Solid U.S. and euro zone data and an upbeat assessment on the economy from Federal Reserve Chairman Ben Bernanke over the weekend earlier pushed investors to take on riskier investments at the expense of the the low-yielding yen and dollar.

“Conventional wisdom suggests that major currencies should trade within their recent ranges until liquidity improves after the Labor Day holiday,” said Wells Fargo currency strategist Vassili Serebriakov. “However, there is plenty of data in the U.S. and elsewhere to change that this week, with consumer-related numbers likely to be watched closely.”

Investors are looking ahead to upcoming U.S. and European data to confirm hopes that the world economy is improving.

The dollar was last up 0.1 percent at 94.49 yen while the euro slipped 0.1 percent to $1.4304 . Against the yen, the euro was unchanged at 135.20 yen .

The euro trimmed losses against the greenback after data showing much higher-than-expected euro zone industrial orders in June.

Sterling fell 0.6 percent on the day at $1.6405 .

The euro , meanwhile, hit an 11-week high against sterling at 87.27 pence, according to Reuters data.

Traders said the euro was pushed past a key options barrier at 87 pence, setting up further gains in the pair, while analysts said expectations for persistently low UK interest rates were weighing on the British currency.

The Federal Reserve’s Jackson Hole meeting over the weekend offered a variety of opinions about the global economy, with Fed Chairman Ben Bernanke acting as the cheerleader for growth.

But traders are keen to see how the euro zone economy fares, especially after higher-than-forecast purchasing managers’ index readings last week. Germany’s Ifo survey of business sentiment will be key this week, analysts said.

The U.S. Conference Board will release its August consumer confidence index on Tuesday, followed by the Reuters/University of Michigan consumer sentiment snapshot on Friday.

Nouriel Roubini, professor at New York University’s Stern School of Business and one of the few economists who accurately predicted the magnitude of the current crisis, wrote in The Financial Times on Monday that there’s still a “big risk” of a double-dip recession.

Allan Meltzer, a political economy professor at Carnegie Mellon University, also told Reuters that the flood of money the Fed and Treasury have injected into the banking sector and economy since the crisis began will soon threaten the dollar.

“Will the Chinese continue to buy the trillions of dollars worth of debt that the Treasury intends to put out every year? We don’t know, but if not, the pressure will be on the Fed to keep buying it, and my guess is that’s going to be inflationary over the next couple of years, and the dollar will suffer,” he said.

Aug 24 (Reuters)

The U.S. dollar fell against the euro and a basket of currencies on Tuesday as weak U.S. housing data and a dim economic outlook for the start of 2009 weighed on the currency.

The contrast of aggressive monetary easing in the United States versus a more cautious European Central Bank is lending support to the euro while hurting the greenback, analysts said.

Some market participants also cited the ongoing conflict in Gaza and Israel, as supporting the Swiss franc near a five-month high.

Meanwhile, sterling continued its downtrend, hitting a 6-1/2 year low against the U.S. dollar and hovering near record lows in sight of parity against the euro on prospects of UK interest rates being cut further amid a deep economic downturn.

In morning trading in New York, the euro was up 1.2 percent on the day at $1.4148, according to Reuters data.

“The Fed continues to be extremely proactive while the ECB has been much more cautious,” said Jessica Hoversen, a fixed income and currency analyst at MF Global Ltd. in Chicago. “As a result, we have the end of the year yield differentials between the two regions that favor the euro, at least for now.”

U.S. interest rates are close to zero and policymakers have said they are ready to take more unconventional steps of providing liquidity to bolster the moribund economy.

In contrast, key interest rates in the euro zone stand at 2.5 percent, and policymakers have been unclear about how much rates will be cut further in the near future.

Hoversen added thin market conditions during the holidays and a weak outlook for key U.S. sectors, such as housing, may help push the dollar lower in the next couple of days.

Prices of U.S. single-family homes in October plunged a record 18.0 percent from a year earlier, according to the Standard & Poor’s/Case-Shiller Home Prices Indices released on Tuesday.

“The numbers are certainly very bad,” said Kathy Lien, director of FX research at GFT Forex in New York. “But there is one silver lining though. The pace of the decline seems to have slowed during the month.”

The U.S. dollar index slipped about one percent against a basket of currencies to 80.595.

EURO NEARS PARITY

Sterling fell as low as $1.4385, its weakest since early 2002, according to Reuters data, while the euro rose 1.4 percent to 97.79 pence, hovering near a record high of 98 pence hit on Monday.

“The market has been focusing a lot on the weakness in the U.K. economy,” said Hoversen at MF. “It seems the pound will be ‘forced’ to touch parity with the euro pretty soon.”

Demand for the Swiss franc rose since Monday after the Israeli attacks at Gaza had triggered so-called “safe-haven” demand for the Swiss currency and gold. The dollar was last slightly lower at 1.0586 , after trading as low as 1.0367 francs on Monday, its weakest since late July,

The dollar slipped 0.2 percent to 90.36 yen, inching lower to 87.13 yen hit earlier in the month, its weakest since mid-1995.

Data highlights on Tuesday also include a release on consumer confidence in December and a reading of factory activity by the Institute of Supply Management.

NEW YORK, Dec 30 (Reuters)

And with inflation soaring, we can’t expect the Bank of England to cut interest rates this week to try to alleviate any of the pain.

To add insult to injury, the pound, our national virility symbol, has plunged against the euro, so we can’t even afford to go away from it all on holiday on the Continent. And we came last in Eurovision… again. We seem to be becoming the sick men of Europe.

If you can’t beat them, they say, join them. So has the time finally come to dump the poor old pound and plump for the euro?

Why Europe could be in as much trouble as the UK

With the euro now among the world’s strongest currencies, you might assume that the eurozone was in a much better state than Britain. But take a closer look and you soon see that plenty of problems have been cropping up on the other side of the Channel, as well as across the Irish sea.

Take housing. Last week’s Nationwide house prices survey showed that prices were down 4.4% year-on-year in May, the biggest fall since the early 1990s. That’s pretty grim.

But in Spain house prices have already fallen 15% across the board since September, according to the developers’ association (APCE). And in Ireland, house prices were down nearly 10% year-on-year up to the end of March.

Of course, the UK property market is set to get a lot worse. But the same could be said for Spain and Ireland.

Then there’s consumer confidence. In Britain this has crumpled, according to the latest GfK indicator, to its lowest point since Margaret Thatcher was ousted from office. Again, pretty grim. But the eurozone isn’t immune either – French consumer confidence has now fallen to its lowest level in 20 years.

And as for inflation, despite the European Central Bank’s (ECB) reputation as a hard-nosed inflation fighter, Europe’s having trouble with rising prices too. Last Friday’s figure turned out worse than expected, coming in with an annual rate of 3.6%, adding to what ECB president Jean-Claude Trichet has called policy makers’ “biggest challenge”. Despite the strong currency, that’s 0.6% higher than in the UK. Indeed, the pressure’s now building on the ECB for the next move in interest rates to be up.

And the broader picture for the euro isn’t looking a lot brighter than for the pound, either. Because long-term private investors are pulling their cash out of the eurozone at the fastest rate since the creation of the single currency, says a report by BNP Paribas.

Foreign direct investment in plant and factories has swung down over the past year to a negative €149bn (£117bn), including a drop to minus €19bn in March alone as the surging euro drove up relative labour costs in southern Europe. Add in a $280bn withdrawal of private funds from eurozone equities and bonds, and total outflows have exceeded €400bn over the last twelve months.

The euro is now suffering from the “reserve currency curse”, says Ambrose Evans-Pritchard in The Telegraph, as central banks in Asia, Russia, and the Middle East use it as an alternative to the dollar. “While Asian funding has helped ease the credit crisis in Europe, it has also pushed the exchange rate to damaging levels. The eurozone has gained financial flows, but has lost industrial and investment flows.”

BNP’s currency strategist Hans Redeke sees mounting signs of stress. “There are lots of ugly surprises in store as deleveraging finally hits Europe. Investors are going to stop treating the eurozone as if it were just Germany. We will discover in this downturn whether the eurozone is really an ‘optimal currency area’. This is the test”.

So, on reflection, maybe this isn’t the time for the Treasury’s great and good to contemplate dumping the pound. And if you’re still unconvinced, here’s what the FT’s Martin Wolf has to say. He’s such a staunch opponent of such a move, he’s even just criticised his europhile peers in print: “the Lex column argued last week that the UK was close to meeting the economic tests for joining. Lex is wrong.

Three reasons why our currency should be left alone

We’ve not been hurt historically by being out of the euro, says Mr Wolf. Between the first quarter of 1999 and the first quarter of 2008, Britain’s economy expanded by 28% compared with 21% in the eurozone as a whole and 16% in Germany. Nor has London’s position as a financial centre been hurt.

In fact, had the UK been a recent eurozone member, our present situation could be even worse. Our credit bubble would have inflated more, because euro interest rates have been lower. On top of that, now that the domestic spending boom is over, there’d have been no offsetting benefit from the recently plummeting pound.

Inflation may well now rise faster in the UK than in the eurozone, but at least we have some hope of controlling this. The Bank of England can set interest rates to suit Britain alone, rather than relying on the ECB, which is arguably far more concerned with how suitable interest rates are for Germany. If the BoE sticks firmly to its 2% inflation target, Britain will almost certainly veer into recession, but then so will the eurozone countries.

So forget the euro – our currency should just be left alone, to find its own level. Which of course, looks like it could well be considerably lower than it is now.

Source: Should Britain Dump the Pound for the Euro?

It appears that inflationary concerns are being put on the back burner as the Fed scrambles to fix what it believes to be more pressing economic concerns. But what is this going to do to fix rising costs in energy and other sectors?
More Cuts, More Concerns

Markets exaggerate in both directions. They create bubbles of overvaluation when expectations are high; they create troughs of undervaluation when expectations are low. At the present time, there is a struggle between optimism and pessimism, in which London is a good deal more optimistic than New York or Washington.

The Bank of England has published the latest issue of its twice-yearly Financial Stability Report. The Financial Times leads on the story under the optimistic heading “Bank of England Signals Worst Is Over.” The report’s argument was summarized by John Gieve, the deputy governor of the bank: “While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months.” The bank’s optimism extends even to the U.S. housing market.

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Even with a further decline in U.S. house prices, the bank does not expect any default in AAA-rated subprime mortgage-backed securities. That means that those securities are significantly undervalued and that some of the writing down has been much greater than necessary.

This optimistic review was published on the day that the Federal Reserve cut interest rates by a further quarter percentage point, to 2%. This was only slightly mitigated by the Fed’s hint that there might be a pause in rate cuts at the next meeting, in June.

There is now a very wide gap between the interest rate philosophy of European central banks, including the Bank of England, and the U.S. Federal Reserve. The Europeans have shown little willingness to counter the credit crunch by large and repeated interest rate cuts. The Fed has continued to follow the much-criticized Alan Greenspan policy of cutting rates early and often.

The pessimistic American view is supported by most New York opinion. Jim O’Neill, the chief economist of Goldman Sachs, says that Britain is “in the eye of the storm of a deleveraging world economy… The U.K. mortgage market is effectively frozen. House prices are going to go through negative changes. It’s going to be a challenge for U.K. policymakers.” This American view has even penetrated to the Bank of England’s Monetary Policy Committee, where an American member of the committee, David Blanchflower, has said that a 30% fall in house prices by 2010 is not implausible. Such a fall would be comparable to the fall in house prices in the United States.

My own view is that the Bank of England is probably premature in spotting a turn in the market. For some time yet, banks will be rewriting their capital bases. They will be concerned to reassure themselves and their customers about their own financial situation and will, therefore, remain risk averse and reluctant to lend. The banks have had a very nasty fright, in which it was impossible to value major investments and difficult to be sure of the true solvency position of major banks. That was a global phenomenon.

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It may be true that the worst of the immediate panic has passed, but the mood of caution, even of exaggerated caution, has not. There are also, in the U.K., problems with the falling valuation of commercial property that are as worrying as the concerns about U.K. residential policy. The Bank of England wants to help restore confidence, but it will take time for banks to return to their more relaxed attitude to the lending risk. Indeed, the Bank of England would not want them to go back to the mood of 2006, when lending standards were too low.

However, the European view is not merely one of optimism about the future trend of asset values, but one of greater pessimism about inflation. Record prices for property may have peaked; some commodities, including gold, have reacted, as well. But energy and food prices are at record levels and have not yet turned down.

European bankers remain relatively anxious about the threat of a return to inflation. That is why European Central Bankers are reluctant to follow the Fed in cutting interest rates. The Bank of England is also worried about the rising budget deficit of the British government. High interest rates tend to offset the inflationary effect of the deficit, which itself seems to be rising by the day.

I find it easy to see the pessimistic case. I expect the U.K. housing and commercial property markets to continue to fall. In London, they are very closely linked. I expect the U.K. budget deficit to continue to rise. I expect Bank of England interest rate policy to remain cautious, as will that of the European Central Bank. I expect these financial conditions to continue in 2009, and probably 2010, as well. There is not all that much encouragement for optimism.

Regards,
Lord William Rees-Mogg

Greg’s Endnote: For the time being, the dollar appears to be rebounding. But that’s not necessarily the case. If European central banks raise interest rates, you can expect the dollar to slide yet again. This means that oil and energy prices will go right back up, and will most likely push even farther. Click here to read about why oil prices are destined to stay on the rise…

Greg’s Final Endnote: If you’d like to hear more from our resident commodities expert and Resource Trader Alert editor, Kevin Kerr, on why he thinks the commodity bull market is far from over, you can see his full interview from MarketWatch.com which aired this morning by clicking here.

Typically, lower rates are good news for borrowers, as they signal lower mortgage interest rates. That expectation has been turned on its head. The credit crunch has prompted lenders to ignore the will of the central bank and instead look after their own.

The Nationwide is increasing its fixed rate mortgages by up to 0.32% today and Alliance & Leicester are doing much the same tomorrow. And that comes just three days after A&L slapped on 0.35% on the same deals, reports the Times. “Experts blame the soaring coast of Libor, the rate of interest at which banks lend to one another.” Libor continued to rise in the first quarter but has dipped back below its 6% plus high for the year. It’s currently 5.92%.

But while credit is drained from the West and food runs short in the East – public order is at risk in at least 33 countries warns the World Bank – what’s really caught your editor’s attention is globalisation as applied to the beautiful game… Something brought into focus by this year’s UEFA Champions League – Europe’s premier football club competition – quarter final line up. This is a quick run through as I saw it…

Four of the eight teams in the quarter finals were English. An achievement which produced a fair degree of backslapping amongst football’s talking heads. ‘It just shows the quality and dominance of the English Premier League over our European rivals’, they crowed. The qualifying teams were the leading ones in the English Premier League: Arsenal, Chelsea, Liverpool and Manchester United.

On Tuesday night Chelsea, owned by a Russian, with a team managed by an Israeli and fielding four English born players beat Turkish team, Fenerbahce, to win 2-0, with goals scored by an Englishman and a German.

Liverpool also played on Tuesday night, with a team managed by a Spaniard and owned by Americans, fielding three English born players. They won on 3-1 with goals from a Dutchman, a Finn and an Englishman. Their opponents were Arsenal – an English-owned team, but with significant Ukrainian and American minority shareholders either of whom may yet take it over. They have a team managed by a Frenchman and fielded no English born players in the game, though later introduced one as a substitute. Their single goal was scored by a Frenchman.

Last night the fourth English club Manchester United, owned by Americans, managed by a Scot, played Italian club AS Roma. They fielded three English born players, though added two more as substitutes and beat Roma 1-0 with the single goal being scored by an Argentinean.

From a total 44 players in the starting line up of these four leading English teams I make ten of them English by nationality. As to England’s national team, it failed recently to qualify for a major tournament, prompting the English manager to be dumped and replaced by an Italian one.

‘Viva el primero liga! El numero uno in el mundo globalizado’ as they say in I don’t know where… The internationalisation of English football seems a high profile proxy for globalised Britain. The league is highly successful and the envy of others, it is rich from TV sponsorship and can attract the best talent from the global labour pool of the world’s footballers. Standards have never been higher nor have ticket prices. All to the good, unless of course you happen to be a credit squeezed fan, or home grown talent looking for a break.

In the financial world, the success of foreign businesses to Britain, adopts a tennis comparison: the “Wimbledon Effect”. Given the summer tennis tournament hasn’t had an English men’s champion since Fred Perry won for the third time in 1936 or a women’s champion since Virginia Wade in 1977, it provides a pithy analogy for the UK’s financial services industry; an industry that has been highly successful in spite of the dearth of local champions. The dashed hopes of two of Britain’s leading investment banks from yesteryear were a case in point.

Back in 1986, The Economist tipped Kleinwort Benson and SG Warburg as the leading British investment banks poised to become world class financial institutions. It didn’t happen. Kleinwort Benson was bought out by Germany’s Dresdner bank in 1995 which in turn was bought by the German insurance giant Alliance. SG Warburg was swallowed up the same year by Swiss Bank Corporation, now subprime disaster-case UBS. A national champion in investment banking was not to be. But then given the spectacular fate of Bear Stearns, perhaps we should be grateful.

*** Colleague Manraaj Dheensay, editor of Profit Hunter, notes there are those in the developing world not hurting from the credit crunch or rocketing food prices:

“At Christie’s on Tuesday an anonymous buyer paid a record £2.5 million for a single leaf from an ancient Koran manuscript – more than twenty times the auction house’s lower estimate for the lot. Just a few minutes later, a 10th-century carved marble capital from a royal palace of the Moorish rulers of Spain sold for £1.3 million pounds, setting a new record for an Islamic stone carving. Christie’s estimate for the piece had been £50,000 to £70,000. The sculpture was put up for sale by a church in Pennsylvania, where it had been hidden in a barn for more than a century. And at Sotheby’s yesterday, a late 12th-century iron key to the Kaaba in Mecca – Islam’s holiest site – sold for £9.2 million pounds – about 20 times its estimated price.”

“”The number of international private buyers active at the top end of the market demonstrates the increasing strength in depth in the Islamic and Indian Art Worlds,” said William Robinson, Christie’s international head of Islamic art, after the auction. What he was saying is, essentially, what we have been saying here at Profit Hunter – there is a huge amount of money out there in the developing world, and that pot is growing very, very quickly indeed.”

And for the energy producers, never more quickly than with a near-record $111 oil price.

Regards,

Rob Mackrill
The Daily Reckoning