Thread: Forexpros Fundamental Weekly Outlook, Nov 30-Dec 4,2009

Dollar slips after European bank meeting
Euro rises after central bank hints it will begin winding down liquidity-boosting operations.
NEW YORK (Reuters) -- The euro rose against the dollar Thursday after the European Central Bank hinted it would slowly start withdrawing emergency liquidity while the yen fell amid fears Japan may move to weaken its currency.

Though the ECB at a meeting left interest rates at record lows, its president, Jean-Claude Trichet, said the next 12-month refinancing operation for banks would be the last. The bank also lifted its economic growth forecast for 2010.

The euro neared a 16-month high around $1.5140 and rose against the yen but it gave up some gains when Trichet said plans to wind down some emergency programs were not a signal that interest rates may be about to change.

"He hinted that they'll do something about an exit policy, so the first knee-jerk reaction was euro positive, but he's not ready to endorse a full exit quite yet, so it's really neither overly supportive of, nor detrimental to, the euro," said Boris Schlossberg, head of research at GFT Forex in New York.

Ultra-loose monetary policy tends to undermine a currency's value because it increases money supply and risks inflation.

The euro rose 0.3% to $1.5085 and 1.1% to ¥132.94.

The euro got a modest boost when Bank of America (BAC, Fortune 500) said it would repay bailout funds to the U.S. government. That increased risk appetite and suggested banking sector improvement.

The yen was under pressure for the second straight day after the Bank of Japan said this week it would provide new three-month funding to banks to combat deflation and after top officials warned that the currency had grown too strong.

The dollar was up 0.8% at ¥88.15, off a 14-year low of of ¥84.82 plumbed last week.

BOJ Governor Masaaki Shirakawa said the central bank does not target foreign exchange for monetary policy but "if the bank's easy stance becomes widely known in markets, it will have certain effects on the currency market in the long run."

Sterling fell 0.3% to $1.6575 while the dollar fell 0.3% to 0.9989 Swiss francs.
Trichet, Bernanke speak

Analysts said Trichet had to walk a fine line as any hint of a rate rise would prompt traders to bid up the euro, especially as the U.S. Federal Reserve has said it would keep its own rates low for an extended time.

"He's saying the outlook for economic growth is still uncertain, which means he's not overly confident, and it seems that is capping the euro gains," said Hidetoshi Yanagihara, senior FX trader at Mizuho Corporate Bank in New York.

In Washington, Fed Chairman Ben Bernanke made his case for a second term in testimony before Congress, telling lawmakers the Fed's forceful actions have prevented a devastating crisis from turning into something even worse.

Bernanke also pledged to maintain price stability and said fiscal deficits eventually have to come down. Some analysts have worried that rising U.S. debt and deficits will undermine the dollar further and eventually provoke higher inflation.

In separate remarks, U.S. Treasury Secretary Timothy Geithner reiterated the importance of a strong dollar and said the United States must persuade the world it will be more fiscally responsible.

Bernanke under fire at confirmation hearing
Central bank chairman gets support from some key senators, but even praise is qualified, while others offer harsh attacks.
NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke got a rough going over from both his supporters and detractors at his Senate confirmation hearing Thursday.

Even some of those who praised his actions during the financial troubles of the last two years, such as Senate Banking Committee Chairman Chris Dodd, balanced that support with arguments that the central bank should be stripped of some of its bank regulation powers due to its past failures of oversight.

While many Democrats on the banking panel joined Dodd in saying they would vote for another four-year term for Bernanke, some of the Republicans questioned whether they could support the chairman who was first appointed by President George W. Bush.

One, long-time Bernanke critic Jim Bunning, R-Ky., said he was ready to do everything he could to block or delay the confirmation, joining a similar threat made late Wednesday by Sen. Bernie Sanders, the Socialist senator from Vermont who is among the 60 members of the Democratic caucus.

The threat of a filibuster by Sanders and Bunning, two senators with diametrically opposed views on most issues, shows the breadth of anger faced by Bernanke sparked by the Wall Street bailouts of the 15 months. A filibuster would meant that Bernanke would need to get at least 60 votes, rather than the simple majority of 51, in order to be confirmed.

And the questions by Dodd and others about the Fed's continued role as a bank regulator raised questions about how Bernanke will be able to do his job if he is confirmed for another term, which is still widely expected.

Dodd said Bernanke and the Fed deserved credit for the steps taken in the financial crisis of a year earlier to stop the economic crisis from becoming significantly worse than it did.

".I believe you are the right leader for this moment in the nation's economic history and I believe your reappointment sends the right signal to markets," Dodd said during his opening statement.

But the committee's ranking Republican, Sen. Richard Shelby of Alabama, was far more critical of Bernanke in his opening statement, telling Bernanke "I fear now our trust and confidence (in the Federal Reserve) was misplaced."

"Not everything that went wrong depends on the system because that system also depends on the people who run it," he told Bernanke. "It's those individuals who need to be accountable for their actions or their failure to act."

Still, despite the implication that he couldn't support confirmation, Shelby did not say how he intended to vote.
Fight over Fed's future powers

Dodd has proposed legislation that would strip much of the bank supervisory duties from the Fed, giving them instead to a newly created authority. He said it might be better if the Fed simply focuses on using monetary policy to support economic growth and fight inflation while maintaining a stable financial system.

Dodd also said the financial crisis is at least partly due to poor supervision of the banking sector by the Fed.

"I admire what you've done over the last two years," he said. "But we shouldn't have had to go through what we did for the last two years had there been cops on the street, doing their jobs, telling us what was going on and allowing us to avoid the problems in the first place."

"Why should I give an institution that failed in that responsibility the kind of exclusive authority we're talking about here?," Dodd asked.

Bernanke responded that the Fed could not have taken the steps that Dodd had praised to stabilize the financial system if it were stripped of its role as banking regulator.

"There's no way we could have been as involved and effective in this crisis if we did not have that knowledge and expertise," he said.

Bernanke also opposed a proposal that recently passed the House Financial Services Committee to give the General Accountability Office power to audit the Fed's monetary decisions, saying that it would be seen by investors as giving Congress the power to pressure the Fed to reverse or delay unpopular rate hikes.

He said if there are increased worries about Congressional interference in the Fed action, it would not be able to stop real rates from rising because investors would demand higher yields on bonds.

Questioned by Sen. Robert Bennett, R-Utah, about the risk of a return of soaring inflation of the late 1970's, and whether the Fed would have to raise rates to the record highs of that era to once again to conquer such runaway prices, Bernanke said he was confident there is not a risk of a return of such inflation.

But he added that the ability of the Fed to beat inflation at that time was a "case study" of why Congress should not audit monetary decisions of the Fed.
Mistakes were made

Bernanke admitted that the Fed made mistakes in supervising the banking system ahead of the financial crisis, and promised to do better. But he said that supervision is already improving, and that it would be a bad idea to strip the Fed of its powers.

"If you fight a battle and lose the battle, does that mean you never use the army again? You have to improve and fix the situation. You don't have to necessarily eliminate the institution," he said in response to one of Shelby's question. "We didn't do a perfect job by any means, but I don't think we stand out as having done a worst job than other regulators."

Bunning, the only member of the Senate to vote against Bernanke when he was first nominated to head the central bank four years ago, was again his harshest critic.

Bunning said Bernanke and previous chairman Alan Greenspan were responsible for helping to inflate the housing bubble whose bursting caused the housing crisis, and that the Fed continues to create more problems by pumping too much cheap money into the system.

At one point Bunning even slipped and referred to Bernanke as "Greenspan," prompting chuckles from both the chairman and his critic.

"You put the printing presses into overdrive to fund the government spending and hand out cheap money to your ******* on Wall Street, which they used to rake in record profits while ordinary Americans and small businesses can't get loans for their everyday needs," Bunning said. "Where I come from we punish failure, we don't reward it."

He attacked Bernanke for the bailout of American International Group (AIG, Fortune 500) and a recent report from an inspector general that the Fed should not have paid 100% of the money owed by AIG to leading financial firms.

"The AIG bailout alone is reason enough to send you back to Princeton," Bunning said.

Dodd joined Bunning in his criticism of the Fed's handling of those payments in the AIG bailout. Bernanke answered that he did not have the leverage to force those banks to accept lower payments during those negotiations.

Oil edges higher
Crude prices recover from previous day's selloff, but gains are contained on growing stockpiles.
LONDON (Reuters) -- Oil prices rose on Thursday as fund activity helped the market to recover from a sell-off the previous session, but oversupply curbed gains.

U.S. crude for January delivery rose 69 cents to $77.29 a barrel, after settling down $1.77 at $76.60 on Wednesday.

Wednesday's falls, which stemmed a two-day rise, followed U.S. government data showing crude stocks rose 2.1 million barrels last week, topping the forecast for a 400,000 barrel rise in a Reuters poll.

The mass of available crude had a particularly marked impact on contracts for delivery in the near term and fund flows were moving from the front-month January contract into February crude, analysts said.

A European Central Bank announcement that it would maintain its main interest rates at 1%, widely expected and generally priced in, held no sway over oil prices, but set the stage for an eventual phase-out of its financial crisis support.

The focus will now be on what ECB President Jean-Claude Trichet says at a news conference.

"The end result over the next six months is you have low interest rates with unleveraged cash in bank accounts seeking somewhere to go in search of yield, and this favors risk appetite and supports equities," said senior BNP Paribas commodities analyst Harry Tchilinguirian.

This can also support oil, but its weak fundamentals have modified the potentially bullish impact.

"Oil will keep doing what it has been doing in relation to equities since March. It's not that oil prices are disconnected from fundamentals, it's that front month prices are reacting to equity markets," Tchilinguirian said.

European shares rose for a third consecutive session on Thursday. The FTSEurofirst 300 was up 0.4% at 1,020.20 points and 58% from the life-time low in March after slumping 45% in 2008 because of the global economic downturn.
OPEC output

Oil hit a high of $82 a barrel in October, but failed to hold above that level as the combination of excess supply, sluggish demand and nervousness about a fragile world economy have knocked the market lower.

The Organization of the Petroleum Exporting Countries meets to reconsider its output policy on Dec. 22 in Angola.

Ahead of that, ministers of the core Arab members of OPEC meet at the weekend in Cairo, where they are expected to discuss supply and demand but without taking formal decisions on the group's production.

Kuwait's oil minister in comments to reporters on Thursday said he was concerned about the high levels of inventory, although he did not expect the group to change output targets at its December meeting.

Adding to OPEC's challenges, the biggest non-OPEC oil exporter Russia set a fourth consecutive monthly output record in November.

It is currently the world's largest producer, although Saudi Arabia is the world's biggest exporter and has shut in spare capacity.

Jobless claims slide to near 15-month low
Number of initial filers for unemployment insurance falls to 457,000, lowest level since September 2008.
NEW YORK (CNNMoney.com) -- The number of first-time filers for unemployment insurance fell last week to a nearly 15-month low, according to a government report released Wednesday.

There were 457,000 initial jobless claims filed in the week ended Nov. 28, down 5,000 from a revised 462,000 the previous week, the Labor Department said.

That's the lowest level since the week ended Sept. 6, 2008. The week being reported included the Thanksgiving holiday.

A consensus estimate of economists surveyed by Briefing.com expected 480,000 new claims for the week.

The 4-week moving average of initial claims was 481,250, down 14,250 from the previous week.

Continuing claims: The government also said 5,465,000 people filed continuing claims in the week ended Nov. 21, the most recent data available. That's up 28,000 from the preceding week.

The 4-week moving average for ongoing claims fell by 75,750 to 5,541,500.

But the slide in continuing claims may signal that more filers are falling off those rolls and into extended benefits.

Continuing claims reflect people filing each week after their initial claim until the end of their standard benefits, which usually last 26 weeks. The figures do not include those who have moved to state or federal extensions, nor people who have exhausted their benefits.

Obama's jobs forum. The Obama administration is holding a jobs summit Thursday. The president will meet with labor representatives, financial experts, small-business owners and other business leaders to discuss how to revive the labor market.

The 130 forum participants are meeting on the eve of the government's November unemployment report.

The nation is expected to have lost another 125,000 jobs, with unemployment remaining at a 26-year high of 10.2%, according to a consensus of economists surveyed by Briefing.com.

Last month, the Labor Department reported that the nation's unemployment rate rose above 10% for the first time since 1983.

A separate report released by outplacement firm Challenger, Gray & Christmas Inc. Wednesday showed the pace of job losses slowing to the lowest level in two years, but the number of cuts announced in 2009 have already exceeded last year's total.

State-by-state data: Only one state reported initial claims fell by more than 1,000 for the week ended Nov. 21, the most recent data available.

Claims in Michigan decreased by 1,242, which the state attributed to fewer layoffs in the auto industry.

Nineteen states said that claims increased by more than 1,000. California reported that claims rose by 14,796; Illinois had 6,168 more claims; North Carolina's increased by 5,557; Pennsylvania saw a jump of 5,285; and Texas claims rose by 3,500.

Oil climbed near $73 a barrel Wednesday after a government inventory report showed crude supplies fell almost twice as much as analysts expected and the Federal Reserve announced it would keep interest rates near 0%.

Crude oil for January delivery rose $1.97, or 2.79%, to settle at $72.66 a barrel. On Tuesday, oil rebounded from a nine-day retreat, rising $1.18 to settle at $70.69 a barrel.