Investors Fear Europe’s Woes May Extend Global Slump

The New York Times - Just as America’s recession begins to ebb, trouble is brewing in Europe that may prolong a downturn on the Continent and ricochet through the global economy as it struggles toward a recovery.

A rout in stock markets that began in Europe spread to Wall Street on Thursday and around the globe to Asia on Friday, amid fears that Europe may be the world’s next financial flashpoint. Pressure has been mounting across the Atlantic as Greece, Portugal and a handful of struggling countries that use the euro scramble to pay off mountains of debt accumulated from years of profligate spending.

The Dow Jones industrial average slid 2.61 percent, or 268.37 points, to 10,002.18 Thursday, after briefly falling below 10,000 for the first time since November, as American investors grew more uncertain about Europe’s economy.

Stock markets across Europe slumped as much as 6 percent, and worries that the troubles might push even big European nations like Spain into a financial crisis drove the euro to $1.37, a seven-month low against the dollar.

Markets in Europe slipped further on Friday, after a sharp sell-off in Asia, amid continued worries about government debt in several European countries and about the state of the U.S. labor market.

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http://www.nytimes.com/2010/02/06/business/global/08euro.html?ref=europe

Dollar's Woes Not Over

The Wall Street Journal - After three months of losses for the U.S. dollar against the euro, what's one more week?

Traders say the dollar, which fell to its lowest level this year on Friday, is likely to continue to trend lower this week as investors sift through a number of key data reports, as well as news from the European Central Bank policy meeting, and react to another round of Federal Reserve Treasury purchases.

The bond purchases may be the key to the dollar's performance in the first part of the week, as they could drive down yields, particularly as the Treasury won't have any note sales this week.

With market rates falling, inflation fears will come to the fore again.

Not that the dollar's chances for a bounce are nil.

"The dollar-positive scenario comes if the Fed allows a bond market selloff to undermine housing," said John Normand, a foreign-exchange analyst at J.P. Morgan Chase. "But officials are unlikely to take this gamble so early in the recovery."

Ultimately, the most vulnerable currency in the near term is the one that is most exposed to quantitative easing.

Given the Fed's commitments on asset purchases, the dollar fits the bill, which will give the euro room to advance after hitting $1.4168 Friday, a level unseen since Decemberhttp://online.wsj.com/article/SB124381671772870785.html

China Slows Purchases of U.S. and Other Bonds

The New York Times - HONG KONG — Reversing its role as the world’s fastest-growing buyer of U.S. Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released this weekend by China’s central bank.

China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years. For the quarter, the reserves edged up $7.7 billion, compared to a record increase of $153.9 billion in the same quarter last year.

The main effect of slower bond purchases may be to weaken Beijing’s influence in Washington, by lessening the reliance of the U.S. Treasury on Chinese central bank purchases at its government bond auctions. Chinese officials from Premier Wen Jiabao on down have expressed growing nervousness over the past two months about their country’s huge exposure to America’s financial well-being.

Private investors from around the world, including the United States, have been buying more American bonds in search of a refuge from global financial troubles. This has made the Chinese government’s cash less necessary and kept interest rates low in the United States over the winter despite the Chinese pullback.http://www.nytimes.com/2009/04/13/business/global/13yuan.html

What Happens if the Dollar is Dethroned?

The Wall Street Journal-There could be far-reaching implications for commodities should the U.S. dollar lose its status as the world's reserve currency.

While such a move could mean more demand for commodities as a hard asset, or "store of value," if there were a general distrust of all currencies, there are differing views on whether it would mean less currency-related fluctuations in pricing of commodities and just what the impact might be on producers around the globe.

It also would remain to be seen whether the world would go to the International Monetary Fund's Special Drawing Rights program -- a reserve asset based on the value of a basket of four currencies -- and whether commodity exchanges would automatically follow suit.

Last Wednesday, Treasury Secretary Timothy Geithner prompted a drop in the dollar when he suggested the U.S. would be "open" to an expansion of the IMF's SDR program, a move China had suggested two days prior. The market initially treated this as consideration for a new global reserve currency, but the greenback quickly recovered as the foreign-exchange market soon dismissed the remark as a misstep. Mr. Geithner himself maintained the dollar would remain the world's dominant currency.

Still, it raises the question of what might happen to commodities if the dollar was no longer king, even though some commodity analysts, such as Logic Advisors principal Bill O'Neill, describe the question as academic more than anything.

"This is an extremely hypothetical situation," said Sterling Smith, vice president with FuturesOne. "I'm not entirely sure it would work all that well."

Commodities such as oil are traded in dollars not only in the U.S. but also on some of the other major exchanges in the world, such as London. This means potential for changes in the supply-demand dynamics whenever the dollar makes a big move. For instance, a weak dollar tends to support commodities by making them cheaper in other currencies and theoretically improving demand, and vice versa.http://online.wsj.com/article/SB123836224310167113.html

Once a Boon, Euro Now Burdens Some Nations

The New York Times - ATHENS — “The Italians, the Spaniards, the Greeks, we all have been living in happy land, spending what we did not have,” said George Economou, a Greek shipping magnate, contemplating his country’s economic troubles and others’ from his spacious boardroom. “It was a fantasy world.”

For some of the countries on the periphery of the 16-member euro currency zone — Greece, Ireland, Italy, Portugal and Spain — this debt-fired dream of endless consumption has turned into the rudest of nightmares, raising the risk that a euro country may be forced to declare bankruptcy or abandon the currency.

The prospect, however unlikely, is a humbling one. The adoption of the euro just a decade ago was meant to pull Europe together economically and politically, ending the sometimes furious battles over who could devalue their currency the fastest and beggar their neighbor.

For the Continent, the currency signaled the potential to one day rival the United States. For its poorer countries, winning admission to the euro zone was a point of pride, showing that they had tamed their budget deficits and set their financial houses in order.

Now, in the middle of the worst economic downturn since the euro’s birth, a new view is emerging — especially as the creditworthiness of Greece, Spain and Portugal, one after the other, has been downgraded. The view is that the balm of euro membership allowed these countries to gloss over serious economic problems that have now roared to the fore.http://www.nytimes.com/2009/01/24/business/worldbusiness/24euro.html?partner=permalink&exprod=permalink

Falling Pound Raises Fears of Stagnation

The New York Times - LONDON — An island nation that bulked up on debt and lived beyond its means. A plunging currency. And a financial system edging toward nationalization.

With the pound at a multidecade low and British banks requiring ever-larger injections of taxpayer cash, it is no wonder that observers have started to refer to London as “Reykjavik-on-Thames.”

While that judgment seems exaggerated, there are uncomfortable parallels between Iceland’s recent financial downfall and Britain’s trajectory. Equally important, news that widening bank losses in Britain have necessitated another round of government life support provides a stark example to the United States.

Washington’s attempts to stabilize financial institutions have failed so far, as well. And now the Obama administration, along with the rest of the world, could watch Britain to see what a bank nationalization might look like, and what it might suggest for American banks.

Ordinary Britons have a more basic worry. After relishing the boom that transformed the drab United Kingdom into Cool Britannia, they fear that the disheartening economic stagnation of the 1970s might return.

The pound, a symbol of British independence from the Continent that is revered nearly as much as the queen, is now down nearly 29 percent against the dollar from a year ago.

There has been a steady drumbeat of gloomy economic news for months, but the mood in Britain has darkened starkly in recent days.

On Monday, Royal Bank of Scotland warned that its 2008 losses could hit £28 billion, or $38 billion, even as Prime Minister Gordon Brown announced a second bailout package for the troubled banking sector worth tens of billions of pounds. Ultimately, the British rescue effort could cost at least £350 billion, with some estimates ranging far higher.http://www.nytimes.com/2009/01/22/business/worldbusiness/22pound.html?partner=permalink&exprod=permalink

Pound Falls Against The Dollar

LONDON -- The British pound fell to a fresh seven-and-a-half-year low against the dollar and a record low against the yen Wednesday amid mounting fears about the British banking sector and expectations the Bank of England will start pumping money into the economy within weeks.

By late morning London time, the pound fell over 2% in European trading to $1.3716, its lowest since June 2001's $1.3685, before recovering slightly to $1.3743.

Meanwhile, the pound plunged to a new all-time low of 122.99 yen before recovering slightly to 123.50 yen.

The pound, which has slumped from midsummer highs of above $2, has been battered on all sides in recent days as the collapse in bank shares, most notably Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC, has fueled speculation that the government will have to take nationalize them, thereby swelling its already hefty debt levels.http://online.wsj.com/article/SB123253882759202161.html

Dollar's Rise Could Damp Inflation

The Wall Street Journal - The U.S. dollar marched higher again on Friday, continuing a development that could ease inflationary pressures but also could slow a U.S. export boom.

Just a couple of months ago, policy makers were alarmed about how far the dollar had fallen. Now evidence is building that its seven-year slide may be ending.When a currency strengthens, it's usually a sign of health in the underlying economy. In this case, the dollar's rally is a sign of weakness in other economies. Reports in recent days showed that the economies of Japan and Europe contracted in the second quarter, and the U.K. slowed. It's now looking less likely that the rest of the world will be insulated from U.S. economic ills.

The dollar's latest rise is closely tied to recent declines in oil and other commodity prices. As economies in the rest of the world slow, demand for raw materials appears to be waning, which is taking pressure off commodity prices. These goods are typically priced in dollars. As the U.S. currency strengthens, commodity producers have less incentive to increase their prices, further easing the upward pressure on prices. http://online.wsj.com/article/SB121884105817145699.html?mod=hps_us_pageone