As sound as the American Dollar

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Upside to the weak dollar...

Weak dollar boosting U.S. profits
April 19, 2008: The falling greenback has helped multinationals buck a slowing American economy.

The dollar's plunge might be preventing Americans from taking that European vacation this summer, but it could be the very thing saving their 401(k)s from buckling. Some of the nation's biggest corporate powerhouses - across all industries - have used the greenback's retrenchment to shield themselves from slumping profit margins. Declines against world currencies make U.S. products look cheap overseas, and translate into big returns when sales are converted back into dollars.

Take Coca-Cola Inc. (KO, Fortune 500) for example. Buying a can of Coke cost $1 in the United States, but the equivalent of about $2 in the U.K. - one reason the beverage giant was able to sail past Wall Street profit projections earlier this week. And they aren't alone: IBM, Google, Caterpillar, and eBay all rallied this week because of strong overseas profits.

"If you look at some of the companies that had good quarters, they're doing half or more business abroad," said Phil Orlando, chief equity market strategist at Federated Investors. "The weakness in the dollar is a significant benefit in currency translation, and for those companies that are developing products that will create a boost for export activity." Orlando points out that economic growth in the U.S. will slow to about 1% during 2008 - down from about 4% last year. Economists believe growth is now at its worst rate since the 2001 recession, and don't expect things to pick up until the last half of the year.

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Global effect of weak dollar...

Weak dollar causing 'desperate situation' for European companies
22 April 2008 - European defence and aerospace CEOs have warned that the weak US dollar will "inevitably lead to a massive relocation" to dollar zones

The weakness of the US dollar will "inevitably lead to a massive relocation of aerospace production capabilities [and] technology centres to US dollar-priced locations", the chief executive officers of Europe's leading defence and aerospace groups have warned.

The executives - represented by the Aerospace and Defence (ASD) Council - said on 21 April that the "necessary step" of relocation to dollar zones (where labour costs are "30 to 40 per cent lower than in the euro zone") threatens the future of the "more than 640,000 highly skilled workers and engineers currently employed by European aerospace and defence companies".

The ASD Council - made up of the chief executives of Airbus, Alenia Aeronautica, BAE Systems, Dassault Aviation, Fincantieri, Diehl, EADS, Finmeccanica, Rheinmetall, Rolls-Royce, Safran, Cobham, Thales and Thales Alenia Space - added that it was "seeking dialogue" with unspecified authorities to "find remedies to solve this desperate situation". The decline of the US dollar against Sterling, the euro and other currencies had a significant impact on the European defence and aerospace sector during 2007.

Weak dollar causing 'desperate situation' for European companies - Jane's Defence Business News

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Granny says, "Write `em off - we got Iraq to take our dollars"...

Iran dumps U.S. dollar for oil trades
April 30, 2008 -- Iran has stopped conducting oil transactions in U.S. dollars, official confirms; Dependence on the dollar reduced in face of increasing U.S. pressure; U.S. unhappy about Tehran's nuclear program and alleged involvement in Iraq

Iran, OPEC's second-largest producer, has stopped conducting oil transactions in U.S. dollars, a top Oil Ministry official said Wednesday, in a concerted attempt to reduce reliance on Washington at a time of tension over Tehran's nuclear program and suspected involvement in Iraq. Iran has dramatically reduced dependence on the dollar over the past year in the face of increasing U.S. pressure on its financial system and the fall in the value of the American currency.

Oil is priced in dollars on the world market, and the currency's depreciation has concerned producers because it has contributed to rising crude prices and eroded the value of their dollar reserves. "The dollar has totally been removed from Iran's oil transactions," Oil Ministry official Hojjatollah Ghanimifard told state-run television Wednesday. "We have agreed with all of our crude oil customers to do our transactions in non-dollar currencies."

Iranian President Mahmoud Ahmadinejad called the depreciating dollar a "worthless piece of paper" at a rare summit last year in Saudi Arabia attended by state leaders from OPEC countries. Iran put pressure on other OPEC countries at the meeting to price oil in a basket of currencies, but it has not been able to generate support from fellow members -- many of whom, including Saudi Arabia, are staunch U.S. allies.

More Iran dumps U.S. dollar for oil trades - CNN.com

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Report: Iraq windfall soars along with oil prices
April 30, 2008 -- Iraq is expected to see $70 billion windfall as oil prices rise, U.S. military says; Official says oil production is still low, but price has nearly doubled since 2003; Congress has OK'd $47 billion for reconstruction since war began, report says; Iraq has spent $50 billion on reconstruction projects, inspector-general says

Iraq's government is expected to reap a $70 billion windfall from soaring oil prices, about double the previous projections, the U.S. military's reconstruction watchdog reported Wednesday. Although Iraq's oil production remains below its pre-war peak of 2.5 million barrels per day, the price per barrel has more than doubled since the U.S.-led invasion in 2003, said Stuart Bowen, the special inspector-general for Iraq reconstruction, in his quarterly report to Congress.

The issue has become a sore spot for some U.S. lawmakers as the war enters its sixth year, with both Republicans and Democrats raising complaints that U.S. taxpayers are footing the bill for reconstruction work in the now-flush nation. Congress has approved about $47 billion in reconstruction funding since the invasion. About $30 million of that has been spent, the inspector-general's report found, and the country's U.S.-backed government was paying about half the cost of reconstruction projects by the end of 2007, the report states.

But further progress will depend on Iraq's ability to spend what it has budgeted and to keep a lid on a pervasive culture of corruption, which Bowen's office has described as a "second insurgency." Iraqi officials have said they plan to issue a supplemental budget to manage the additional money, according to Wednesday's report. "This supplemental budget presents an extraordinary opportunity for Iraq to expand its infrastructure investment, but it also heightens concerns about corruption," the report states.

More Report: Iraq windfall soars along with oil prices - CNN.com

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Real estate greed costing more for oil as dollar weakens...

Dollar plumbs new low versus euro
July 15, 2008: Concerns about U.S. banking sector drive greenback to record low against the 15-nation euro.

The dollar sank to a new all-time low against the euro Tuesday as concerns about the health of the U.S. banking sector and economy deepened. The 15-nation euro rose as high as $1.6038 in European trading, breaking through its previous high of $1.6018 set April 22. It later pulled back to $1.5992, but remained stronger against the dollar. The greenback also fell against the Japanese yen, dropping to ¥105.18.

Track currencies

Fears about the dangerously volatile mortgage giants Fannie Mae and Freddie Mac, along with government seizure of regional mortgage lender IndyMac on Friday, have reignited credit worries, and investors have started to focus on the plight of smaller regional banks. The government may have demonstrated that it would support struggling mortgage finance companies Freddie Mac and Fannie Mae, and large financial institutions, but "that doesn't really do much for regional banks that are seeing their capital eroded," said Steve Malyon, currency strategist with Scotia Capital in Toronto.

Shares of Washington Mutual and National City plummeted in Monday trading and later issued statements that they had enough capital to avoid the fate of IndyMac. The weak U.S. currency has been one of the factors blamed for high prices of oil and other commodities. Crude futures held above $145 a barrel in Asian trading as investors bought oil as a hedge against inflation.

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Wholesale inflation is worst in 27 years
15 July `08 WASHINGTON - Wholesale prices soar in June; sales are sluggish

The economy showed the depth of its twin problems on Tuesday, slow growth and rising inflation, as the nation wrestled with a teetering financial system, a slumping dollar and rising prices for food and fuel. The Labor Department reported that soaring costs for gasoline and food pushed inflation at the wholesale level up by a bigger-than-expected 1.8 percent in June, leaving inflation rising over the past year at the fastest pace in more than a quarter-century.

Over the past 12 months, wholesale prices are up 9.2 percent, the largest year-over-year surge since June 1981, another period when soaring energy costs were giving the country inflation pains. Core inflation, which excludes energy and food, was better behaved in June, rising by just 0.2 percent, slightly lower than expectations. A separate report from the Commerce Department showed that all the economy's problems were weighing on the consumer. Retail sales edged up by a tiny 0.1 percent in June, weaker than had been expected, as consumer spending was held back by a sharp plunge in sales at auto dealerships.

U.S. stocks headed for a sharply lower open as the reports on inflation and retail sales failed to cool concerns about the financial sector. Banking stocks were pounded on Monday despite the government's efforts to calm concerns with a support package fashioned over the weekend for mortgage giants Fannie Mae and Freddie Mac. Federal Reserve Chairman Ben Bernanke, who was scheduled to deliver his midyear report on the economy to Congress on Tuesday, was expected to highlight the threat posed by inflation pressures. The central bank at its June meeting brought an end to an aggressive rate-cutting campaign that had been designed to keep a prolonged housing slump and severe credit crunch from pushing the country into a deep recession.

More Wholesale prices soar in June; sales are sluggish - Yahoo! News

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Get ready for a rate hike...

Rate hikes needed - Philly Fed president
WASHINGTON (AP) -- July 22, 2008: President of the Philadelphia Federal Reserve Charles Plosser says inflation needs to tackled, even if the financial downturn hasn't been resolved.

To fend off inflation, the Federal Reserve probably will need to boost interest rates "sooner rather than later" even if employment and financial conditions haven't revived, the president of the Federal Reserve Bank of Philadelphia said Tuesday. Charles Plosser is a voting member of the Federal Open Market Committee, the group including Fed Chairman Ben Bernanke that determines the direction interest rates should go to influence national economic activity.

Fed acts on economy

Out of concern about inflation, the Fed in June ended a nearly yearlong string of rate reductions aimed at shoring up the wobbly economy. The Fed left its key rate at 2%. Many economists predict Fed policymakers will leave rates alone again when they meet next on Aug. 5. Possessing a reputation for being extra-vigilant about inflation dangers, Plosser was one of two members who dissented from the Fed's decision in late April to slice its key rate. That turned out to be the Fed's last rate reduction, in one of its most aggressive campaigns that started last September.

Price stability goal

"Inflation is already too high and inconsistent with our goal of - and responsibility to ensure - price stability," Plosser said in a speech to a group assembled by the Philadelphia Business Journal. "We will need to reverse course - the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later," he warned. "And, I believe it will likely need to begin before either the labor market or the financial markets have completely turned around," he added.

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Banks droppin' like flies...

Three more U.S. banks closed down
Saturday 26th July, 2008 - Three more U.S. banks have failed, prompting Federal regulators to appoint receivers to the banks, and sell off their deposits and other assets.

The banks in Reno, Nevada and Newport Beach, California, were shut down late Friday afternoon. A deal was then done to merge the banks' operations into the Mutual of Omaha Bank, Omaha, Nebraska. The First Heritage Bank N.A., Newport Beach, CA, and the First National Bank of Nevada, Reno, NV, were closed by the U.S. Office of the Comptroller of the Currency late Friday.

Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named Receiver to the two banks. No advance notice is given to the public when a financial institution is closed. As the former First National Bank of Arizona, Scottsdale, AZ, had merged with First National Bank of Nevada a little over three weeks ago, it too was caught up with Friday's closures.

Simultaneous with the closures Friday the FDIC said it had entered into purchase and assumption agreements with Mutual of Omaha Bank, Omaha, Nebraska, to take over all of the deposits and certain assets of the First National Bank of Nevada, (including those of First National Bank of Arizona), and First Heritage Bank, N.A., Newport Beach, California.

More Three more U.S. banks closed down

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Problem banks: What you need to know
July 26, 2008: Bank failures put a sharp focus on FDIC ratings of banks facing financial problems. Here are answers to some common questions.

The federal rescue on Friday of two more failing banks - two weeks after the high-profile seizure of IndyMac Bank - leaves many Americans wondering whether their bank is safe. The bottom line: the vast majority of banks are in good shape, and when banks do fail, customers rarely lose money because most deposits are insured.

But the bank failures raise questions about how regulators identify the small number of troublesome banks - what the FDIC calls its "problem list." The list, published every three months, included 90 banks in the first quarter of 2008, up from 76 at the end of last year. The number has been increasing since the third quarter of 2006, when it hit a historic low of 47. Total assets at the problem institutions stand at $26.3 billion.

What is the problem list?

Problem banks have serious deficiencies in their finances, operations or management that threaten their continued viability. The Federal Deposit Insurance Corp. publishes the number of banks in this condition in its Quarterly Banking Profile report. The agency doesn't reveal the banks' names, but it does give the total assets of these institutions.

How does a bank get on the list?

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Uncle Ferd fixin' Grannny a lil' cart so she can sell apples onna street corner...

U.S. Headed Toward Bankruptcy, Says Top Budget Committee Republican
Monday, August 04, 2008 - The ranking Republican on the House Budget Committee said the U.S. government is headed toward bankruptcy if it stays on its current fiscal course.

“We know that for a fact,” Rep. Paul Ryan (R-Wis.) told CNSNews.com in a video interview. “All the actuaries, all the objective scorekeepers of the federal government, are predicting this.” To back up this claim, Ryan cited an estimate by the non-partisan Government Accountability Office that says the government faces a $53-trillion shortfall to cover the costs of promised benefits in its entitlement programs. “They say we are $53 trillion short of fulfilling the promises the government is making to the American people, in today’s dollars,” said Ryan.

“Meaning that if we want to keep the promises of Medicare, Medicaid and Social Security, which are basically the three major entitlement programs, today we would have to set aside $53 trillion dollars and invest them at Treasury rates in order to do it,” he said. Ryan said that to deal with this situation the government must either reform the entitlement programs or eventually impose massive tax increases on American workers. “For the last 40 years, the federal government has had to tax every dollar made in America at 18.3 cents on that dollar to pay the bills of the federal government,” said Ryan. “By the time my three children – who are three, five and six years old—are my age, the federal government will have to tax 40 cents out of every dollar made in America just to pay the bills for the federal government at that time,” he said.

Ryan asked the Congressional Budget Office to determine what the tax rates would need to be to cover federal spending at that level. “What they told me was really startling,” said Ryan. “They said that the current low rate, the 10-percent bracket for low-income Americans, would have to go up to 25 percent. The middle-income tax rate for middle-income Americans would have to go up to 66 percent, and the top rate, which is what small businesses pay, would have to go to 88 percent. “Those would be the tax rates you would have to have if you wanted to tax your way out of this problem,” he said. “And if you did that, all experts conclude, you would literally crash the American economy.”

More CNSNews.com - U.S. Headed Toward Bankruptcy, Says Top Budget Committee Republican

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Fannie posts another quarterly loss...

Fannie Mae: $2.3 Billion 2Q Loss
Friday, Aug. 08, 2008 (WASHINGTON) — Fannie Mae swung to a second-quarter loss that was more than triple what Wall Street expected as conditions in the housing market continued to deteriorate, forcing the mortgage finance giant to make bold cutbacks that will send shock waves through the mortgage market.

Fannie Mae is raising fees, which will be passed onto borrowers as higher interest rates, and abandoning "Alt-A" borrowers because those loans are defaulting at an alarming rate. These high-risk loans — made to borrowers with solid credit but little proof of their income, or small or no down payments — made up about 11 percent of Fannie's portfolio but accounted for more than half of its credit losses in the quarter.

"The housing market has returned to earth fast and hard," said Daniel Mudd, Fannie Mae's president and chief executive. And it appears more bad news is ahead. "Volatility and disruptions in the capital markets became even more pronounced in July," Mudd said. The Washington-based company, the largest U.S. buyer and backer of home loans, said Friday it lost $2.3 billion, or $2.54 a share, for the quarter that ended June 30. The loss, the company's fourth-consecutive quarter of red ink, compares with profit of $1.95 billion, or $1.86 a share, in the period last year.

Analysts surveyed by Thomson Financial had expected a loss of just 68 cents a share. While revenue rose to $3.97 billion from $1.42 billion a year earlier, Fannie Mae's losses from defaulting mortgages skyrocketed. Disappointed stockholders sent Fannie Mae's shares down 9 percent, or 93 cents, to $9.02 in Friday morning trading. Investors continue to worry that Fannie Mae and its smaller government-sponsored sibling, Freddie Mac, will be swamped by losses from the mortgage crisis and won't be able to raise enough capital. Together, Fannie Mae Freddie Mac, hold or guarantee nearly half of outstanding U.S. mortgage debt.

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$1 trillion in losses? Bank on more
August 8, 2008: Wall Street should not be surprised to see pain in the financial sector linger on for much longer.

Make no mistake: The worst probably is not over for financial firms. Not by a long shot. Many bank stocks have bounced sharply from their panic-induced lows of mid-July on hopes that the bleak second-quarter results represented the bottom. But the bigger-than-expected losses reported by Freddie Mac and Fannie Mae this week, accompanied by dismal forecasts for the housing market, are strong indicators that there are likely more credit-related woes to come.

"The banks are still at the mercy of writedowns. I don't think the worst is over for financials yet," said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co. The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. It's a widely used number, but Sonders thinks it's "potentially very conservative." So how high could losses go? Sonders points to the $1.6 trillion forecast from hedge fund firm Bridgewater Associates or even the $2 trillion number from Nouriel Roubini, the highly-respected professor of economics at NYU's Stern School of Business.

And based on the losses already reported, we're not even halfway through the crisis. But as scary as those predictions sound, it's actually somewhat healthy to see forecasts of bigger losses. Sonders said that at some point, the market will probably even begin to discount the fact that there are more losses ahead. They key is that investors have to expect them in the first place. The biggest problem that the market has had to grapple with this year is that investors can't believe the numbers that banks are reporting.

More $1 trillion in losses? Bank on more - Aug. 8, 2008

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Is the yuan gonna be our new currency?...

Banks will need to consider restructuring
Sunday 17th August, 2008 - The ongoing credit crisis has caused major losses for some of the world’s biggest banks.

The unprecedented losses have caused questions about whether the large financial organisations should be broken up in order to survive.

Major global banks have taken more than US$300 billion in asset write-downs, and organisations like the International Monetary Fund believe that amount could reach $1 trillion. There have recently been comments from economists that the universal bank models no longer work.

While the creators of global banks like Citigroup, JPMorgan Chase & Co., and HSBC Holdings had promised customers and shareholders that a diverse set of businesses would shield them from economic volatility, this hasn’t happened.

Banks will need to consider restructuring

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Chinese banks eye American soil
August 15, 2008: ICBC - the largest lender in China - is the latest to win approval to do wholesale banking stateside. Others may follow.

The American banking system has become a melting pot in recent years as financial institutions from all over the world have set up shop in the United States. Now more Chinese banks, bolstered by a booming economy and recently forged alliances with big Western players, are eyeing a stateside presence. Earlier this month, the Federal Reserve gave the go-ahead to Industrial and Commercial Bank of China, China's largest lender, to open a wholesale banking operation in New York - a sign that some experts say could herald a wave of other Chinese banks entering the United States.

"This is an acknowledgement that they are on the way," said Henry Fields, a partner at the law firm Morrison & Foerster whose practice has centered around assisting foreign banks looking to establish operations in the United States. China's ICBC is hardly the first foreign financial institution to put down roots in the United States. This year alone, a number of banks from such far-flung countries as Azerbaijan and India were approved by the Fed to establish representative branches here in the United States.

ICBC is the second Chinese bank to set up shop in the United States over the past year. China Merchants Bank won similar approval from the Fed in November. Currently, only a handful of Chinese banks are chartered domestically. Under the Fed authorization, ICBC will be able to finance trade and support the increasing number of its clients doing business in the United States.

ICBC will not be able to take in FDIC-insured deposits, but the start of a commercial branch is often considered to be the first step for a foreign bank looking to expand into the United States. "Foreign banks have traditionally come through wholesale branches and then the banks usually expand into retail banking if there is a strategic reason to do so," said Fields.

Holding them back

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Gov't. takeover more likely...

New Fannie, Freddie fears hit shares
August 18, 2008: Report suggests that the administration doubts mortgage giant firms will be able to raise needed capital, making a government takeover inevitable.

Shares of Fannie Mae and Freddie Mac tumbled Monday on a report suggesting that a government takeover of the troubled mortgage finance giants is inevitable. Shares of Fannie and Freddie were both about 11% lower in late morning trading. Both companies have seen their shares plunge more than 80% since the start of the year. The financial newsweekly Barron's quoted an unnamed Bush administration official as saying that government officials don't expect the two firms to be able to raise needed capital from private sector investors to cover future losses from rising defaults and foreclosures.

The article said that inability to raise capital will leave the government no choice but to have the federal government loan them money or buy their equity. Congress recently granted the Treasury Department the power to loan Fannie and Freddie an unlimited amount of money or to buy up their shares if necessary. The article suggested that such an infusion of capital will wipe out the holdings of current shareholders. Fannie spokesman Jason Lobo declined to comment. Freddie spokeswoman Sharon McHale denied that the company is in trouble.

"It significantly overstates our financial situation," she said. "We continue to be adequately capitalized and we are committed to raising additional capital. We're financially sound and have strong liquidity." Officials from Freddie have pledged to regulators to raise $5.5 billion in additional capital, but even without that the firm is meeting current capital requirements. Executives have not given a time frame for when they will raise that additional financial cushion.

"Any capital that we do raise will depend on a variety of factors, including prevailing market conditions," McHale said. Executives at Fannie and Freddie, as well as Treasury Secretary Henry Paulson, have repeatedly said they do not expect the firms to need to turn to the government for loans or an equity infusion. Both recently reported steep quarterly losses that were much larger than expected. But even with those losses, executives said they have capital in excess of minimum requirements.

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