Euro Highest

EURUSD resumed its uptrend in early European trade today as it once again challenged all time highs set last Friday at 1.4528. Boosted by a rebound in European equity markets and better than expected economic results from the Euro-zone, the pair continues to hold the 1.4500 figure as market participants await the ECB meeting this Thursday.

As we noted in our weekly, “The ECB meeting on Thursday remains the key to further gains in the euro. Although no one expects the central bank to hike rates in November, the European monetary authorities generally like to prepare the market for any policy moves. To that end Mr. Trichet’s commentary will be crucial in signaling whether the bank will tighten in December. ECB officials have been uniformly hawkish in their recent statements but it remains to be seen if they will be willing to raise rates in the face of record high exchange rates for the EURUSD.”

On the economic front EZ news was generally positive today with PMI Services printing slightly better at 54.7 versus 54.5 expected. Looking at the details of the subcomponent surveys the German data revealed that while new business improved markedly jumping from 52.1 to 54.5, business expectations slipped below the 50 boom/bust line to 48.7 suggesting that the higher euro is starting to weigh even on the region’s services sector.

With US economic calendar empty, the pair will most likely trade on risk assumption/risk aversion flows, driven by the price action of US equities. The trend in the EURUSD remains up, and the pair may well challenge the 1.4550 level, as euro longs try to knock out option barriers set at that price. However, we continue to believe that any forward progress in the pair is likely to be incremental from this point onward, unless US data shows significant deterioration, inviting further cuts from the Fed or ECB determines that inflation risks outweigh the dangers of sabotaging growth and chooses to hike rates to 4.25% by year end.

U.S. Housing Starts Slide

Housing starts in the U.S. plunged more than forecast to a 14-year low in September, keeping the real-estate market the Federal Reserve's top concern.

The 10.2 percent decrease to an annual rate of 1.191 million followed a 1.327 million rate the prior month, the Commerce Department said today in Washington. Building permits fell 7.3 percent to a 1.226 million pace.

Higher mortgage costs and stricter lending rules will further depress home sales and feed the decline in construction that threatens to stall economic growth. The Fed may cut interest rates again this year as the pall cast by housing persists into 2008, economists said.

``Housing continues to get worse and worse,'' said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. ``The contraction will go on into at least the middle of next year. There are certainly going to be more rate cuts by the Fed.''

Prices paid by consumers rose 0.3 percent in September as food and energy costs climbed, the Labor Department also reported. The core measure, which excludes food and energy costs, rose 0.2 percent for a second month in line with forecasts.

Treasury securities rose following the reports and stock- market futures held earlier gains. The yield on the benchmark 10- year note fell to 4.63 percent at 8:56 a.m. in New York, compared with 4.65 percent late yesterday.

The number of housing starts was the lowest since March 1993. The decline was led by a plunge in construction of townhouses, apartments and condominiums.

Survey Forecasts

Starts were projected to fall to a 1.28 million unit pace, from an originally reported 1.331 million in August, according to the median forecast of 79 economists polled by Bloomberg News. Estimates ranged from 1.2 million to 1.35 million.

Permits, a sign of future construction, were forecast to drop to 1.285 million, according to the survey median, with projections ranging from 1.23 million to 1.32 million.

Construction of single-family homes fell 1.7 percent to a 963,000 rate, today's report showed. Work on multifamily homes slumped 34 percent to an annual rate of 228,000.

The decrease in starts was led by a 28 percent drop in the Midwest. Construction fell 12 percent in the South and 10 percent in the West. Starts jumped 45 percent in the Northeast.

The number of homes under construction fell 1.4 percent to a 1.114 million pace and the number of properties completed dropped 8.2 percent to an annual rate of 1.391 million.

Housing units authorized, but not yet started, decreased 4.2 percent to 187,400, today's data showed.

`Significant Drag'

Housing will be a ``significant drag'' on the economy into next year as ``conditions in mortgage markets remain difficult,'' Fed Chairman Ben S. Bernanke said Oct. 15.

Policy makers lowered the benchmark rate by a half point to 4.75 percent on Sept. 18. The decision followed the August turmoil in financial markets that triggered concern over rising defaults by subprime mortgage borrowers, or those with poor or limited credit history.

``Risk-management considerations also played a role in the decision, given the possibility that the housing correction and tighter credit could presage broader weakening in economic conditions that would be difficult to arrest,'' Bernanke said.

The majority of investors and economists project the Fed will trim rates again, probably in December, and some are betting on a cut at a meeting later this month.

The National Association of Home Builders/Wells Fargo index of builder confidence plunged to a record low 18 in October, the Washington-based association said yesterday. Levels lower than 50 mean most respondents view conditions as poor. The index averaged 42 last year.

More Cancellations

Builders are reeling from a surge in cancellations as buyers turn more cautious and banks pull back on lending.

D.R. Horton Inc., the second-largest U.S. homebuilder, said yesterday that orders in the quarter ended Sept. 30 plunged to the lowest in almost six years. Centex Corp. last week said it'll take a $1 billion charge on property and generate less cash from sales than forecast.

``We expect the housing environment to remain challenging,'' D.R. Horton's Chairman Donald Horton said. ``Buyers continued to approach the home-buying decision cautiously.''

Foreclosures doubled in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, according to RealtyTrac Inc. Rising foreclosures will throw even more properties back on the market, economists said.

The National Association of Realtors last week cut its home- sales forecast for the 10th time this year. New-home sales will decline 24 percent this year to a 10-year low and existing-home sales will fall 11 percent, the group said Oct. 10.

The economy will probably grow at a 1.8 percent annual pace this quarter after expanding at a 2.7 percent rate from July through September, according to the median estimate of economists surveyed by Bloomberg earlier this month.

What to Look for in the FOMC Minutes

dailyfx.com

US Dollar: What to Look for in the FOMC Minutes
A delayed reaction to Friday’s non-farm payrolls report as well as the market’s expectation for tomorrow’s FOMC minutes has taken the US dollar higher against every major currency today. Even the New Zealand dollar, which was firmer against the US dollar for most of the day turned lower towards the end of the US trading session. Tomorrow’s FOMC minutes are from the September 18th monetary policy meeting, which was when the central bank lowered both the Fed funds and discount rate by 50bp each. Although the credit markets have stabilized quite a bit since the rate cut and there have been no new blowups in the financial sector, the Fed’s reasons for taking the preemptive move could still trigger sharp market movements. If thee Fed decided to deliver the larger interest rate cut not because the US economy needed it, but because they wanted to avoid making successive cuts, then that would lower the likelihood for interest rates to be cut at the end of the month and consequently rally the US dollar. On the other hand if the move was taken because the Fed felt that the US economy had deteriorated so much that a 50bp Fed Funds and discount rate cut was necessitated, then that would be bearish for the US dollar. We expect the market to react more significantly to the former rather than the latter because recent economic data including non-farm payrolls could give the Fed the luxury of waiting until December before lowering interest rates again. Towards the end of the week, our focus will turn to trade, inflation and consumer spending. The weakness of the US dollar should help to narrow the trade deficit while boosting inflation. Consumer spending is the biggest potential market mover this week (it is not due out until Friday). The strength of payrolls in September and the upward revision to retail sales in August suggest that retail sales could be stronger than the market is currently expecting. Overall, it seems to be shaping up to be a dollar positive week.

Euro Slips Back Towards 1.40
The Euro is slipping back towards 1.40 on the back of a smaller than expected rise in German factory orders as well as mixed commentary from ECB and IMF officials. Despite the German Economics Minister’s comment that he is not losing sleep over the current level of the Euro this morning, recent economic data indicates that as much as some officials may try to deny it, the strength of the currency is indeed having an impact on the economy. Factory orders rebounded only 1.2 percent, following the biggest drop in at least 16 years. Although ECB officials seem to agree that price stability is subject to upside risks, ECB member Bini-Smaghi indicated today that if Europe wanted to act to weaken the strong Euro, they did not need to wait for the G7 meeting later this month. Is he trying to say that the ECB may physically intervene in the Euro? Probably not because the currency is already falling off its highs and Germany, the Eurozone’s largest member remains comfortable with the current level of the Euro. Also, the ECB would far sooner verbally intervene in the before physically intervening. Meanwhile IMF Rato’s comment that the dollar is undervalued is also pressuring the EUR/USD. Tomorrow we have more comments from ECB officials as well as the German trade balance and industrial production. Both numbers are expected to be softer given the weakness in factory orders and the recent strength of the Euro.

Are the Commodity Currencies Finally Reversing?
The Australian, New Zealand and Canadian dollars are all softer today due to the drop in commodity prices and broad dollar strength. After hitting a new 23 year high overnight of 0.9034, the Australian dollar gave back all of its gains to end the day below 90 cents. Although economic data was mixed with ANZ job advertisements falling and the AIG Construction PMI index rising, the strength of the Australian economy should be the envy of countries like the US who is still struggling. The same can be said for Canada, despite the currency’s fall today. Employment numbers were exceptionally strong on Friday, paving the way for another rate hike by the Bank of Canada. As for New Zealand, house prices fell for the first time since the beginning of the year last month, but even that has only put a minor dent in the kiwi’s rise. Whether this is a real reversal in the commodity currencies or another blip before further gains is contingent upon oil and gold prices. If they have peaked, so will the Australian, New Zealand and Canadian Dollars.

British Pound Hit by Weaker Economic Data
The British Pound is weaker against the US dollar following mixed economic data. Input prices in the month of September were hot, but output prices were weaker than expected. This indicates that even though oil prices are driving up the cost for raw materials, these higher costs have not been passed onto factories. Part of this may be due to the weakness that we are beginning to see on the factory level. Even though the monthly growth rate of industrial production was stronger than expected, the annualized pace of growth slowed materially. Overall, the latest data indicates the difficult situation that the Bank of England is facing at the moment. Inflationary pressures remain high but economic growth is slowing.

Mild Move in the Dow Leads to Mixed Performance in the Japanese Yen Crosses
The Japanese markets were closed for a public holiday in Japan last night, so there was no economic data released. Tonight we have the Eco Watchers index but that is not expected to be market moving. The big event this week is the Bank of Japan interest rate decision, yet even that may not cause any significant movements in the Japanese Yen since there is only a 3 percent change for a quarter point rate hike. Instead, Yen traders should continue to keep an eye on the Dow. Should the stock market resume its rise, we could see fresh gains in carry trades. The dollar could extend its gains against the Yen given the bullishness of last week’s non-farm payrolls release. Major resistance for the pair is not until 119.

Last Signals

Sell
GBPUSD at 2.0215
GBPJPY at 232.48

Yen Gains Against Pound, Euro as Credit Market Losses Spread

By Kosuke Goto and Stanley White
The yen gained versus the pound and the euro on speculation credit market losses will damp confidence among consumers and businesses across Europe.

The Japanese yen climbed against 15 of the 16 most-active currencies as investors reduced holdings of higher-yielding assets funded by loans from Japan, known as carry trades. The pound snapped a three-day advance against the dollar as the Independent newspaper reported the U.K.'s deposit protection plan needs more cash to cope with the bailout of mortgage lender Northern Rock Plc.

``The news caused renewed risk reduction, triggering yen- buying,'' said Akihiro Tanaka, a senior currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-largest lender by assets. ``We have no other choice but to respond to this kind of news each time.''

The yen rose to 230.79 versus the pound at 2:17 p.m. in Tokyo from 232.27 yesterday in New York. It climbed to 161.49 per euro from 161.79 and to 114.70 per dollar from 114.86. The yen may rise to 113 a dollar by year-end Tanaka said.

The Independent said the U.K. Financial Services Compensation Scheme holds 4.4 million pounds ($8.9 million), while a similar U.S. fund has $49 billion. Global economic instability stemming from credit-market turmoil in the U.S. is ``likely to be protracted,'' the International Monetary Fund said in a report released in Washington yesterday.

Consumer Confidence

The dollar traded at $1.4078 against the euro, within a cent of its record low, before U.S. reports forecast by economists to show falling home sales and consumer confidence. Signs of a weakening U.S. economy may stoke bets the Federal Reserve will cut interest rates again this year, reducing the appeal of holding U.S. debt.

Japan's currency advanced the most against New Zealand's dollar, a favorite of the carry trade, gaining 1 percent to 84.93 from 85.78 in New York yesterday. Against the Australian dollar, it climbed 0.4 percent to 99.30. Australia's key rate is 6.50 percent and New Zealand's is 8.25 percent.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

The Bank of England agreed to bail out Northern Rock on Sept. 14. Chancellor of the Exchequer Alistair Darling pledged Sept. 17 to guarantee deposits as Northern Rock customers withdrew an estimated 2 billion pounds.

`Trigger a Run'

``The pound is being sold on this news,'' said Tetsuhisa Hayashi, chief currency trader in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's largest lender by assets. ``The amount for protection is too small. Investors are afraid this could trigger a run on the banks, just like we have seen people rush into Northern Rock on TV.''

The pound fell to $2.0138 against the dollar from $2.0223 yesterday. It may drop to $2 and 228 yen today, Hayashi said.

The euro also weakened against the yen on speculation data today will show German business confidence fell to the lowest in a year, casting doubt on growth in Europe's largest economy. Economists forecast the Ifo research institute's sentiment index, due at 10 a.m. in Munich, fell to 105 in September from 105.8 in August, according to a Bloomberg survey.

``We could see some euro selling,'' said Tetsu Aikawa, deputy general manager of the capital markets division at Shinsei Bank Ltd. in Tokyo. ``Weak economic data aren't good for sentiment. It calls into question whether the economic outlook will remain strong enough for interest rates to rise.''

The euro may fall to $1.40 and 161 yen today, he said.

Forced to Cut

The U.S. currency has fallen against all 16 most-active currencies in the past month on concern a U.S. housing slump will slow growth. It depreciated 2.9 percent against the euro and 1.5 percent versus the yen.

``I'm dollar-bearish,'' said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets. ``The U.S. economy will no doubt slow. The Fed will be forced to cut rates at least once more this year, diminishing the yield advantage.''

The U.S. currency may fall to $1.41 per euro and 114.60 yen today, Kato said.

Aggravating the Situation

The National Association of Realtors will probably report today that U.S. home resales fell 4.7 percent last month to an annual rate of 5.48 million, according to the median forecast of 72 economists surveyed by Bloomberg News.

``Falling housing prices will continue aggravating the whole situation, inflating bad assets,'' said Kazuo Mizuno, chief economist in Tokyo at Mitsubishi UFJ Securities Co. ``This will adversely affect U.S. consumption, pushing down the dollar,'' to 108 yen by year-end.

The New York-based Conference Board will say its index of consumer confidence decreased to 104.3 this month from 105 in August, according to the median forecast of 71 economists surveyed by Bloomberg.

The central bank on Sept. 18 cut its key rate by a half- percentage point to 4.75 percent. The European Central Bank's rate is 4 percent, and the Bank of Japan's is 0.5 percent, the lowest among industrialized nations.

Futures contracts show 72 percent odds of a quarter- percentage point cut to 4.5 percent at the Fed's meeting Oct. 31.

All Position Closed

Closed Positions:

GBPJPY
1. Sell At 242.28 + 380 Pip

GBPUSD
1. Sell At 2.0282 + 70 Pip
=====================
Result: + 450 Pip

Using PRINCE TRADING SYSTEM

TOTAL TRADED: + 3,919 Pip





Because I Will have my Vacation All positions are closed.
See You on the next time.
Have A nice trading to All

Prince

Update GBPUSD 9th August

Close Buy At 2.0296 -20 Pip

Open
1. Sell at 2.0282




Result All Trade +3,469

ECB Offers Unlimited Cash

ECB Offers Unlimited Cash as Bank Lending Costs Soar

The European Central Bank, in an unprecedented response to a sudden demand for cash from banks roiled by the subprime mortgage collapse in the U.S., loaned 94.8 billion euros ($130.2 billion) to assuage a credit crunch.

The overnight rates banks charge each other to lend in dollars jumped to the highest in six years. The so-called dollar London interbank offered rate rose to 5.86 percent today from 5.35 percent and in euros gained to 4.31 percent from 4.11 percent.

The ECB's response to the fastest increase in the dollar bank rate since June 2004 signals that lenders are reducing the supply of money as losses triggered by the U.S. mortgage slump spread worldwide. BNP Paribas SA halted withdrawals from three investment funds today and Dutch investment bank NIBC Holding NV said it had lost at least 137 million euros on subprime investments, reversing evidence yesterday that credit markets were stabilizing.

``Liquidity in the market has completely dried up as investors aren't recycling their money back because of subprime concerns,'' said Saher Bin Jung, a trader on the commercial paper desk at Commerzbank AG. ``Levels have shot up dramatically since yesterday as issuers are trying to entice investors back.''

The ECB said today it provided the largest amount ever in a single so-called ``fine-tuning'' operation, exceeding the 69.3 billion euros provided on Sept. 12, 2001, the day after the terror attacks on New York.

Stocks, Treasuries

The announcement added to investor nervousness, pushing Europe's Dow Jones Stoxx 600 Index down 1.9 percent, while the Standard & Poor's 500 Index futures expiring in September lost 20.9 to 1,483.0. U.S. Treasury notes gained for the first time in four days as investors sought the safest assets, cutting yields on two-year notes by 16 basis points, or 0.16 percentage point, to 4.50 percent.

BNP Paribas, France's biggest bank, stopped investors withdrawing from funds with 2 billion euros of assets because it couldn't ``fairly'' value their holdings after concern over U.S. subprime mortgage losses roiled credit markets.

Three-month dollar Libor rose to 5.5 percent from 5.38 percent.

Federal Reserve spokesman David Skidmore declined to comment on the increases in overnight money-market rates.

GBPJPY 9th August

Close Buy at 240.32 + 190 Pip

Open
1. Sell At 242.29

Total Trade : +3,489

GBPUSD 8th August evening

GBPUSD Positions Up Date:

Close Positions:
1. Sell At 2.0340 +44
2. Sell At 2.0322 +22
3. Sell At 2.0231 -60
=================
Result: +6

Total Trade: +3,299 Pip

Yen Falls as Asian Stocks Gain

Yen Falls as Asian Stocks Gain, Australia Raises Interest Rate

Aug. 8 (Bloomberg) -- The yen fell against the euro as Asian stocks rose and the Federal Reserve said the U.S. economy can withstand mortgage defaults, encouraging investors to buy higher-yielding assets with funds borrowed in Japan.

The currency fell the most against the Australian dollar, a favorite of so-called carry trades, after that nation's central bank raised its benchmark rate to 6.50 percent today. The &cls;Standard and Poor's 500 Index&cle; posted its best two-day gain since 2003 after the Fed said a six-year economic expansion won't be undone by a credit-market slump.

``With stock prices rising, the yen should be weaker,'' said Satoshi Okagawa, head of the foreign-exchange forward trading group at Sumitomo Mitsui Banking Corp. in Tokyo. ``All in the markets are caring about stocks, which represent risk appetite.''

The Japanese yen declined to 163.49 per euro at 1:38 p.m. in Tokyo from 163.25 late in New York yesterday. It also fell to 118.93 against the dollar from 118.83.

The yen dropped against 12 of the 16 most-active currencies as the Morgan Stanley Capital International Asia-Pacific Index of shares rose 0.6 percent. The S&P 500 climbed yesterday as investors took the Fed's statement as a sign turmoil in the credit markets won't limit global growth.

The Australian dollar has gained 0.8 percent versus the yen this month. It rose to 101.83 yen today from 101.57 in New York yesterday. The Reserve Bank of Australia increased its benchmark rate from 6.25 percent, widening the advantage in yield for two- year Australian debt over Japanese government bonds to 5.40 percentage points from 5.37 points on Aug. 6.

New Zealand's dollar, another favorite of the carry trade with a key rate of 8.25 percent, was at 90.46 yen.

`Surprisingly Weak'

Japan's currency also extended this month's losses to 0.8 percent against the euro after machinery orders, a key indicator of corporate spending plans, fell a seasonally adjusted 10.4 percent in June from the previous month. The median of 40 estimates in a Bloomberg News survey was for a 1.1 percent drop.

``The data were surprisingly weak,'' said Masaki Fukui, a senior economist and currency analyst at Mizuho Corporate Bank Ltd. in Tokyo. ``Today's data cannot support the Bank of Japan to raise rates this month. It's yen negative.''

The yen may move between 115 and 120 per dollar in one month, Fukui said.

The Bank of Japan will hold a two-day policy meeting starting on Aug. 22. The central bank last increased borrowing costs by 0.25 percentage point in February to 0.5 percent, the lowest among major economies. The benchmark rate is 4 percent in the euro region.

The yield premium investors earn on 10-year U.S. Treasury notes over similar-maturity Japanese bonds widened to 3.05 percentage points from 3.03 points yesterday and 2.90 points at the end of last week.

Subprime Mortgages

Fed policy makers repeated that inflation is still a risk after keeping rates at 5.25 percent. The ``economy seems likely to continue to expand at a moderate pace,'' the rate-setting Federal Open Market Committee said.

Gains in the dollar may be limited by speculation losses on U.S. subprime mortgages will prompt the Fed to lower interest rates this year.

The U.S. currency has fallen 3.6 percent against the yen in the past month on concern housing-market weakness will slow economic growth. Fed Funds futures also show traders increased bets on at least one rate cut by December to 49.5 percent odds from 6 percent a month ago.

``The U.S. subprime problems won't be solved any time soon, as housing prices are still falling,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo. ``This is a continuing correction of the housing market bubble and will keep adversely affecting U.S. consumption,'' pushing down the dollar to 115 yen by year-end.

German Exports

The euro may strengthen on speculation a German report today will show exports rebounded in June, adding to evidence Europe's largest economy is resilient to higher borrowing costs.

Europe's single currency may extend this year's 4 percent gain versus the yen on prospects the European Central Bank will raise interest rates at a faster pace than the Bank of Japan. The yield spread between two-year German and Japanese bonds was 3.29 percentage points today, above the average of 3.13 points in the past year.

``Growth in the euro area is robust,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``The ECB is likely to hike in September and perhaps once more this year. It's supportive of the euro,'' which may rise to $1.3770 and 163.75 yen today, he said.

Bernanke Looks

Bernanke Looks Beyond Market Tumult to Focus on Inflation Risks

Aug. 8 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke isn't blinking in his battle against rising prices even as tumult in financial markets threatens to slow growth.

Fed officials said higher inflation is ``the predominant risk'' when they kept their benchmark interest rate at 5.25 percent yesterday. They rebuffed calls for a more balanced assessment that may have presaged a rate cut. In doing so, they also broke with former Chairman Alan Greenspan, who elevated the role of financial market stability in setting policy.

``They see the paramount task as keeping inflation low and keeping inflation expectations anchored,'' said Brian Sack, a former adviser to senior Fed officials on policy strategy who's now an economist at Macroeconomic Advisers LLC in Washington.

Bernanke's unwillingness to budge comes after price increases slowed for four straight months, to the lowest since he took office. The Fed chief emphasizes the institution's forecasts over coming quarters, while Greenspan tended to stress current conditions when markets weakened, enabling rapid shifts in policy.

U.S. stocks lost about $1.26 trillion in market capitalization since benchmark indexes reached records in July as banks restricted credit because of rising defaults on subprime mortgages. Volatility climbed to the highest since April 2003 this week, according to the VIX index, a gauge tied to the S&P 500 index compiled by the Chicago Board Options Exchange.

``The signal from the Fed was unmistakable: turbulent markets, in and of themselves, will not be sufficient to force their hand,'' said Peter Kretzmer, senior economist at Banc of America Securities LLC in New York.

`Baptism of Fire'

The 1987 stock-market crash was Greenspan's ``baptism of Fire,'' he said at a New York exposition June 1. While some advised him to wait to see the impact on the economy from a 23 percent slide in the Dow Jones Industrial Average, Greenspan said he concluded quickly that the U.S. was on the edge of ``fairly pronounced dangerous positions.'' He then said he would provide ``liquidity'' to the banking system.

In 1998, the Greenspan Fed lowered the benchmark rate three times as emerging market turmoil roiled Wall Street, and raised it on three occasions the next year. In January 2001, the Fed enacted an emergency rate cut just seven weeks after saying the risks were ``weighted mainly toward'' inflation pressures.

Bernanke, 53, and his colleagues have kept the federal funds rate unchanged for a year, the longest freeze in nine years.

Futures Trading

Traders yesterday reduced their expectations for a rate cut in the coming two months. Investors see a 58 percent chance the Fed will lower its benchmark rate by the end of October, down from 84 percent the previous day, based on futures on the Chicago Board of Trade. A reduction by year's end is still a certainty, futures indicate.

Unlike Greenspan, Bernanke isn't going to provide short- term financing to help ease a slump in asset prices, said Joe Carson, director of research at Alliance Bernstein LP in New York. It's too early to know if Bernanke's strategy will be successful, he said.

``Wall Street is looking for an easy solution to these problems,'' Carson said. Monetary ``policy is not going to help out.''

At least 70 mortgage firms have halted operations, gone bankrupt or sought buyers since the start of 2006. Large banks are also cutting back on their appetite for risky financings of corporate takeovers. At Bear Stearns Cos., two hedge funds failed in June and the firm's chief financial officer said Aug. 3 that the fixed-income market is in the worst shape in 22 years.

The Fed said yesterday that it still expects a ``moderate'' expansion. Policy makers added that ``solid growth in employment and incomes and a robust global economy'' will help.

Growth Rate

The government said on July 27 that the U.S. economy expanded at a 3.4 percent annual pace in the second quarter, the fastest in more than a year, after a revised gain of 0.6 percent in the three months ending March.

Economists and Fed officials anticipate a slacker expansion in the second half. For the year, Fed governors and presidents expect growth, on average, of about 2.25 percent to 2.5 percent, Bernanke told Congress last month. The projections are about a quarter-point below the previous round in February, mainly because of the weakness in homebuilding.

Price increases have slowed for four straight months under the Fed's preferred gauge, which excludes food and energy costs. The core personal consumption expenditures price index rose 1.9 percent in June after a revised 2 percent gain in May, the Commerce Department said July 31.

Financial volatility did change Fed officials' sense of the risk around the forecast. ``Downside risks have increased somewhat,'' the statement said.

``It is a step away from tightening, it is not a step toward easing,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. ``Greenspan was more of a tinkerer. Bernanke is `stay the course until you tell me not to.' And the `you' is not the bond market, it is the economy.''

GBPJPY 8th August

Close Positions:

GBPJPY
1. Sell at 240.58 + 15 Pip
2. Sell at 240.41 + 2 Pip
====================
Result: + 17 Pip

Open Position:
GBPJPY
1.Buy at 240.32

Position Update 8th August

Positions Up date:

GBPJPY
1. Sell at 240.55
2. Sell at 240.41

GBPUSD
1. Sell at 2.0340
2. Sell at 2.0322
3. Sell at 2.0231


Total Trade Result : + 3,293 Pip

GBPJPY 7th August

Result:
1. Buy at 240.98 -50

Open now
1. Sell at 240.55

Fed Lack of Transparency

Fed Lack of Transparency Keeps Traders in Dark as Stocks Drop

Aug. 7 (Bloomberg) -- The Federal Reserve trails other central banks in openness, hamstringing it in times of market turmoil, and may not catch up even if Chairman Ben S. Bernanke's campaign to improve communications succeeds.

Fed policy makers, who meet in Washington today to set interest rates, are nearing the end of more than a year of talks on how to increase transparency. The Fed is behind five of eight major counterparts, including the European Central Bank and Bank of England, according to a paper by two European economists.

The differences were stark last week, when ECB President Jean-Claude Trichet hit the airwaves and held an unscheduled press conference while colleagues spoke to newspapers amid the biggest global stock sell-off since 2003. Bernanke was invisible, and because the Fed's top officials are so tightly scripted, any break from tradition may have panicked as many investors as it reassured. The statement today may at most contain brief comments on heightened economic risks, analysts said.

``It's one less degree of freedom,'' said Chuck Lieberman, a former New York Fed economist who's now chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey. ``The very act of providing some assurance might scare the market'' because it would be unusual, he said.

The Federal Open Market Committee will keep its benchmark rate at 5.25 percent for the ninth straight meeting, according to all 96 economists surveyed by Bloomberg News. The statement is scheduled for 2:15 p.m. in Washington.

Still Trailing

While European, Japanese and U.K. central bankers hold press conferences and conduct on-the-record interviews, Bernanke's efforts are unlikely to produce that degree of transparency, Fed watchers said. America's central bank hasn't set a date for concluding the communications review.

Any changes will be ``pretty minor,'' said Adam Posen, a former Fed economist who has collaborated with Bernanke. The Fed may increase the frequency of and information contained in its economic forecasts, falling short of adopting an explicit inflation goal, economists including Posen predict.

Kansas City Fed President Thomas Hoenig said in May that ``advancing how we use the minutes'' of Fed meetings was one of the options under discussion. A conclusion is ``a ways off,'' he said May 15 in Denver.

Beginning in 1994, the Fed under former chairman Alan Greenspan started announcing rate decisions and issuing statements explaining them. That was copied by other central banks, including in Australia and New Zealand.

The Fed's counterparts have kept innovating and now the U.S. central bank is the only one among the Group of Seven nations that doesn't hold regular press conferences. It has given no indication the practice is under consideration.

`A Ways to Go'

``The Fed over the last five to seven years has been moving in the right direction but still has a ways to go,'' said Tom Schlesinger, who researches the Fed as executive director of the Financial Markets Center in Howardsville, Virginia.

Openness such as the ECB showed last week would be unthinkable at the Fed, where the chairman and vice chairman tend to restrict public availability to appearances that are scheduled weeks or months in advance.

The Fed's relative lack of clarity is a challenge because, unlike the ECB, it's charged with achieving full employment as well as stable prices, said Sylvester Eijffinger, a professor at Tilburg University in the Netherlands and co-author of the study ranking central banks. It ``leads to some confusion in terms of communication,'' he said.

No Cure-All

Transparency isn't a cure-all. Wim Duisenberg, Trichet's predecessor, was faulted for confusing markets with mixed messages on interest rates and contributing to a slump in the euro. And Bernanke himself tripped up with off-the-cuff remarks to a reporter in April last year.

Bernanke, 53, told CNBC reporter Maria Bartiromo at a Washington party markets had misinterpreted remarks to Congress that had suggested the Fed was finished raising rates. Bonds tumbled when CNBC reported the conversation May 1, 2006. Bernanke later said the incident was a ``lapse in judgment.''

Public comments by top Fed officials can help soothe investors. By chance, Bernanke was scheduled to testify before Congress on Feb. 28, a day after the biggest one-day slide in the Standard & Poor's 500 index in four years.

Soothed Market

Bernanke said then that financial markets were ``working well'' and growth was still likely to accelerate. The S&P 500 rallied 0.6 percent, taking back some of the 3.5 percent drop the previous day.

Last week, the index capped its worst three-week sell-off since February 2003 and the lack of scheduled events meant that this time, investors had no reassuring words from the Fed chief. Neither Bernanke nor Vice Chairman Donald Kohn has spoken in public since July 19, leaving commentary to lower-ranking officials such as Governor Randall Kroszner, who said the ``real economy does not yet seem to be affected.''

``Some sort of statement from the Fed that they stand willing to provide additional liquidity might help confidence,'' said James Nixon, a former forecaster for the ECB and BOE who is now an economist at Societe Generale SA in London. Trichet ``went some way to calm the market.''

Position Update

Close Sell Positions.
Result:
1. Sell 241.90 +86
2. Sell 240.58 -45
===============
Nett: +41

Total Trade: +3,343 Pip

Open Positions:
GBPJPY
1. Buy at 240.98

GBPUSD
1. Sell at 2.0340
2. Sell at 2.0322

Bad of UK Data

Well as News report that I have posted before, seem UK's Manufacturing Production release dropped to its slowest rate in two years.
confirmed close all Buy Position around 2.0344 and also Open Sell at 2.0340

Result:
1. Buy at 2.0298 +40
2. Buy at 2.0294 +44
3. Buy at 2.0252 -12
=================

Total: +72

Result Total +3,302 Pip

Open Positions:

GBPJPY
1. Sell at 241.90 + 260 Pip
2. Sell at 240.58 + 128 Pip

GBPUSD
1. Sell at 2.0340 +40 Pip

UK manufacturing employment growth

UK manufacturing employment growth dropped to its slowest rate in two years, in the three months to July, a survey by the Confederation of British Industry, CBI, revealed, Monday. The survey showed that the growth in demand for goods had eased in the quarter to July. New orders grew for the third successive quarter, though slower than in the previous six months, while manufacturing output growth slowed in the quarter to July. The CBI is the UK''s leading business organization, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. The Regional Trends Survey, conducted by the CBI and Experian, were extracted from the 576 replies to the CBI''s Industrial Trends Survey in July. In the three months to July, fully half of UK manufacturers were working at full capacity, the survey revealed. As a result, job cuts in the manufacturing sector slowed to 5,000, much lower than the average of 30,000 job cuts every quarter since 2003. Four of eleven UK regions actually saw gains in employment. Job losses were heaviest in the West Midlands, London and the South East and the South West. Export growth had slowed down among most of the regions, the report said. Manufacturing costs increased in the quarter to July, reversing an earlier decline, pushed mainly by the high price of oil. However, firms were confident of increasing prices to offset rising costs, the survey found.The Northeast region witnessed robust growth in orders, output, employment and investment intentions while prices for both domestic and exports markets were strong. The metals and engineering industries in the West Midlands region was singled out by the survey for strong performance."The manufacturing sector''s revival is continuing, though the rate of growth has slowed somewhat. With more firms now working flat out than at any time since early 2006, there has been a very welcome effect on jobs," said Doug Godden, head of economic and fiscal policy at the CBI.

Dollar Falls to Four-Month Low Against Yen

Dollar Falls to Four-Month Low Against Yen on Growth Concerns

Aug. 6 (Bloomberg) -- The dollar fell to a four-month low against the yen and traded near a record low against the euro on speculation hedge fund losses and a slowing economy will prompt the Federal Reserve to cut borrowing costs this year.

The currency also declined against the Swiss franc after a weaker-than-forecast U.S. jobs report caused traders to increase bets on lower interest rates as soon as October. The yen climbed versus the New Zealand dollar and the British pound as a slump in Asian stocks pushed investors to repay Japanese currency loans used to purchase higher-yielding assets.

``The dollar will fall further,'' said Koichi Yoshikawa, head of currency trading at BNP Paribas in Tokyo. ``People had funded their investments with yen and Swiss francs under good credit conditions. This money stream is turning around, which means a weaker dollar and a stronger yen.''

The dollar dropped to 117.63 yen at 12:45 p.m. in Tokyo from 118.05 on Aug. 3 and reached 117.19, the weakest since March 29. It weakened to 1.1840 Swiss francs, from 1.1907. The U.S. currency also fell to $1.3816 per euro from $1.3773, close to an all-time low of $1.3852 touched July 24. It may fall to 117 yen today, Yoshikawa said.

Federal Fund futures show traders see an 84 percent chance the Fed will cut its 5.25 percent benchmark rate by October, up from 14 percent a month earlier. The Labor Department said on Aug. 3 that job growth slowed to 92,000 in July, compared with 126,000 in June and the median forecast in a Bloomberg survey of 127,000.

The pace of leveraged buyouts has slowed more than 33 percent since June, data compiled by Bloomberg show. Investors are cutting back on riskier assets such as the loans and bonds that fund LBOs after being burned by losses from U.S. subprime mortgages.

``The subprime problem and concern about the economy damage U.S. credit markets,'' Yoshikawa said.

Carry Trades

Japan's currency got a boost as a 2.7 percent decline in the S&P 500 Index spilled over to Asian stock markets, encouraging investors to pare so-called carry trades. The Morgan Stanley Capital International Asia Pacific Index of shares dropped 1.2 percent.

The yen climbed against 15 of the 16 most-active currencies. Only the Swiss franc, another popular funding currency, gained more. The yen has risen 5.2 percent against the dollar since Bear Stearns Cos. said June 22 two of its hedge funds that made bets on subprime loans collapsed.

Easy to Buy

New Zealand's dollar, a favorite of carry trades because of its 8.25 percent benchmark rate, dropped 0.6 percent to 89.21 yen. Australia's currency, where the key rate is 6.25 percent compared with Japan's 0.5 percent, slid 0.4 percent to 100.54. The pound dropped to 240.20 from 240.95 on Aug. 3.

``It's easy to buy the yen today,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The subprime problem means traders will want to avoid risk and buy back the yen.''

Japan's currency may rise to 117 against the dollar and 161.20 per euro today, he said.

Volatility implied by yen currency options expiring in one month with a strike price near the current level rose to 10.45 percent, the highest in 14 months. Traders quote implied volatility, a measure of expected price swings, as part of pricing options.

Higher volatility may discourage carry trades as it exposes these bets to more currency risk. The yen has gained 3.3 percent against the dollar since one-month volatility started rising from 5.725 percent on June 5, the lowest since Bloomberg began compiling the data in 1995.

``We're seeing increased options demand on expectations the dollar will fall more against the yen,'' said Ryousei Ishida, senior vice president of foreign exchange options at Mizuho Corporate Bank Ltd. in Tokyo. ``Volatilities have room to rise further. There's been a lot of negative news out of the U.S.''

Federal Reserve

The dollar fell for a third day against the euro on speculation Fed policy makers will voice concern about slowing economic growth at a meeting tomorrow, where it will probably leave rates unchanged.

``With the subprime woes intensifying, the Fed might make a reference to this in their statement,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``This would fuel Fed rate-cut expectations by year-end. It's negative for the dollar,'' which may decline to $1.3852, a record low, and to 117.20 yen today.

The currency also slid for a second day against the yen as the difference in yield between benchmark two-year U.S. and Japanese bonds narrowed today to 3.42 percentage points, the least in more than two years.

Latest Result Up Date

Result Up Date From 24th July 2007:

GBPJPY:
+ 2,450
- 20
+ 20
+ 140
--------
+2,590 Pip

Still Open Position
1. sell at 241.90 = +80 Pip

From 25th July 2007
GBPUSD:
+665
- 15
- 10
-------
+640 Pip

Still Open Positions
1.Buy at 2.0298 = +116
2.Buy at 2.0294 = +120
3.Buy at 2.0352 = + 58
-------------------------
Total: = +294

All Trade made + 3,230 Pip

So Far so good. Have a nice trade to all of You.


Prince

GBPJPY 3 Ausgust

Sell New at 241.90 and close all Buy Position.
Result:
1.Buy at 240.55 130 Pip
2.Buy at 240.94 80 Pip
3.Buy at 242.53 -75 Pip

Result Total: 140 Pip

GBP and GBPJPY 3 August

GBP
Add New Buy at 2.0352.
Open Positions:
1.Buy at 2.0298
2.Buy at 2.0294
3.Buy at 2.0352

GBPJPY
Add new Buy at 242.53
Open Positions:
1.Buy at 240.55
2.Buy at 240.94
3.Buy at 242.53

Yen Strengthens as Sharper Currency Swings Deter Carry Trades

The yen strengthened against the dollar and the euro as sharper swings in exchange rates prompted traders to cut investments in higher-yielding assets paid for by borrowing the Japanese currency.

The yen was the best performer among the 16 most-active currencies against the dollar today as subprime mortgage losses pushed fund managers to pare so-called carry trades. A measure of volatility in dollar-yen reached the highest in five months.

``The currency market remains choppy and driven by sentiment,'' said Gundy Cahyadi, an economist at IDEAglobal in Singapore. ``Chances the high-yielders will rebound in a big way today will be limited.''

The yen climbed to 162.30 versus the euro at 7:50 a.m. in London compared with 162.58 in late New York yesterday. It also advanced to 118.71 against the dollar from 118.96.

Volatility on one-day dollar-yen options reached 19.005 percent today, the highest since March 14, from 12.755 percent yesterday. Rising volatility may discourage carry trades as it implies bets will be exposed to greater exchange-rate fluctuations.

The yen also advanced 0.3 percent against the Australian and New Zealand dollars, popular carry trade currencies. Australia's dollar was at 101.50 yen from 101.80 yen, and New Zealand's dollar was at 90.85 from 91.15 yen.

The Bank of Japan's 0.5 percent benchmark rate compares with 5.25 percent in the U.S., 8.25 percent in New Zealand and 6.25 percent in Australia.

Repatriation Flows

Japanese investors sold 2.1 billion yen in overseas bonds and notes, while buying 47.4 billion yen in foreign short-term securities, the ministry said. Total holdings were cut for a third week, with net sales of 3.4 billion yen.

The currency also gained on speculation Japanese investors are converting income after Italy paid 14 billion euros ($19.1 billion) in coupon and principal on government debt yesterday, according to Societe Generale SA in Tokyo.

The yen has weakened 3.3 percent against the dollar in the past year as the lowest borrowing costs among major economies encouraged investors to borrow in Japan to buy higher-yielding assets.

American International Group Inc., the world's biggest insurer, may be sitting on losses of as much as $2.3 billion from securities backed by subprime mortgages, analysts said. Bear Stearns Cos., the manager of two hedge funds that collapsed last month, blocked investors from pulling money out of a third fund as losses in the credit markets expand.

``Confidence among investors hasn't clearly been restored, as there are still concerns over the subprime issue,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``They're probably looking to scale back carry trades, which may lift the yen'' to 118.40 against the dollar and 161.70 per euro today, he said.

Interest Rates

The euro may be supported by speculation European Central Bank President Jean-Claude Trichet will today signal an interest- rate increase as soon as next month after policy makers keep rates at 4 percent today.

The currency may extend this year's 3.5 percent advance against the dollar as the yield spread between two-year German and U.S. bonds narrowed this week to the least in 2 1/2 years. The British pound may gain for a fourth day as the Bank of England will raise borrowing costs to 6 percent by year-end after holding them at 5.75 percent at today's meeting, a Bloomberg News survey shows.

September Hike

``Trichet is likely to reaffirm expectations of a September rate hike,'' said Masashi Kurabe, currency manager at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. ``The euro may go higher'' to $1.3720 and 163.50 yen today, he said.

The euro traded at $1.3669 from $1.3667 yesterday, and the pound was at $2.0319 from $2.0325.

Interest-rate futures show investors are betting the ECB will lift rates at least once more this year. The implied yield on the December Euribor futures was at 4.49 percent, up from 4.48 percent yesterday. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999.

The dollar may extend losses on speculation a government report tomorrow will show U.S. companies added fewer jobs in July. The Labor Department will report U.S. employers added 127,000 nonfarm jobs, down from 132,000 a month earlier, according to a Bloomberg News survey of economists. The jobless rate is forecast to stay at 4.5 percent.

``Dollar-bearish sentiment is still prevailing amid concern over U.S. subprime issues,'' said Akihiro Tanaka, a senior dealer in Tokyo at Resona Bank Ltd. ``Jobs data won't help boost the dollar, even though data are better than expected. It rather has a further downside risk.''

The dollar may fall to 118.50 yen today, Tanaka said.

U.K. Pound Little Changed Before Bank of England Rate

U.K. Pound Little Changed Before Bank of England Rate Deci

The pound was little changed before a Bank of England rate-setting meeting at which policy makers are expected to hold borrowing costs at a six-year high.

The U.K. currency held near a three-week low against the dollar as investors shun high-yielding currencies on concern losses on U.S. subprime mortgages will damage global economic growth. The BOE is forecast to leave key rates at 5.75 percent, while interest-rate futures indicate it will raise borrowing costs a quarter percentage point by the end of this year.

``We had a few sluggish U.K. numbers over the last couple of weeks but that in itself won't upset the Bank of England,'' said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London. ``The BOE is widely expected to leave rates on hold.''

Against the euro, the pound traded at 67.29 pence as of 7:24 a.m. in London, from 67.25 late yesterday in New York, and at $2.0311, from $2.0325.

The U.K.'s largest mortgage lender HBOS Plc will release house-price data for July at 8 a.m. in London. Economists surveyed by Bloomberg News forecast the average value of a home rose 0.3 percent, from 0.4 percent the month before.

The implied yield on the December interest-rate futures contract was at 6.17 percent yesterday. The contract settles to the three-month London inter-bank offered rate for the pound, which has averaged about 15 basis points more than the bank's key rate in the past decade.

U.K. bonds closed little changed yesterday. The yield on the 4 percent note maturing September 2016 was 5.20 percent.

Trichet, Poised to Raise Rates, Follows Bundesbank

Trichet, Poised to Raise Rates, Follows Bundesbank

European Central Bank President Jean-Claude Trichet

July 31 (Bloomberg) -- The European Central Bank might be run by a Frenchman; its heart and soul belong to Germany's Bundesbank.

ECB President Jean-Claude Trichet faces political pressure to stop raising interest rates, and some of his own policy makers query the extent of the inflation threat in Europe. Still, investors are betting he'll push borrowing costs higher, upholding the legacy of Germany's central bank, which celebrates its 50th anniversary tomorrow.

``Some ECB council members are sounding more cautious about further rate increases, but I'd still bet on the Bundesbank cabal winning the argument,'' said Charanjeev Chana, an economist at Stone & McCarthy Research Associates in London. ``We still expect rates to rise twice more by the end of the year.''

The Bundesbank's inflation-fighting zeal remains at the heart of European monetary policy even after the bank ceded control of rates to the ECB in 1999. German memories of rampant inflation after World War I, and Adolf Hitler's subsequent rise to power, forged the Bundesbank's resolve to achieve stable prices and made it a role model for central banks across Europe.

``The Bundesbank tradition was completely adopted by the ECB,'' said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. ``And Germany is the biggest economy in the euro zone, which tends to give the Bundesbank president more clout on the ECB council.''

`Hyperinflation'

``Hyperinflation'' gripped Germany in the 1920s after the government printed banknotes to finance World War I and fund reparation payments to the Allies after the country's defeat in 1918.

Prices spiraled out of control and confidence in the Weimar Republic, Germany's first full-fledged democratic system, was undermined. By the end of 1923, prices were doubling every 49 hours, and one U.S. dollar was worth more than a trillion German marks.

``Nothing rendered the German people so embittered, so full of hatred, so ready for Hitler, as inflation,'' former Bundesbank and ECB Chief Economist Otmar Issing said in 2004, quoting Austrian writer Stefan Zweig.

To ensure hyperinflation never returned, the government created the Bundesbank on Aug. 1, 1957. It was charged with ``safeguarding'' the stability of the deutsche mark, which had been established in 1948 and became a bedrock of Germany's economic recovery.

De-Facto Anchor

The mark also became the de-facto anchor to which other European currencies were tied after the collapse in 1971 of the Bretton Woods fixed exchange-rate system.

With the introduction of the euro in 1999, ``there had to be a reason for markets to attach credibility to the ECB,'' said James Nixon, an economist at Societe Generale in London. ``The Bundesbank provided one.''

The ECB adopted the principles that earned the Bundesbank respect. Both argue that price stability is the overriding aim of monetary policy, a stance that contrasts with the U.S. Federal Reserve's dual mandate to both fight inflation and foster job creation.

The ECB, like the Bundesbank, also says its decisions should be independent of government interference and take money-supply developments into account.

Doubts Raised

Those principles are now being questioned as the Frankfurt- based ECB prepares to raise rates for the ninth time since late 2005. The ECB's benchmark is already at 4 percent, a six-year high, and inflation has stayed below the bank's 2 percent ceiling for 11 straight months.

Bank of France Governor Christian Noyer has raised doubts about the accuracy of inflation signals sent by money-supply data, while Portugal's Vitor Constancio has said the appreciating euro may curb any inflation threat.

``This may be viewed as part of the ECB detaching itself from the old Bundesbank line, but the fact that Trichet defended the monetary strategy so strongly sent a very powerful message,'' said Thorsten Polleit, an economist at Barclays Capital in Frankfurt.

Trichet used a speech in June to laud the Bundesbank's ``acceptance of the ultimately monetary nature of inflation,'' and said ignoring money growth would entail ``excessive and unreasonable risks.''

French Attack

Trichet and the Bundesbank have also been united in defending the ECB after French President Nicolas Sarkozy called for governments to have a say in monetary policy.

The ECB's independence is enshrined in law and to question it is ``not acceptable,'' Trichet said. Bundesbank President Axel Weber dismissed Sarkozy's comments as ``noise.''

The Bundesbank has also supplied the ECB with a string of so- called hawks. Weber is the toughest inflation fighter on its 19- member governing council, according to a ``hawkometer'' compiled by Stone & McCarthy. He's topped the index in 10 of the past 14 months. ECB Executive Board member Juergen Stark, a former Bundesbank vice president, regularly rates among the top three.

With oil prices rising and the euro-region economy growing at close to the fastest pace since 2000, Weber and Stark are arguing for higher rates.

``Trichet seems to be listening,'' said Chana. ``The ECB acts pre-emptively to prevent inflation, and that's a Bundesbank trait.''

The ECB will raise its key rate to 4.25 percent in September, according to all 13 economists in a Bloomberg News survey. Some expect the bank to signal the move after its policy meeting on Aug. 2.

For now, the ECB remains driven by a doctrine best summed up by former Bundesbank President Karl Otto Poehl.

``Inflation is like toothpaste,'' he said in 1980. ``Once it's out, it's difficult to get back in again. So the best thing is not to squeeze too hard on the tube.''

Bear, Lehman, Merrill Trade as Junk

Bear, Lehman, Merrill Trade as Junk, Derivatives Show (Update1)

By Caroline Salas

The exterior of the New York Stock Exchange

July 31 (Bloomberg) -- On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk.

Bonds of U.S. investment banks lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since at least October 2004, according to Merrill indexes. Prices of credit-default swaps based on the debt imply that their credit ratings are below investment grade, data compiled by Moody's Investors Service show.

The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year.

``The market is being driven by fear,'' said Mark Kiesel, who oversees $80 billion of corporate debt at Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund.

Credit-default swaps tied to $10 million of bonds sold by Bear Stearns, the second-largest underwriter of mortgage bonds, were quoted as high as $145,000 yesterday, from $30,000 at the start of June, indicating growing investor concerns. The swaps traded today at $85,000, according to broker Phoenix Partners Group in New York.

The contracts, financial instruments based on bonds and used to speculate on the chances of default, imply a rating of Ba1, one level below investment grade and six lower than Bear Stearns' A1 ranking, according to New York-based Moody's.

`Wall of Worry'

Prices of credit-default swaps for Goldman, the biggest investment bank by market value, Merrill, the third largest, and Lehman, the No. 1 mortgage bond underwriter, also equate to a Ba1 rating, data from Moody's credit strategy group show. Bonds of New York-based Goldman and Merrill are rated Aa3, seven levels higher than swaps suggest. Lehman is rated A1, the same as Bear Stearns.

About 1 percent of the thousands of companies followed by Moody's have a gap of more than five levels between their actual and implied rankings, analyst Tony Smith said in a July 19 report titled ``Broker Securities Climb a Wall of Worry.''

Spokesmen for the firms declined to comment or didn't return phone calls. High-yield, or junk, bonds are rated below Baa3 by Moody's and BBB- by Standard & Poor's.

Credit-default swaps are the fastest-growing part of the derivatives market. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Losing Value

Investment-grade bonds of brokerage firms lost 0.47 percent on average since June, while securities with similar ratings returned 0.19 percent, according to Merrill indexes. Finance companies are the biggest part of the corporate bond market, accounting for 40 percent of the $2 trillion of debt outstanding, according to New York-based Morgan Stanley, the second-biggest investment bank by market value.

Investors demand an extra 1.25 percentage points in yield to own the bonds of brokers instead of Treasuries, up from a low of 0.64 percentage point on Jan. 29. The wider spread represents an extra $6 million in annual interest for every $1 billion they borrow.

Lehman sold $1.5 billion of 6 percent notes due in 2012 earlier this month at a price to yield 1 percentage point more than Treasuries with a similar maturity. The company sold five- year debt with a 0.62-percentage-point spread on Jan. 9.

The difference adds up to $5.7 million a year in extra interest. The price of the new securities fell to 99.8 cents on the dollar to yield 1.38 percentage points more than Treasuries yesterday, according to Trace, the bond-price reporting system of the NASD.

Skittish Investors

Investors grew more skittish about the credit markets this month as mortgage defaults increased and at least 40 bond and loan sales faltered. U.S. foreclosures rose 58 percent in the first half of 2007 from a year earlier, as more homeowners fell behind on payments, according to a report yesterday by RealtyTrac Inc., an Irvine, California-based seller of foreclosure data.

Concerns escalated last week after banks including Goldman, Bear Stearns and New York-based JPMorgan Chase & Co., the No. 3 U.S. bank, were left holding $10 billion of loans they provided for the buyout of Chrysler, a unit of Stuttgart, Germany-based DaimlerChrysler AG, by Cerberus Capital Management LP in New York.

JPMorgan was among at least eight banks holding about $10 billion of loans for Nottingham-based Alliance Boots Plc, the U.K.'s biggest pharmacy chain being purchased by Kohlberg Kravis Roberts & Co.

Fewer Cylinders

Financing leveraged buyouts and bundling subprime mortgages and bonds into other securities called collateralized debt obligations generated about $21 billion in fees last year, data compiled by Freeman & Co., Thomson Financial and JPMorgan Chase show.

``The brokers were hitting on all cylinders,'' said Chuck Moon, who manages $30 billion as head of investment grade credit at Hartford, Connecticut-based Hartford Investment Management Co. ``Now there are a couple of cylinders in question.''

Bond and credit-default swap prices suggest Wall Street firms are no safer for debt investors than companies teetering on the edge of investment grade, including mining company Freeport- McMoRan Copper & Gold Inc. in Phoenix and Stamford, Connecticut- based copy machine maker Xerox Corp.

Pimco Buys

Credit-default swaps tied to $10 million of Freeport's bonds cost about $115,000 and those linked to Xerox's debt trade at $96,000, according to CMA Datavision. Xerox bonds are rated Baa3 by Moody's and BBB- by S&P. Freeport's are ranked Ba3 by Moody's and BB+ by S&P.

That may be a signal to buy, said Moon. Bonds of brokers are ``attractive'' because yields have widened so much compared with Treasuries, he said, declining to comment on whether he's adding them.

The growth in credit-default swaps allows finance companies to hedge more of their risks than a decade ago, Moon said. ``I don't think it's a disaster because, quite frankly, the institutions have become more sophisticated about their risk management practices.''

Pimco bought bonds of banks and brokers in the past two weeks, expecting them to sustain earnings growth and benefit from global mergers and acquisitions, Kiesel said. Profits at Bear Stearns will rise to $14.53 a share this year and $15.66 in 2008 from $14.27 in 2006, according to the average estimate in a Bloomberg survey of 16 analysts.

Reasons to Buy

Merrill's MOVE Index, a measure of expectations for Treasury volatility, reached 92.6 on July 26, up from a low this year of 51.2 on May 15. Merrill reported a 31 percent rise in second- quarter profit on July 17, while Lehman's earnings rose 27 percent to a record.

``We have been adding, I wouldn't say we've been power- lifting,'' Kiesel said. ``You want to leave some powder dry as you've got an unprecedented amount of high-yield supply that's hitting the market. That's a train coming down the tracks. So stepping in front of that takes some guts.''

Banks have agreed to provide bonds and loans for buyouts including the $25.6 billion takeover of Greenwood Village, Colorado-based credit-card processor First Data Corp. and the $45 billion acquisition of energy company TXU Corp. of Dallas. If they can't find investors for the debt, the banks may have to provide it themselves.

Pimco is still ``underweight'' in corporate debt, meaning it owns a smaller percentage than is contained in their benchmark index. The firm is a unit of Frankfurt-based insurer Allianz SE.

Marking Down

Bear Stearns analyst Ian Jaffe raised his recommendation on broker debt to ``overweight'' from ``underweight'' on July 13 because risk premiums increased and the economy is growing. Jaffe, who is based in New York, declined to comment.

CreditSights Inc., an independent bond-research firm in New York, also says investors should buy broker bonds.

``We've been probably the earliest and biggest critics of the brokers for the proprietary trading risks they're taking and the private-equity lending,'' said David Hendler, the head financial services analyst at CreditSights. ``We're saying the fear and spreads don't make sense.''

Banks face losses from acquisition-related debt because they typically sell the bonds and loans later at a discount. Treasury Secretary Henry Paulson, a former Goldman chairman and chief executive officer, described the credit markets decline as a ``wakeup call'' for banks in a July 26 interview.

`Got a Problem'

``They've got a problem,'' said Daniel Fuss, vice chairman of Loomis Sayles & Co. in Boston, which manages $22 billion in bonds. ``It's pretty bad. They're going to have to go back to the private-equity people'' to renegotiate their lending commitments, he said.

The perception of the risk on Bear Stearns bonds has risen more than its competitors on concerns that a decline in new securities backed by home loans will reduce earnings. Sales of mortgage bonds may tumble by a third to $556 billion in the second half of this year compared with the first six months, Lehman debt strategists said in a July 30 report.

Bear Stearns last month was forced to extend $1.6 billion in credit to one of two hedge funds that collapsed from bad bets on securities backed by mortgages to people with poor or limited credit.

`Fearful Behavior'

``You're getting paid for their concentrated exposure to mortgage risk,'' CreditSight's Hendler said. ``A lot of investors are trying to gauge subprime risk and how it affects their direct exposures. There is a lot of negative, fearful behavior.''

Credit-default swaps tied to $10 million in bonds of Goldman Sachs, the world's most profitable securities firm, rose to a high of $125,000 yesterday, according to Phoenix Partners. The default swaps traded at $69,000 today, Phoenix data show.

``Fundamental credit research does not mean anything at all in this environment,'' said Scott MacDonald, director of research at Aladdin Capital Management in Stamford, Connecticut. ``People are just trying to get out of the way.''