RISE OF THE NEW PACIFIC POWERS
A relaxed and cheerful George W. Bush, on his final presidential trip to east Asia, seemed visibly relieved on Thursday to be leaving behind the vexatious foreign policy challenges that go with his office.
Delivering an Asia policy speech in Bangkok before attending Friday’s opening of the Olympic Games in Beijing, Mr Bush jokingly recalled Thailand’s historical habit of giving inconveniently large elephants to its allies and reminisced about the enthusiasm for Elvis Presley evinced by Junichiro Koizumi, the former Japanese prime minister.
More importantly, Mr Bush was able to assert truthfully that relations between the US and Asia have improved during his eight years in the White House.
He summarised all that has gone right for trans-Pacific ties, including a rise in two-way trade to more than $1,000bn last year, a lessening of tension in the Taiwan Strait and the forging of stronger relations between the US and several Asian democracies.
Mr Bush predictably condemned the weak and isolated regimes of North Korea and Burma, and cautiously criticised the rather more powerful government of China for suppressing political and religious freedom, earning an equally predictable and formulaic response from Beijing rejecting interference in China’s internal affairs.
Sino-US relations have certainly improved since the early and confrontational days of the first Bush administration in 2001, when a US EP3 spy plane was forced to land in China after a fatal collision with a Chinese jet fighter.
The suspicion remains, however, that the benign state of US-Asia ties today is as much the result of luck as of design. In focusing their energies on Iraq and the Middle East, Mr Bush and his team neglected Asia – and were indeed criticised for doing so by some of their smaller Asian allies. Ironically, that seems to have allowed flows of trade and investment, unimpeded by politics, further to bind together the two sides of the Pacific.
And for all Mr Bush’s talk of liberty, democracy and the rule of law (a message undermined in any case by detention without trial in Guantánamo Bay and the torture of prisoners in Iraq), he has in fact retreated on matters of principle before the advancing Asian powers of India and China.
The US administration was so eager to befriend India that it struck a controversial and arguably illegal deal that would – if ratified by all sides – allow the supply of civilian nuclear technology to India in spite of its refusal to sign the nuclear Non-Proliferation Treaty. As for China, the country is now so powerful an economic and political force that Mr Bush has bowed to the Communist party’s wishes and will neither meet political dissidents nor worship in an unapproved church during his visit to Beijing.
Militarily, the US will remain pre-eminent for many years, but it is nevertheless a Pacific superpower in relative decline. Mr Bush, who has had to deal with this uncomfortable reality, can perhaps take comfort from the knowledge that his successor as US president will face exactly the same problem.
The crisis: a tale of two monetary policies
By Martin Feldstein
The European Central Bank and the Federal Reserve are facing similar problems but pursuing different policies. The ECB has been raising interest rates while the Fed has been cutting them. The overnight federal funds rate is now 2 per cent while the corresponding ECB rate is 4.25 per cent. Which central bank is doing the right thing? Or could they both be?
Inflation is a significant problem in both the eurozone and the US, with a headline consumer inflation rate over the past 12 months of 4 per cent in the eurozone and 5 per cent in the US. Both economies are also facing declining economic activity with falling employment and lower industrial production.
The sharp rise in the prices of energy and food during the past 12 months will undoubtedly spill over into higher prices for other products in both the US and Europe. The primary challenge for both central banks is to limit this inflationary shock to a one-time pass through, avoiding the rise in wages that would occur if employees attempted to offset the decline of their real incomes. It was that futile wage-price spiral that drove inflation rates in the 1970s to double-digit levels. Preventing a repetition of that requires convincing the public that today’s high inflation rate will soon decline.
Despite the similar problems faced by the two central banks, there are important differences that justify their separate strategies. The contrast between the ECB’s mandate to achieve price stability and the Fed’s “dual mandate” to balance the goals of price stability and employment is not just an accident of legislative history but a reflection of fundamental differences between the two economies. Those differences make it more difficult to tame inflation expectations in Europe and therefore require the ECB’s tougher policy.
The role of trade unions is the most important difference. Only 7.5 per cent of US private sector employees are union members and they are concentrated in automotive, airline, construction and other depressed industries. In contrast, more than 25 per cent of employees in the European Union are members of trade unions and in some EU countries the wages set in union contracts are automatically extended to other companies in the same industry.
Because of this union power, the ECB must persuade union members and their leaders that it is determined to bring inflation down to its target level of less than 2 per cent. The ECB’s tough stance and exclusive emphasis on price stability is crucial to shifting inflation expectations and persuading unions to accept the rise in food and energy prices without pressing for offsetting wage gains.
In contrast, the Fed does not have to worry in the same way about union power and collective bargaining. Wage setting is decentralised and wage contracts do not have the formal links of wages to inflation that intensified the wage-price spiral of the 1970s.
Differences in the inflation histories also influence today’s appropriate policies of the ECB and the Fed. Although Americans remember the double-digit inflation of the late 1970s and early 1980s, there has been no US experience similar to the earlier hyperinflations in Germany and other EU countries. The ECB pursues a tough inflation target policy to persuade Europeans that there is not even a small probability of returning to those conditions.
Finally, the ECB recognises that it is still a very young institution that must prove to the European public that it will follow the successful anti-inflation tradition of the German Bundesbank. But a decade of relatively good performance is not a reliable guide to the future. The ECB is only now facing its first challenge of imported high inflation and the expanding membership of the European monetary union is bringing new voting representatives to the ECB whose views are yet to be tested.
The power of Europe’s unions, its history of hyperinflation and the need to develop credibility for a young institution all justify the ECB’s tough stance. Because the Fed does not have these problems but faces a potentially serious recession, it is prepared to gamble that the weakness in US employment and the general decline in economic activity will prevent a wage-price spiral without further increases in the interest rate. If food and energy prices remain at today’s level and wage costs do not accelerate, the overall consumer price index inflation will decline by next year to an annual rate of less than 3 per cent. I think the Fed’s current interest rate strategy makes sense but would be too risky for the ECB.
The writer is professor of economics at Harvard University
-- The Beijing Olympics got under way tonight with an opening ceremony attended by U.S. President George W. Bush and watched by probably the largest live television audience in history.
The ceremony, before more than 80 state leaders including Russian Prime Minister Vladimir Putin, sparks 16 days of competition for which China has spent $70 billion -- six times the previous record of Athens in 2004.
``Friends have come from afar, how happy we are,'' sang 2,008 performers, quoting Confucius and banging traditional ``fou'' drums, in the welcoming scene at the Bird's Nest stadium.
About 2.3 billion television viewers are tuning in for the start of China's first Olympics, more than the record 1.3 billion that watched the 2006 soccer World Cup final in Berlin, according to MindShare, a unit of WPP Group Plc. The ceremony isn't being broadcast live in the U.S.
The show began in sultry weather, a taste of the conditions that athletes will have to combat during one of the capital's two hottest and most humid months. The IOC has said it will reschedule events if smog endangers athletes.
Temperatures reached 32 Celsius (90 Fahrenheit), with humidity above 89 percent as the pageant began, while the pollution index was twice the recommended maximum by the World Health Organization.
Chinese President Hu Jintao said today the ceremony represented ``a historic moment,'' while International Olympic Committee President Jacques Rogge said the Olympics ``will help both the world to understand China better and maybe for China to understand the world better.''
The 3 1/2-hour ceremony began amid tight security at 8 p.m. -- the number eight is considered lucky because of its similarity to the word for ``prosperity'' in Mandarin. Beijing has shut its airport and banned flights tonight.
By tradition, the Greek team will lead representatives of the 10,500 athletes from 205 countries into the stadium, nicknamed the Bird's Nest for its crisscross framework that includes 45,000 tons of steel.
Disciples
As host, China will enter last, preceded by Australia and Zambia because the marching order follows the Mandarin alphabet.
The ceremony follows 13 months of rehearsals and includes 14,000 performers -- most from the People's Liberation Army -- and 3,000 ``scholarly disciples'' of Confucius, whose teachings were banned during the Cultural Revolution because they were considered elitist.
British soprano Sarah Brightman and Chinese singer Liu Huan also feature in a program overseen by Chinese film director Zhang Yimou, whose movies include ``Raise the Red Lantern'' and ``Red Sorghum.'' Some 30,000 fireworks will go off and the ceremony will include the lighting of the Olympic cauldron.
Chinese media have speculated for months over which athlete might perform the symbolic act, carried out at previous games by the likes of boxer Muhammad Ali and Australian runner Cathy Freeman. Li Ning, China's ``Prince of Gymnastics,'' is the favorite, the Xinhua state news agency reported today.
Yao Takes Flag
Houston Rockets center Yao Ming, 110-meter hurdles champion Liu Xiang and China's first Olympic champion, Xu Haifeng, may not get the torch because they already took part in the relay, state media reported. Yao will carry the Chinese flag tonight.
The U.S. flag-bearer, selected by teammates, will be Lopez Lomong, a Sudanese-born member of an athletes group critical of Chinese policies toward Darfur. Among the dignitaries tonight are U.S. Treasury Secretary Henry Paulson and French President Nicolas Sarkozy, who had threatened to boycott the event because of China's March crackdown in Tibet.
Cyclists will be among the first to discover whether China's $17 billion anti-pollution drive is working when they take part in the 152-mile road race tomorrow.
The first seven gold medals from 302 events will be awarded tomorrow. The closing ceremony takes place Aug. 24.
-- Devotees of Warren Buffett's investing strategy may need to look no farther for a bargain than the battered stock of the billionaire's Berkshire Hathaway Inc.
``Regardless of what's happening to earnings, the cash is still rolling in and asset prices are down,'' which will help Berkshire add holdings, said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which oversees $800 million, including Berkshire shares. ``It's Buffett time.''
Berkshire may post a 32 percent decline in second-quarter profit today to $2.13 billion as falling prices crimp insurance earnings and building-related businesses slow with the housing slump, said Charles Hamilton, an analyst at FTN Midwest Securities Corp. The Omaha, Nebraska-based investment and holding company's stock had its worst first half since 1990 and is down 18 percent this year through yesterday.
Buffett, 77, has been seeking acquisitions and funding takeovers while buyout firms struggle to borrow. Last month he pledged $3 billion to Dow Chemical Co.'s $15.4 billion buyout of Rohm & Haas Co. In April, Buffett agreed to put up $6.5 billion to help Mars Inc. buy Wm. Wrigley Jr. Co. in a deal that gives Berkshire a discounted stake in the chewing gum maker.
Berkshire had about $35 billion in cash as of March 31 and competing insurers including American International Group Inc. and MBIA Inc. have had to raise capital to cushion against losses from bad bets on the housing market. Buffett toured four European cities in May, drumming up potential acquisitions to boost earnings while U.S. insurance operations decline.
Bricks, Corporate Jets
A profit drop would be the third straight for Berkshire, the company's worst streak since 2004. AIG has been unprofitable three straight quarters, and Robert Willumstad, the insurer's chief executive officer, said yesterday the company ``would not consider any major acquisitions at this time.''
Buffett, ranked the richest person by Forbes magazine, built Berkshire over four decades from a failing textile maker into a $175 billion company by buying out-of-favor stocks and businesses whose management he deemed superior. Subsidiaries provide products from bricks to corporate jets.
Buffett said at Berkshire's annual meeting in May that his company will ``make some extra money'' from the credit crisis. ``If a market goes down, it's more attractive than before,'' Buffett said.
Berkshire entered bond insurance in December as the largest companies in the industry, MBIA and Ambac Financial Group Inc., struggled to maintain their credit ratings. CIT Group Inc., the lender that lost 64 percent of its market value this year through yesterday, said last month a Berkshire subsidiary agreed to pay $300 million for a loan portfolio backed by factory-built homes.
`Caution Flag'
Berkshire's stock may stumble to $108,000 in 12 months, said FTN's Hamilton, who rates the shares ``neutral.'' They declined $1,485, or 1.3 percent, to $113,990 at 9:38 a.m. in New York Stock Exchange composite trading.
``He's given the caution flag and people are ignoring it,'' said Hamilton, based in Nashville, Tennessee. Buffett has said insurance profits will slip as rates fall amid competition for market share and the pace of natural disasters returns to normal after two uneventful U.S. hurricane seasons.
Berkshire investors are betting with history on their side: the shares advanced in 17 of the past 20 years.
When markets are in turmoil, Buffett's offers become more attractive because he has cash available, said Michael Revy, a portfolio manager at Froley Revy Investment Co. in Los Angeles.
The Dow investment was trumpeted by the chemical company as an endorsement of the business, even as Chief Financial Officer Geoffery Merszei said on a conference call with investors that Buffett is ``going to demand very good conditions.''
Private Placement
Berkshire agreed to buy Dow preferred stock paying 8.5 percent annual interest and convertible to common stock. The stake may make Berkshire the biggest shareholder of the Midland, Michigan-based company. Dow paid less than a 6.5 percent coupon on recent bond offerings, according to Bloomberg data through yesterday.
``In a private placement you get an anchor investor'' and don't have to disclose as much financial information as in a public offering, Revy said.
Buffett agreed not to hedge or sell his position for five years, a commitment that most investors may have been unwilling or unable to make, Revy said.
Some investors in convertible securities will short the company's common stock, selling borrowed shares that they can replace cheaper if the company falters. A jump in short selling can unnerve investors, Revy said.
Florida Deal
Also last month, Buffett struck a deal with the state of Florida, which agreed to pay $224 million in exchange for an assurance he'll buy $4 billion in tax-free state bonds paying 6.5 percent should a hurricane cause more than $25 billion in losses to the state's catastrophe reinsurance program this year.
Florida sells coverage to homeowners at below-market rates, and plans to fund cash shortfalls in the bond market
Said Carret Zane's Betz, ``Warren probably gets up every morning and licks his chops wondering `where's the next bargain going to come from?'''
-- Russian Prime Minister Vladimir Putin said ``war has started'' over the breakaway region of South Ossetia as Georgian President Mikheil Saakashvili accused its neighbor of a ``well-planned invasion.''
Saakashvili said in a Bloomberg Television interview that his nation of 4.6 million people is ``fighting to secure its borders'' amid a ``full-blown military aggression'' involving thousands of Russian troops. Aerial bombings and widespread fighting in and around the region killed an unknown number of civilians and wounded ``scores'' more, Saakashvili said.
Putin earlier today told George W. Bush in Beijing that ``volunteers'' were pouring over the border to help defend South Ossetia from Georgian forces, according to Putin spokesman Dmitry Peskov. ``War started today in South Ossetia'' when Georgia attacked Russian peacekeepers in the disputed region, Putin said. The Defense Ministry later said it deployed ``reinforcements.''
The ruble dropped the most against the dollar in 8 1/2 years and Russian stocks tumbled today on concern the conflict will worsen. The U.S., U.K., European Union and NATO, which Georgia is seeking to join, all called on both sides to end hostilities.
South Ossetia, which has a population of about 70,000 and is less than half the size of Kosovo, broke away from U.S.-backed Georgia in the early 1990s and now is a de facto independent state with Russian peacekeepers and economic support.
NATO
Fighting escalated throughout the day, with Russian planes dropping four bombs on the Vaziani military base, which the North Atlantic Treaty Organization uses for training, Georgian Security Council chief Kakha Lomaia said by phone. The base is about 15 kilometers from the Georgian capital.
Georgian forces have shot down three Russian planes since the fighting began, Lomaia said. Russia earlier bombed two Georgian towns, Gori and Kareli, he said.
Russia's Defense Ministry denied losing aircraft and declined to comment on the bombing report.
``We will not allow the death of our compatriots to go unpunished,'' Russian President Dmitry Medvedev, 42, told state television after the Interfax news service said Russian troops were killed in Georgian shelling of a barracks and checkpoint. ``The guilty will get the punishment they deserve.''
Saakashvili, 40, said Russia amassed troops for months on its northern border before hostilities began. The Russian government earlier denied bombing Gori, Stalin's birthplace, and Kareli, and accused Georgia of ``unleashing a dirty, reckless scheme.''
'Very Hot'
``There are so many claims and counter-claims that it's impossible to know who started it,'' said James Nixey, manager of the Russia and Eurasia Program at the Royal Institute of International Affairs, a research institute based in London. ``Both sides have been antagonistic and easy to antagonize. It's a cold war that's suddenly gotten very hot.''
Georgia last month increased the size of its military to 37,000 soldiers and today Saakashvili called up reservists and urged the nation to defend ``every meter'' of land. Russia has a standing army of about 1.1 million.
Russian television showed tanks heading over the border to South Ossetia from the Russian region of North Ossetia at about 3:30 p.m. Moscow time. Interfax reported at about the same time that Russian warplanes were bombing Georgian targets.
`Short and Hot'
``Fighting continues,'' Russian Major General Marat Kulakhmetov, commander of Russia's peacekeeping forces in South Ossetia, said by mobile phone. The peacekeepers have suffered casualties, although it's too early to say how many, he said.
Georgia is a key link in a U.S.-backed ``southern energy corridor'' that links the Caspian Sea region with world markets, bypassing Russia, the world's biggest energy producer. Two pipelines pass through the country linking Azerbaijan and Turkey.
The BP Plc-led Baku-Tbilisi-Ceyhan oil pipeline, which has been closed since Aug. 5 due to an explosion in Turkey, runs about 100 kilometers south of the South Ossetian capital of Tskhinvali.
The most recent violence in the region erupted on Aug. 1, when South Ossetia said Georgian shelling of the regional capital Tskhinvali claimed six lives. Georgia said South Ossetian forces sparked the fighting.
``The conflict might be short and hot, but my sense is that neither party wants a prolonged conflict,'' said Michael Denison, associate fellow at London-based research group Chatham House and a professor of international security at the University of Leeds.
-- The ruble dropped the most in 3 1/2 years, Russia's Micex Index fell to a 22-month low and bond yields climbed after Prime Minister Vladimir Putin said ``war has started'' in the breakaway Georgian region of South Ossetia.
Credit-defaults swaps, a measure of bond risk, jumped the most this year after Georgia's Interior Ministry said jets bombed the towns of Gori and Kareli near South Ossetia. Yields on government bonds rose.
The ruble fell the most against the central bank's basket of dollars and euros since that gauge was introduced in February 2005. The Micex plummeted, bringing its decline this year to 28 percent after oil slid 20 percent from its July high. Russian ``volunteers'' are pouring over the border to help defend South Ossetia from Georgian forces, Putin told U.S. President George W. Bush in Beijing, according to Putin spokesman Dmitry Peskov.
``We didn't need this,'' said Ivan Mazalov, who helps manage $5 billion in shares of companies from the former Soviet Union at Prosperity Capital Management in Moscow. ``It's not going to break the Russian economy, but war is bad for investor sentiment.''
Bombings by Russian warplanes followed an attack by convoys from Russia on Georgian forces near the South Ossetian capital of Tskhinvali, Georgian Interior Ministry spokesman Shota Utiashvili said by phone today from Tbilisi, Georgia. Russia's government earlier denied the bombing claim, and the Defense Ministry accused Georgia of ``unleashing a dirty, reckless scheme.''
`Last Nail'
The dispute between the countries ``adds to bruised investor sentiment'' in Russia and is ``potentially damaging to Russia's external relations, particularly with the West,'' JPMorgan Chase & Co. wrote in a note to investors. ``Clearly a war would not support investor confidence and would further fuel the debate about political risk.''
The ruble weakened as much as 1.3 percent against the dollar-euro basket and was at 29.7004 by 6:29 p.m. in Moscow, from 29.3585 yesterday. The basket mechanism was introduced as a way of limiting the impact of the ruble's fluctuations on the competitiveness of Russian exports. The dollar gained against most major currencies today.
``This is the last nail in the coffin,'' said David Tavadian, head of fixed income and derivative sales at Calyon Rusbank SA, a Moscow-based unit of Credit Agricole SA. Calyon's Russian loan book is worth $7 billion. ``It tells people that in Russia you have to be careful.''
The ruble-denominated Micex sank 5.3 percent to 1,359.62. The dollar-denominated RTS Index slumped 6.5 percent to 1,722.71, the biggest one-day drop in more than six months.
Energy companies retreated as oil headed for its fourth decline in five weeks, while Bank of Georgia tumbled in London.
Energy Stocks
Shares of Rosneft, the country's biggest oil producer, sank 7.4 percent to 207.04 rubles, extending its weekly decline to 14 percent. OAO Lukoil, the second-biggest oil producer, dropped 5.3 percent to 1,839.35 rubles. Oil and gas companies comprise about 55 percent of the Micex Index.
OAO Sberbank, the biggest bank in Russia, sank 6.2 percent to 60.14 rubles, its lowest in 21 months. Bank of Georgia, the republic's biggest bank, dropped 24 percent to $12 in London, a record low.
The perceived risk of holding Russian government debt jumped the most this year in the credit-default swap market. Contracts on the nation's bonds rose 15 basis points to 117, according to CMA Datavision prices at 3:55 p.m. in London.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Bonds Drop
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a country's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Russian government bonds dropped. The benchmark 30-year note yielded 5.67 percent, up 5.5 basis points. The yield on the two- year 8.25 percent bond rose 6 basis points to 5.73 percent, the highest since March 11, according to ING Groep NV prices on Bloomberg. The difference in yield between Russian and U.S. two- year notes widened to 336 basis points, the widest since April.
A ``significant escalation or a prolonged conflict'' in Georgia would be ``likely'' to affect Georgia's credit rating, Edward Parker, emerging markets credit analyst at Fitch Ratings, said by telephone today.
Inter RAO
OAO Inter RAO, a Russian power generator with plants in Georgia, dropped 1.51 kopeks, or 19 percent, to 6.61 kopeks in Moscow. A kopek is one hundredth of a Russian ruble.
Inter RAO owns the Mtkvari Energetika power plant in Georgia, half of which is currently in operation. The company also has the AO Khrami GES-1 and GES-2 hydropower plants under trust management, which provide 110 megawatts, or 10 percent of Georgia's power production, according to the company's Web site.
OAO Polyus Gold, Russia's biggest gold producer, tumbled 66.8 rubles, or 6.9 percent, to 903.01 rubles. Gold fell to a three-month low in London on speculation dollar gains will spur sales by investors who bought the metal as an alternative.
-- Copper, crude oil and silver tumbled, deepening a monthlong slump in commodities, as a stronger dollar and slower economic growth eroded demand for raw materials.
Copper headed for its biggest weekly drop since March, crude oil fell to the lowest since May and silver reached its cheapest since January. The dollar had its biggest increase in four years against the euro after European Central Bank President Jean- Claude Trichet said economic growth will be ``particularly weak'' through the third quarter. Fannie Mae, the largest U.S. mortgage finance company, said the worst housing slump since the Great Depression is deepening.
``People understand that we might face a difficult two or three quarters ahead of us,'' said Christoph Eibl, who helps manage more than $1 billion of commodities at Tiberius Asset Management AG in Zug, Switzerland. ``Industrial-related commodities will not outperform.''
The Reuters/Jefferies CRB Index of 19 commodities declined 2.84 to 396.70 as of 2:38 p.m. in London, extending its drop to 16 percent since July 2. Commodities, as measured by the UBS Bloomberg CMCI Index of 26 raw materials, have advanced for six consecutive years, bolstered by demand from China, the world's largest consumer of metals.
Crude oil fell $2.21, or 1.8 percent, to $117.81 a barrel on the New York Mercantile Exchange after earlier dropping to $117.05, the lowest since May 5. Oil is trading 20 percent below the record $147.27 reached July 11.
``Oil is following the euro-dollar and that's keeping pressure to the downside,'' said Gerrit Zambo, an oil trader at BayernLB in Munich. ``There are worries about the economic situation with expectations of flat demand.''
Crude Outlook
Crude oil may fall next week amid weakening demand caused by a global economic slowdown, a survey showed. Thirteen of 35 analysts surveyed by Bloomberg News, or 37 percent, said prices will drop through Aug. 15.
Copper for delivery in three months fell $225, or 2.9 percent, to $7,440 a metric ton on the London Metal Exchange. Prices have dropped 17 percent since June.
``The overriding theme of a weaker demand side is still prevailing,'' Daniel Hynes, an analyst at Merrill Lynch & Co. in London, said today by phone. Aluminum, nickel, tin, lead and zinc also dropped.
Ten of 19 analysts and traders surveyed yesterday and Aug. 6 forecast copper will fall next week. Eight expected an increase and one was neutral.
Gold fell to a three-month low in London on speculation dollar gains will spur sales by investors who bought the metal as an alternative to earlier declines in the U.S. currency.
Gold Drops
Gold for immediate delivery declined $14.07, or 1.6 percent, to $858.98 an ounce after falling to $855.42, the lowest since May 5. Gold rose to as high as $1,032.70 on March 17.
``The situation in gold is not very good,'' said Mario Innecco, a futures broker at MF Global Ltd. in London. ``A lot of people are saying if we break $850, we're going to $600.''
Silver fell 45.5 cents, or 2.8 percent, to $15.745 an ounce after earlier reaching $15.67, the lowest since Jan. 22. Prices are down 9.9 percent this week, the biggest drop since March 21.
Robusta coffee headed for its biggest drop in four weeks in London. The contract for September delivery fell $22, or 0.9 percent, to $2,353 a ton. The beans have slipped 3.2 percent this week, the steepest drop since the week ending July 11.
Coffee is falling ``probably mostly because the dollar is gaining against the euro,'' Eugen Weinberg, a commodities analyst at Commerzbank AG, said by phone from Frankfurt.
Cocoa and white sugar also dropped on the Liffe exchange.
Seasonal Output
Palm oil in Malaysia posted a fifth weekly loss as higher seasonal output and declines in crude oil and soybeans reduced demand for the commodity as a substitute in fuel and cooking.
Soybean meal in Chicago slumped after India, Asia's biggest supplier of the livestock feed, said it may ship a record quantity next year after rain in the biggest growing regions encouraged increased soybean planting.
Soybean meal for December delivery dropped as much as $11.90, or 3.6 percent, to $320.80 a ton in after-hours electronic trading on the Chicago Board Of Trade. Wheat, corn and soybeans also declined on the bourse.
-- The euro fell the most in almost eight years against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows.
The euro is poised for its biggest weekly loss since January 2005 after ECB President Jean-Claude Trichet yesterday said economic growth will be ``particularly weak'' through the third quarter. An index that tracks the dollar against the currencies of six U.S. trading partners touched the highest since February. Crude oil fell to a three-month low.
``This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''
The euro declined 1.95 percent to $1.5032 at 10:23 a.m. in New York and reached $1.5005, the lowest level since Feb. 27, from $1.5325 yesterday. It dropped as much as 2.08 percent, the biggest one-day drop since Sept. 6, 2000. Against the yen, the European currency traded at 165.84, from 167.70. The dollar rose 0.5 percent to 109.97 yen after touching 110.08, the strongest since Jan. 10.
Moving Average
The euro's decline below $1.53 and the break of the 200-day moving average at $1.5226 ``marks a significant change in sentiment for the dollar,'' pointing to a further decline to $1.46, Kevin Edgeley, a London-based technical analyst at Goldman Sachs Group Inc., wrote in a report today.
The euro has declined 3.1 percent against the dollar in its fourth weekly decline, the worst losing streak since May 2007. Against the yen, the U.S. currency has advanced 2.1 percent, heading for its biggest weekly gain in almost two months.
``The most important aspect of the dramatic collapse in the euro dollar is the absence of confirmation from other markets,'' said David Woo, global head of currency strategy at Barclays Capital Inc. in London. ``None of the typical drivers of the euro-dollar in the past couple of years could have accounted for the magnitude of this move, which leads one to conclude that this is a technical driven move.''
The South African rand led losses among the most-traded currencies as the prices of gold and platinum dropped, reducing prospects for export earnings from the country's biggest exports. The greenback rose to a six-month high against the Australian dollar, and advanced to the highest since September against the New Zealand dollar on speculation the central banks will cut borrowing costs.
Russia's Ruble
The Russian ruble fell by the most in 2 1/2 years against a dollar-euro basket used by the government after Georgia's Interior Ministry said four Russian fighter-jets entered Georgian airspace and bombed the towns of Gori and Kareli, boosting the risk of war. The ruble dropped as much as 0.8 percent against the basket.
The pound fell below $1.93 for the first time since March 2007 as the Bank of England kept its main interest rate steady at 5 percent yesterday after inflation accelerated and the economy teetered on the brink of a recession. It has dropped 2.7 percent this week to $1.9210, its biggest weekly drop in three years.
The Dollar Index on the ICE futures exchange reached 75.713 today, the highest since Feb. 21.
`No Bias'
Trichet said yesterday he has ``no bias'' or ``pre- commitment'' toward future rate movements after the central bank left the main refinancing rate at 4.25 percent. He told reporters in Frankfurt that while inflation remains a threat, risks to economic growth are ``materializing.''
European retail sales dropped by the most in at least 13 years in June, the European Union said on Aug. 5. Consumer confidence slid in July by the most since the Sept. 11, 2001, terrorist attacks, the European Commission said July 30.
Traders pared bets the ECB will lift rates a second time this year after increasing its main rate by a quarter-point last month. The implied yield on the December interest rate futures, an indication of expectations, retreated 2 basis pointsto 4.94 percent today.
The New Zealand dollar slumped as much as 2.2 percent to 69.84 U.S. cents, the biggest loss in two months. Australia's dollar dropped 1.7 percent, falling for a fourth day, to 89.10 U.S. cents, from 90.66 cents yesterday. The Reserve Bank of Australia said it may lower borrowing costs, after keeping its benchmark interest rate at a 12-year high of 7.25 percent this week.
Oil, Metals, Crops
Crude oil, metal and crop prices fell as the dollar climbed, reducing the appeal of commodities as a currency hedge. Oil has declined to $118.15 a barrel since touching the record of 147.27 on July 11.
The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.
``Oil prices have turned out to be much more supportive of the dollar than I expected,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``It does temporarily relieve some concern that the U.S. economy will weaken further. This is a plus for sentiment.''
Aug. 8 -- U.S. stocks rose, helping the Standard & Poor's 500 Index post the first back-to-back weekly gain since May, as retailers and airlines rallied on speculation lower commodity prices will boost earnings.
Home Depot Inc., Macy's Inc. and Gap Inc. climbed as the dollar's biggest advance against the euro in four years pushed crude oil to a three-month low. General Motors Corp. rallied, while United Airlines parent UAL Corp. jumped almost 10 percent. Fannie Mae dropped after joining Freddie Mac in posting a bigger- than-estimated loss and slashing its dividend.
The S&P 500 added 15.68 points, or 1.2 percent, to 1,281.75 at 10:20 a.m. in New York. The Dow Jones Industrial Average rose 182.06, or 1.6 percent, to 11,613.49. The Nasdaq Composite Index climbed 40.22, or 1.7 percent, to 2,395.95, the highest level in a month. More than three stocks gained for each that fell on the New York Stock Exchange.
``The break in commodity prices has changed consumer and investor sentiment,'' said Eric Green, Cherry Hill, New Jersey- based director of research at Penn Capital Management, which manages $4.5 billion. ``That's critically positive.''
The S&P 500 added 1.7 percent this week as Cisco Systems Inc. and Procter & Gamble Co. joined the majority of companies in beating estimates, the Federal Reserve predicted inflation will ease through next year and crude oil declined 7 percent.
Fuel Costs
After falling to a 2 1/2-year low on July 15, the benchmark for U.S. equities rebounded 5.5 percent. It's still down 13 percent this year as record fuel costs and bank losses stemming from the U.S. mortgage crisis prompted analysts to lower profit estimates.
Crude oil dropped 3.1 percent to $116.32 a barrel in New York, heading for its fourth decline in five weeks. Oil, metal and crop prices fell as the dollar jumped to a five-month high against the euro.
Consumer stocks rose as crude slipped. Home Depot, the world's largest home-improvement retailer, rose 4.4 percent to $25.56 for the biggest gain in the Dow average. Macy's, the second-largest U.S. department store chain, rose 5 percent to $19.86. Gap, the largest U.S. clothing retailer, climbed 3.7 percent to $17.55, the highest since June 19.
GM, the biggest U.S. automaker, added 3 percent to $10.04. UAL gained 94 cents to $10.55.
Earnings at companies in the S&P 500 will advance 2.3 percent this year, according to data compiled by Bloomberg. That compares with expectations for a 15 percent increase at the end of last year.
Earnings Watch
Second-quarter earnings at S&P 500 companies that have released results since July 8 are down 21 percent on average from a year earlier, according to data compiled by Bloomberg. Profits at consumer discretionary companies have declined 80 percent as higher fuel and food costs crimp household budgets. Financial earnings are lower by 86 percent.
Fannie Mae fell 4.3 percent to $9.52. The government- sponsored company, whose shares closed at a 17-year low of $7.07 on July 15, reported a second-quarter net loss of $2.3 billion, or $2.54 a share. Before a one-time gain, the loss was $2.51 a share, compared with the 72-cent average estimate of 10 analysts in a Bloomberg survey.
While three-quarters of S&P 500 companies that have reported results beat or met the average analyst estimates, the misses have been larger in size, chiefly at automobile companies and consumer finance companies. In aggregate, results at the 422 companies that have reported fell short of analyst estimates by 6.8 percent. That's worse than in the first quarter, when aggregate profit missed the estimates by 2.7 percent.
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