempered by crude’s sharp dip at the beginning of this week.

U.S. crude futures are currently up on the day, but are trading some 13 percent below the level they hit early on Monday. Traders are awaiting U.S. stockpiles data due later in the session.

Physical offtake of gold is also slowing, traders said. In India, the world’s largest bullion market, domestic gold buying declined as well-stocked traders awaited further price falls.

“We have many buy orders at $750 (an ounce) levels,” a dealer at a Mumbai bank said.

Among other precious metals, spot silver tracked gold lower to $9.38/9.46 an ounce from $9.54.

CAR SALES TUMBLE

Platinum prices rose, recovering some of this week’s up to 10 percent losses. The metal slipped sharply on fears over falling sales by automakers, the main consumers of platinum used to make autocatalysts.

Data released on Tuesday showed U.S. car sales tumbled nearly 37 percent in November, the 13th consecutive month of falls, to their lowest level since 1982.

Sales at GM and Chrysler fell 41 percent and 47 percent respectively in November. Carmakers said there was no sign demand would rebound in the next six months.

However, with platinum having already fallen two-thirds from the highs it hit in March and much of the bad news already priced in, the market showed little reaction to the news.

“The platinum group metals market has come to expect the worse, and much of this bearish news has been priced in already,” Standard Bank analyst Walter de Wet said.

A top lawmaker predicted Washington will approve a bailout plan for U.S. automakers after they submitted survival plans to Congress, and both GM and Chrysler said they needed an immediate cash injection to avoid failure.

Spot platinum rose to $803.50/823.50 an ounce from $796 late on Friday, while its sister metal palladium was little changed at $171/176 an ounce against $169.

A Reuters survey showed platinum, palladium and silver are expected to record sharp price falls in 2009 as demand sags in line with economic growth.

By Jan Harvey
LONDON, Dec 3 (Reuters)

The dollar rose against the euro on thin trade on Friday, as weak equities markets and fears of a deepening global recession led investors to seek the U.S. currency as a haven.

Worries about consumer spending helped weigh on U.S. and European shares, while the low-yielding yen gained ground.

Extreme risk aversion and repatriation flows have been supporting the U.S. currency recently.

The euro weakened against the yen and sterling on growing expectations that slowing euro zone inflation may lead the European Central Bank to cut interest rates more aggressively next week from the current benchmark rate of 3.25 percent.

Trading volumes were lower than usual as U.S. markets reopened for only half a day after Thanksgiving Holiday.

“Trading is very thin, with the dollar getting support from a drop in global equities and fear the start of this shopping season is going to be really bad,” said Greg Salvaggio, a currency trader at Tempus Consulting in Washington D.C. “Euro/dollar is going to be stuck in a narrow trading range between 1.26 and 1.30 for now.”

In mid-morning trading in New York, the euro was 1.1 percent lower at $1.2746 , while the dollar was up 0.7 percent against a basket of six currencies at 86.378.

Some traders also mentioned sizable month-end dollar buy-orders at the London (1600 GMT) currency fixing was adding support to the U.S. unit.

Political jitters may also have helped the dollar after militants killed more than 100 people in Mumbai, India’s financial center, in coordinated attacks.

“It’s another ‘negative’ looming in the markets,” said Salvaggio. “It may also be giving a bit of a lift to Treasuries and the dollar this morning.”

Looking ahead to next week, markets were bracing for interest rate decisions by several central banks next week, including the Bank of England, the ECB, the Reserve Bank of Australia and the Reserve Bank of New Zealand.

Provisional figures showed euro-zone annual inflation slowed to 2.1 percent in November from 3.2 percent in October.

“The ECB seems to be lagging behind the curve. Now that the region has officially hit a recession, it is possible that they will be more aggressive in easing rates,” said Kathy Lien, director for currency research at GFT Forex in New York.

“The only factor holding them back is inflation pressures. Although producer and consumer prices have been easing, the central bank is not entirely convinced that the upside risks to prices have alleviated,” she added.

The euro dropped 1.2 percent to 121.58 yen , while the dollar was little changed at 95.42 yen .

For the UK, economists polled by Reuters on Thursday expect the BoE will follow up November’s 150 basis point interest rate cut with at least a 50 point reduction when it meets next week.

“The Bank of England has been the most aggressive and proactive of the G-10 central banks in their attempts to ease monetary policy,” Lien said. “With the economy in a recession according to UK officials, interest rates could fall as low as 1 percent if the crisis continues well into the New Year.

By Vivianne Rodrigues
NEW YORK, Nov 28 (Reuters)