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        • Bird & Fortune:
          The sub-prime market explained


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            • WASHINGTON, February 14, 2008: The U.S. Federal Reserve chairman, Ben Bernanke, told the Congress on Thursday that the country's economic outlook had deteriorated and signaled that the central bank was ready to keep on lowering its benchmark interest rate - as needed - to shore things up.

              In remarks to the Senate Banking Committee, Bernanke said the combination of housing and credit crises had greatly strained the U.S. economy. Hiring has slowed and consumers are likely to tighten their belts further as they are pinched by high energy prices and watch the value of their single biggest asset - their homes - weaken, he warned.

              "The outlook for the economy has worsened in recent months, and the downside risks to growth have increased," Bernanke said. "To date, the largest economic effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so." Bernanke also said that the "virtual shutdown" of the market for subprime mortgages - given to people with blemished credit histories or low incomes - and a reluctance by skittish lenders to make "jumbo" home loans exceeding $417,000 have aggravated problems in the housing market.

              Unsold homes have piled up and foreclosures have climbed to record highs. "Further cuts in homebuilding and in related activities are likely," Bernanke cautioned.

              Bernanke's remarks overshadowed largely upbeat government economic reports. The Labor Department said Thursday that the number of U.S. workers seeking initial unemployment claims fell by 9,000, to 348,000, last week, easing some concerns about the state of the labor market.

              In addition, the Commerce Department said that the U.S. trade deficit fell in 2007 after five straight years of setting records. The decrease, which came despite higher prices for foreign oil and another record deficit with China, reflected a jump in exports. The weak dollar made U.S. goods attractively priced in many markets abroad.

              For December, the deficit fell 6.9 percent to $58.8 billion, a better performance than analysts had forecast. Also, for all of 2007, the deficit dropped 6.2 percent, to $711.6 billion.

              In midmorning trading, major U.S. stock indicators were down less than 1 percent.

              Given all the dangers facing the economy, the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke said, indicating additional rate cuts were likely.

              He appeared with the U.S. Treasury secretary, Henry Paulson Jr., and with Christopher Cox, chairman of the U.S. Securities and Exchange Commission, amid increasing concerns that the economy may be drifting into recession. The Federal Reserve, which started lowering its benchmark interest rate in September, recently turned much more aggressive. Over the span of just eight days in January, it cut rates by 1.25 percentage points - the biggest one-month rate reduction in a quarter-century.

              Economists and Wall Street investors say they believe the Fed will cut rates even more at its next meeting in March and probably again in April.

              "Our economy is clearly in trouble," said the committee's chairman, Senator Christopher Dodd, a Connecticut Democrat. Restoring investor and consumer confidence, he said, is critical "if we are going to get back on our feet again."

              Bernanke said his forecast was for the economy to continue to endure a "period of sluggish growth." That would be "followed by a somewhat stronger pace of growth starting later this year" as the effects of the Fed's rate cuts and a newly enacted economic stimulus package began to be felt. The $168 billion package, which includes rebates for people and tax breaks for businesses, was speedily passed by Congress last week and signed into law on Wednesday by President George W. Bush.

              Senator Richard Shelby, Republican of Alabama, though, said he believed the impact of the rebates would be "negligible" and likened it to "pouring a glass of water into the ocean."

              Even though Bernanke's forecast envisions an improving economic picture later this year, the Fed chief said it was nonetheless "important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated" or that credit will become even harder to secure.

              That's why, for now, Bernanke indicated the Fed was still inclined to lower interest rates.

              Yet, that could change, depending on how the economy and inflation unfold.

              "A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives" of promoting healthy employment and economic growth while keeping inflation under control.

              Inflation should moderate, Bernanke said.

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              • ugh.. i hate the inflation... you can't buy anything for a normal price unless it's stolen

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                • WASHINGTON, February 20, 2008: Policy makers at the U.S. Federal Reserve Board have sharply reduced their forecasts for U.S. economic growth this year, even as some expressed new worries about rising inflation, according to minutes of the central bank's two policy meetings in January.

                  The new forecast, a compilation of predictions by Fed governors and presidents of the Fed's regional banks, anticipates that the U.S. economy will grow 1.3 percent to 2 percent in 2008.

                  The forecast, released Wednesday, implies that the economy would be almost stagnant during the first six months of this year, and then get a boost in the second half of the year from both the fiscal stimulus package that the Congress passed this month and from the Fed's recent decisions to reduce interest rates.

                  But even with that, Fed officials predicted sluggish growth until some time next year, noting that the housing market had yet to hit bottom and that credit had tightened for businesses as well as consumers as a result of the huge losses that banks and Wall Street firms had incurred from soured mortgages.

                  The minutes and the new forecast shed light on the Fed's two decisions in January - the first a surprise move on January 21 to cut its benchmark rate by three-quarters of a point to 3.5 percent, and the second on January 30 to lower the rate an additional half-point.

                  Both of the two policy meetings came at moments of turbulence and uncertainty in the economy, and together they amounted to a major course correction in policy.

                  The emergency meeting on the evening of January 21, at which some of the regional Fed presidents spoke over a secure videoconference, took place on a day when stock markets plunged around the world on what appeared to be fear about U.S. economic problems.

                  Fed officials, meeting on a government holiday when the American markets were closed, stunned investors and analysts alike by cutting the benchmark federal funds rate on overnight loans between banks. Though Fed officials insisted they were not trying to rescue the stock markets, they were keenly aware from activity in the futures markets that U.S. stocks were poised to plunge as soon as markets opened on January 22.

                  Fed officials justified the surprise rate cut by pointing to a declining economic outlook, but they acknowledged that they had become increasingly worried about a "negative feedback loop" or self-fulfilling prophecy in which fears in financial markets led to paralysis in the real economy.

                  The decision did prop up stock markets the next day, but it also prompted widespread criticism that the Fed had capitulated to short-term pressures from the stock market.

                  As it happened, the plunge in global stock markets coincided and may have been partly caused by an almost random disaster in Europe: the discovery by Société Générale, one of the biggest European banks, that a derivatives trader had run up billions of euros in unhedged trading. As the markets were plunging, Société Générale was desperately unwinding the trader's bets - a move that led it to book a loss of almost €5 billion, or $7.1 billion.

                  It remains unclear whether Société Générale's problems aggravated the global stock plunge, and Fed officials contended that they had ample reasons to take extra precautionary steps against a possible downturn in the U.S. economy.

                  On January 30, the Fed announced another big rate cut, bringing the federal funds rate down to 3 percent and leaving open the possibility of additional rate reductions in March.

                  Fed officials had already made it clear before Wednesday that they had lowered their forecasts for growth. In their last forecast, released in November, policy makers predicted that the economy would expand by about 2.2 percent in 2008 and that unemployment would remain almost stable at about 4.9 percent. The new growth forecast of 1.3 percent to 2 percent is down from an October prediction of 1.8 percent to 2.2 percent. Unemployment would reach 5.2 percent or 5.3 percent this year, compared to the earlier forecast of 4.8 percent or 4.9 percent.

                  Also Wednesday the government reported that prices at the consumer level rose 0.4 percent in January, a bigger gain than economists had predicted, adding to worries about the economy and sending a reminder to central bankers that rising prices remained a threat.

                  Meanwhile, the housing crisis continued to take a toll on residential home construction. Groundbreakings for homes rose slightly but remained near their lowest levels since the early 1990s, and permits for new home projects fell again.

                  The inflation report "should not provide too much of a headache for the Federal Reserve, which seems to be largely indifferent to near-term inflation movements at the moment," wrote economists at ING Bank.

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                    • WASHINGTON, February 21, 2008: The U.S. Federal Reserve Board, for all its power, faces tough new limits on its ability to keep the economy out of a recession.

                      Even though the Fed cut short-term interest rates twice in January, home mortgage rates have edged up steadily in the past few weeks and credit for businesses is as tight as it was when financial markets seized up last August.

                      On Wednesday, the central bank, led by Ben Bernanke, found itself facing signs of a problem the United States has not seen in decades: stagflation, the mix of slumping economic growth, sharp spikes in prices for oil and food and a rising pace of overall inflation.

                      The U.S. Labor Department reported that consumer prices had jumped 4.3 percent in January, compared with the level one year earlier. That was the biggest jump in more than two years. Even after excluding the volatile prices for food and energy, inflation was up 2.5 percent - well above the central bank's unofficial target of 1 percent to 2 percent.

                      A few hours after the report on consumer prices, Fed officials acknowledged that they had reduced their forecast for U.S. economic growth this year to an anemic pace of 1.3 percent to 2 percent and that joblessness was likely to climb to 5.3 percent from 4.9 percent today.

                      The Fed's outlook helped propel U.S. stock markets higher on the expectation that the central bank's more dismal outlook for the economy would lead to further interest rate cuts aimed at reviving growth. After being down earlier, the Dow Jones industrial average closed up 90 points, or 0.73 percent, at 12,427.26, while the Nasdaq composite index erased an earlier 0.6 percent loss to close up 0.9 percent.

                      The Fed's new forecast, however, assumes that growth will be all but stagnant for the first six months of this year before the economy gets a lift in the second half from the economic stimulus package that Congress recently passed and from the Fed's own decisions to lower interest rates sharply.

                      Although inflation is nowhere near the double-digit rates of the late 1970s, many economists agree with Fed officials that inflation will cool as the economy slows.

                      But the combination of rising prices and stalling growth, aggravated by the deepening downturn in housing and credit markets, has put the Federal Reserve Board in a box of its own making.

                      On one hand, officials are cutting interest rates to keep the economy growing at a time when oil prices are surging, credit is tightening and major financial institutions are shell-shocked from the housing and mortgage busts.

                      On the other hand, the fear of rising inflation makes it more difficult for the Fed to jolt the economy with another wave of cheap money.

                      Lower interest rates have already pushed down the value of the dollar, which in turn prompted oil-producing countries to push for higher oil prices.

                      "They are walking a very fine line right now," said Stephen Cechetti, a professor at Brandeis International Business School, in Massachusetts. "They are trying to maintain their low-inflation credibility at the same time they are dramatically cutting interest rates. The facts are that growth is falling quickly, and that inflation is high and rising."

                      Nowhere have the Fed's limitations been more apparent than in the home mortgage market. Even though the central bank cut short-term interest rates twice in January, in part to stabilize the housing market, investors remained so worried about the longer-term outlook that mortgage rates have edged up steadily in the past three weeks.

                      "What's disturbing and scary is that the Fed is doing all the right things - cutting rates, and saying they'll do more - but it's not doing anything," said Michael Menatian, president of Sanborn Mortgage, based in Connecticut. "We have hundreds of customers who want to refinance, but they're locked out."

                      Fed officials do not see themselves as powerless. Its two January cuts in rates, one at an unscheduled emergency meeting Jan. 21 and the other at a scheduled policy meeting January 30, brought the Fed's benchmark overnight lending rate down 3 percent.

                      According to minutes of both meetings, released Wednesday along with policy makers' latest economic projections, Fed officials were increasingly worried that plunging confidence in financial markets would lead to a self-fulfilling prophecy of tighter credit conditions, stalling activity in the real economy and even more fear in financial markets.

                      Fed policy makers, according to the minutes, noted that credit was becoming harder to get for both consumers and businesses and that financial institutions were "fragile" after booking huge losses on mortgage-backed securities.

                      "Some noted the especially worrisome possibility of an adverse feedback loop, that is, a situation in which a tightening of credit conditions could depress investment and consumer spending, which in turn could feed back to tightening credit conditions," the central bank said in its summary of the discussion.

                      But at least some Fed policy makers were also worried about rising inflation. William Poole, president of the St. Louis Fed, dissented from the first rate cut and Richard Fisher, president of the Fed's Dallas branch, dissented from the second.

                      The new Fed forecast, a compilation of the individual projections by Fed governors and the presidents of the regional Fed banks, anticipates that inflation will slow down in response to slower economic growth and that consumer prices will rise between 2.1 percent and 2.4 percent this year.

                      Fed policy makers made it clear they were willing to reduce interest rates to prevent a serious downturn, even if inflation was slightly higher than they wanted, according to the minutes.

                      "As had been the case in previous cyclical episodes, a relatively low real Federal funds rate now appeared appropriate for a time to counter the factors that were restraining growth, including the slide in housing activity, the tightening of credit availability and the drop in equity prices," the summary recounted.

                      In a nod to the more aggressive inflation-fighting members on the Fed's policy making committee, the minutes also noted that policy makers should be ready to reverse course rapidly if the prospects for growth improved.

                      "All this sets the stage for a difficult dilemma for the Fed," Bernard Baumohl, managing director of the Economic Outlook Group, a forecasting company in Princeton, New Jersey, wrote in a report to clients.

                      "The only sure way the central bank can keep inflation expectations subdued is to tighten monetary policy and raise interest rates until investors, employees and business leaders are convinced that prices will remain low and stable."

                      But Baumohl predicted that inflation would indeed moderate as Fed officials hoped, noting that major discount retailers like Wal-mart had already cut prices in anticipation of lower consumer spending.

                      "Pricing power is very limited in this environment," Baumohl said in an interview. "If companies raise prices to keep up with higher costs, they risk losing market share. And once they lose market share, it becomes very expensive and hellishly difficult to get it back."

                      Comment



                      • WASHINGTON (CBS News) ― President Bush said Thursday that the country is not headed into a recession and, despite expressing concern about slowing economic growth, rejected for now any additional stimulus efforts.

                        "We've acted robustly," he said.

                        "We'll see the effects of this pro-growth package," Mr. Bush told reporters at a White House news conference. "I know there's a lot of, here in Washington people are trying to - stimulus package two - and all that stuff. Why don't we let stimulus package one, which seemed like a good idea at the time, have a chance to kick in?"

                        "One of the things he wanted to do is focus attention on the White House," said CBS News chief Washington correspondent Bob Schieffer after the press conference.

                        Mr. Bush's view of the economy was decidedly rosier than that of many economists, who say the country is nearing recession territory or may already be there.

                        The centerpiece of government efforts to brace the wobbly economy is a package Congress passed and Mr. Bush signed last month. It will rush rebates ranging from $300 to $1,200 to millions of people and give tax incentives to businesses.

                        CBS News correspondent Bill Plante reports however, that the collapse of the housing market may have put the economy beyond the reach of the stimulus spending which won't reach taxpayers until May.

                        "We're talking about the collapse of an $8 trillion housing bubble," the Center for Eonomic and Policy Research's Dean Baker told Plante, "and that's a huge hit to the economy."

                        The president expressed his oppostion with Democrats in the Senate over proposed laws to help strapped homeowners.

                        "Unfortunately the Senate is considering legislation that would do more to bail out lenders and speculators than to help American families keep their homes," he said.

                        Another issue particularly worrisome to American consumers, there are indications that paying $4 for a gallon of gasoline is not out of the question once the summer driving season arrives. Asked about the possible increase by CBS News Radio correspondent Peter Maer, Mr. Bush said "That's interesting. I hadn't heard that. ... I know it's high now."

                        Mr. Bush also used his news conference to press Congress to give telecommunications companies legal immunity for helping the government eavesdrop after the Sept. 11 terrorist attacks.

                        He continued a near-daily effort to prod lawmakers into passing his version of a law to make it easier for the government to conduct domestic eavesdropping on suspected terrorists' phone calls and e-mails. He says the country is in more danger now that a temporary surveillance law has expired.

                        The president and Congress are in a showdown over Mr. Bush's demand on the immunity issue.

                        Mr. Bush said the companies helped the government after being told "that their assistance was legal and vital to national security." "Allowing these lawsuits to proceed would be unfair," he said.

                        More important, Mr. Bush added, "the litigation process could lead to the disclosure of information about how we conduct surveillance and it would give al Qaeda and others a roadmap as to how to avoid the surveillance."

                        The Senate passed its version of the surveillance bill earlier this month, and it provides retroactive legal protection for telecommunications companies that wiretapped U.S. phone and computer lines at the government's request and without court permission. The House version, approved in October, does not include telecom immunity.

                        Telecom companies face around 40 lawsuits for their alleged role in wiretapping their American customers.

                        Senate Democrats appeared unwilling to budge.

                        As Mr. Bush began speaking, Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., cast the president's position as a "tiresome campaign...to avoid accountability for the unlawful surveillance of Americans."

                        "The president once again is misusing his bully pulpit," Leahy said. "Once again they are showing they are not above fear-mongering if that's what it takes to get their way."

                        Mr. Bush criticized the Democratic presidential candidates over their attempts to disassociate themselves from the North American Free Trade Agreement, a free-trade pact between the U.S., Canada and Mexico. Mr. Bush said the deal is contributing to more and better-paying jobs for Americans.

                        "The idea of just unilaterally withdrawing from a trade treaty because of, you know, trying to score political points is not good policy," he said. "It's not good policy on the merits and it's not good policy as a message to send to people who have in good faith signed a treaty and worked with us on a treaty."

                        Democratic Sens. Hillary Rodham Clinton and Barack Obama are feuding over NAFTA as they compete for their party's presidential nomination, as the pact is deeply unpopular with blue-collar workers. Though neither has said they were ready to pull the United States out of the agreement, both say they would use the threat of doing so to pressure Mexico to renegotiate it.

                        Mr. Bush fended off a question about why he has yet to replace Fran Townsend, his White House-based terrorism adviser, who announced her resignation more than three months ago. He said the job is being ably filled by her former deputy, Joel Bagnal.

                        On another issue, Mr. Bush said that Turkey's offensive against Kurdish rebels in northern Iraq should be limited - and should end as soon as possible. The ongoing fighting has put the United States in a touchy position, as it is close allies with both Iraq and Turkey, and a long offensive along the border could jeopardize security in Iraq just as the U.S. is trying to stabilize the war-wracked country.

                        "It should not be long-lasting," Mr. Bush said. "The Turks need to move, move quickly, achieve their objective and get out."

                        He also said, though, that it is in no one's interest for the PKK to have safe havens.

                        On Russia, Mr. Bush said he does not know much about Dmitry Medvedev, the handpicked successor to President Vladimir Putin who is coasting to the job. Mr. Bush said it will be interesting to see who represents Russia - presumably either Medvedev or Putin - at the Group of Eight meeting later this year in Japan.

                        The president advised his own successor to develop a personal relationship with whomever is in charge in Moscow.

                        "As you know, Putin's a straightforward, pretty tough character when it comes to his interests - well so am I," Mr. Bush said. He said that he and Putin have "had some diplomatic head butts."

                        Mr. Bush also said, however, that the pair have "a cordial enough relationship to be able to deal with common threats and opportunities, and that's going to be important for the next president to maintain."

                        Mr. Bush also defended his stance of not talking directly with leaders of adversaries such as Iran and Cuba without setting preconditions. In doing so, he offered some of his strongest criticism yet of Raul Castro, who assumed Cuba's presidency on Sunday after his ailing brother Fidel, who ruled for decades, stepped aside.

                        "Sitting down at the table, having your picture taken with a tyrant such as Raul Castro, for example, lends the status of the office and the status of our country to him," Mr. Bush said.

                        He said that Raul Castro is "nothing more than an extension of what his brother did, which is ruin an island."

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                        • February 29, 2008 -- Beaten down by fears of a U.S. recession, the dollar is falling with new speed-- creating severe challenges not just for the U.S., but also for sugar traders in Brazil, central bankers in the Persian Gulf and a host of others.

                          On Thursday, the dollar sank to a new record low against the euro, deepening a six-year slide in which it has fallen more than 40% versus the European currency and more than 20% against a broader basket of currencies. In late trading in New York, one euro fetched about $1.52, just two days after it surged through the symbolically important level of $1.50.

                          The latest impetus: economic data in the past three days showing a softening U.S. labor market, deepening turmoil in housing, and growth in 2007 slowing to the worst pace in five years. Federal Reserve Chairman Ben Bernanke put more pressure on the dollar during testimony before Congress yesterday, emphasizing gloomy prospects for the economy while pointing to the weak dollar as a rare bright spot helping exports, jobs and the trade deficit.

                          The greenback's biggest detractors - a small but growing group - say the currency is in danger of eventually losing its place as the world's dominant currency. Jim Rogers, a well-known commodity investor and a former partner of famed currency trader George Soros, has a particularly bleak assessment: "The dollar is a terribly flawed currency and its days are numbered," he said in a recent interview. He cited the U.S.'s huge foreign-held debt as the biggest cause.

                          Yet for all of the gloom, the world is unready to let go of America's unloved dollar. Akin to the way Microsoft's often-criticized Windows operating system remains indispensable to the majority of computer users, the dollar remains the common language of finance, the medium of exchange in everything from sugar to wheat to oil.

                          Shaking the dollar loose from that place would require a vast reworking of the global financial system that few parties seem prepared to confront. It is far from certain that the dollar will continue to decline. But if it does, businesses and policy makers around the world could be wrestling with the problems created by their dependence on it for many years.

                          The dollar's weakness adds upward pressure to the prices of commodities, most of which are traded in dollars. They're now soaring in value for a number of reasons including that they've become cheaper for buyers who hold other currencies, which drives up demand. An enfeebled dollar also means the reserves of many central banks are falling in value, a dilemma that isn't easily resolved.

                          The dollar is involved in 86% of the $3.2 trillion in daily currency transactions around the world, often as a middle step in exchanges between two other currencies, according to the Bank for International Settlements. While that is down from 90% in 2001, no other currency comes close.

                          Fears of mass exodus

                          Nearly two-thirds of the world's central-bank reserves remain denominated in dollars, according to data from the International Monetary Fund, despite widespread fears of a mass exodus from the currency. The euro accounts for about a quarter - up from 18% when it was introduced in 1999, but less than its predecessor currencies' share in 1995. Because the U.S. is such a huge trading partner for so many countries, the reserve buildup is not easily unwound.

                          In trade, the dollar is also deeply entrenched. Businesses lower their transaction costs by dealing in a common currency. More than 80% of exports from Indonesia, Thailand and Pakistan are invoiced in dollars, for instance, according to the latest figures available in research by the European Central Bank, although less than a quarter of their exports go to the U.S.

                          For countries heavily reliant on commodity exports such as oil, the figures are higher still. Almost 100% of Algeria's exports are invoiced in dollars, even though only 27% end up in the U.S.

                          "There is no global financial architecture in place to supplant the dollar as the world's main reserve currency," says Joseph Quinlan, chief market strategist for Bank of America. That demand also props up the dollar's value, and erosion in its status could contribute to a further fall.


                          For the U.S., there are benefits and drawbacks to having a dominant currency that's declining in value. Because the U.S. can borrow anywhere in the world in its own currency, it isn't facing the kind of dilemma countries such as South Korea and Indonesia faced in the 1990s. They borrowed in other currencies - mostly dollars - and when their own currencies collapsed against the dollar, the local-currency value of their debts soared, forcing many companies into bankruptcy.

                          A weak dollar helps U.S. exports by making U.S. goods cheaper overseas, which can trim the nation's trade deficit. Thus the Treasury Department, while officially supporting a strong dollar, has not protested its mostly gradual decline. U.S. exports of goods and services have grown on average by 8% annually during the past four years, faster than the 7% growth rate of the 1990s - a difference worth more than $17 billion a year if it continues.

                          A cheap dollar also fuels upward pressure on the prices of imports, a factor that complicates the Federal Reserve's task of fighting inflation. But foreign exporters - who often choose to hold their dollar prices steady rather than raise them and risk losing sales - bear some of the burden of the currency's decline and diminish its inflationary impact in the U.S.

                          Last month at the World Economic Forum in Davos, Switzerland, Mr. Soros suggested that the credit crisis would damage the dollar's dominant role in the global economy: "It's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency."

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                          • continued.....

                            Dollar kerfuffle

                            In another sign of the times, Warren Buffett, who has long prophesied the dollar's decline, was at the center of a dollar kerfuffle recently when CNBC, the business network, quoted him as saying the dollar was destined to become "worthless." He quickly called the network to correct the report: What he'd actually said was that it would become "worth less."

                            Then there are bears like the trader Mr. Rogers, who recently said the dollar's days as currency kingpin are numbered. If history is any guide, it's not that simple: A reworking of a global financial system built around the dollar would take years and a massive change in the economic landscape.

                            At the beginning of the 20th century, the U.S. was already the world's largest economy, but the British pound still accounted for nearly two-thirds of official foreign-exchange reserves held by the world's central banks. The dollar didn't emerge as the dominant currency until after World War II devastated Europe. Even then, some commodities still traded in pounds: The London sugar market didn't jettison sterling for a dollar-denominated trading contract until around 1980.


                            Today, Brazil accounts for about 40% of world sugar exports, and almost none of that goes to the U.S. because of U.S. tariffs on foreign producers. But Brazil's trade still takes place in dollars because that's how global commodities markets quote prices.

                            "When I sell to my clients, they want to pay in dollars," says Felipe Vicchiato, executive for investor relations for Pradópolis, Brazil-based Grupo São Martinho, which sells sugar product from Russia to Dubai. "We don't have any other option." He says the firm wouldn't consider switching to another currency.

                            Dollar weakness is squeezing his margins, Mr. Vicchiato says. His costs for harvesting sugar are billed in the local currency, the real, while his company is paid in dollars for sales abroad. He notes the dollar tumbled nearly 17% against the real last year.

                            The firm hedges a portion of its exports by buying futures contracts that lock in prices to try to limit the dollar's damage on profits. Sugar futures have surged 30% year-to-date as producers start to react to the dollar declines. "Sugar prices have to be raised to compensate for the weaker dollar," Mr. Vicchiato says.

                            In Malaysia, the stock and derivatives exchange is launching a new international palm-oil futures contract next month. Malaysia and Indonesia are the titans of the trade, together accounting for 87% of global palm oil production. China is the world's largest importer of palm oil, while the U.S. imports less than 3% of the total - a smaller share than Bangladesh or Egypt.

                            But the new contract will be traded in dollars. "We thought briefly about the euro," says Raghbir Singh Bhart, head of global markets at Bursa Malaysia. "Frankly, we didn't think very long." Just because the dollar "is getting a hammering doesn't make a difference.... The global trade is still conducted in that currency."

                            Some of America's geopolitical rivals are trying to break free of the buck.

                            Russia is creating a commodity exchange where futures contracts for oil, as well as other products, would be denominated in rubles. In a speech earlier this month, Dmitry Medvedev - the virtually certain winner of Russia's presidential election on Sunday - noted that "the global economy is going through uneasy times. The role of key reserve currencies is under review. And we must take advantage of it."

                            Iran's ambassador to Russia lauded the oil plan, according to a report from Iran's official news agency, which headlined the move as an effort to rid the world of the "dollar's slavery."

                            But other efforts to extricate the dollar from its central role haven't gone very far.

                            Saddam Hussein caused a stir in September 2000 when the Iraqi leader abruptly declared he would no longer accept dollars for his country's oil. But when the Iraqi strongman was captured in 2003, he was found personally holding $750,000 - all of it in $100 bills.

                            Adding another currency

                            Iran itself is home to the headquarters of a 33-year-old organization called the Asian Clearing Union, which acts as a clearinghouse for cross-border transactions among eight countries, including Iran, India, Pakistan and Bangladesh. The currency used to account for the trades? The U.S. dollar.

                            The group is exploring whether to add the euro as another currency for its transactions, but "the dollar will be the major currency," says Mohamad Belayet Hossain, an official at Bangladesh's central bank who is involved in studying the change.

                            Last November, at a meeting of the Organization of Petroleum Exporting Countries, Iran's foreign minister urged the group to publicly express concern at the weakness of the dollar. Thirty minutes of the closed-door meeting was inadvertently broadcast to members of the media. Responding to Iran's proposal, the Saudi foreign minister, Prince Saud al-Faisal, warned it was a "sensitive issue" that could "cause the dollar to drop further."

                            Alternatives to pricing

                            The idea was quashed by Saudi Arabia, but it spurred speculation that OPEC was exploring alternatives to pricing in dollars. Oil experts say such a change would be hard to pull off. Oil prices are based around three types of crude oil: West Texas Intermediate, Brent crude, and Dubai crude. These key benchmarks are all denominated in dollars.

                            "If you want something different, you have to agree to change the whole pricing system, and nobody is prepared to do it," says Robert Mabro, the former director of the Oxford Institute for Energy Studies. One reason: The dollar could rise again, and any other currency picked could easily fall.

                            The dollar is still deeply rooted as a reserve currency for central banks. The dollar's share of global central bank reserves hit a peak of 72% in early 2002, according to data from the International Monetary Fund. It declined by six percentage points that year and the next, but has remained relatively stable since. The dollar's share stood at 64% of total reserves as of last September.

                            There isn't "much evidence of a major shift out of the dollar," says Brad Setser, a fellow at the Council on Foreign Relations. The euro is a dominant reserve currency in Europe, he says, but not globally.

                            The IMF figures exclude the reserves of China and several Persian Gulf nations, which tie their currencies closely to the dollar and accumulate dollars to manage their exchange rate. So the actual percentage of global reserves held in dollars is likely higher.

                            Central banks face a dilemma if they want to change that relationship. Because major U.S. trading partners export so much to the U.S., there is a constant flow of dollars into their central bank coffers that can't be changed unless the U.S. trade deficit shrinks dramatically.

                            If they sell the dollar reserves, it would weaken the dollar's value. That would potentially hurt their own trade competitiveness, and push down the value of their remaining dollar reserves. If they keep the dollars, a buildup of unwanted assets would only mount.

                            "There is no alternative to the dollar as a trading currency in Asia," says Andy Xie, a Hong Kong-based economist. "Eventually, the renminbi [Chinese yuan] will replace the dollar in Asia, perhaps in our lifetime. But it will take at least 30 to 40 years."

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                              • LONDON, March 2, 2008: Currencies will be in full focus on financial markets this week, following the dollar's drubbing of recent days, yet anyone hoping for help from policy makers to shore up the ailing U.S. currency is likely to be disappointed.

                                Crucial meetings of European Union finance ministers and those who set interest rates for the European Central Bank are expected to do little to shift the status quo, while the U.S. Federal Reserve Board appears set on cutting rates again this month.

                                "I don't see a major change in trend," said Lex Hoogduin, chief economist at Robeco, an asset management firm in the Netherlands.

                                This means that gold and oil prices should maintain their record-breaking pace, at least over the coming days, while equity and bond investors will have to continue revaluating their holdings in the context of a soaring euro and low-yielding dollar.

                                It may also put strains on export-oriented emerging Asian stock markets, which have otherwise started to see an increase in institutional investment flows.

                                The dollar took many investors by surprise last week, falling to a record low against the euro, which is now at about $1.52, meaning that the euro has strengthened about 15 percent against the dollar over the past 12 months.

                                In a development less heralded, but by no means less significant, the so-called dollar index, which tracks the U.S. currency against six major counterparts, hit its lowest level since its inception in 1973.

                                While many institutional investors believe that the dollar will recover some strength by the end of this year, there is no conviction that this will happen soon.

                                "The trend in the short term is for more dollar weakness," said Colin Asher, senior economist at Nomura, an investment bank.

                                A major reason for this is that the background dynamics that have pushed the dollar lower - specifically interest rate differences - are unlikely to change in the next few months, let alone in the week to come.

                                People who set rates at the European Central Bank, for example, have made it clear that they are more worried about inflation than a slowing economy.

                                All 72 economists in a Reuters poll last week said the bank would leave rates at 4 percent when it met Thursday.

                                European policy makers are also unlikely to be overly concerned about the euro because its strength makes imports cheap, putting a damper on the inflation that so concerns them.

                                By contrast, the chairman of the Federal Reserve, Ben Bernanke, clearly signaled last week that the U.S. central bank would cut rates again to stop further damage to the ailing U.S. economy.

                                The Fed is widely seen cutting rates by at least 50 basis points, to 2.5 percent, at its next meeting March 18.

                                This leaves currency markets hostage to U.S. data due this week - including figures on manufacturing, services, jobs and vehicle sales - which are expected to be generally poor.

                                The question may then be how far the dollar will fall, although Asher, the economist, noted that with the dollar already so weak a bit of a bounce cannot be ruled out.

                                Profit-taking and better-than-expected data can always turn things around quickly, particularly in an era of overall global market volatility.

                                For equities this week, the weak dollar provides a mixed picture. The weakness has little short-term impact on many U.S. equities, which tend to be domestic in orientation, but it shakes the more export-focused markets of Europe and Asia.

                                "It should hurt European equity markets more than it will help U.S. equity markets," said Klaus Wiener, chief economist of Generali Investments.

                                Stock markets, he said, would be focused on plans to rescue U.S. monoline insurers, the companies that insure structured finance whose potential downgrading as a result of credit market turmoil threatens to spill over into other parts of the financial sector.

                                The volatility on currency markets, meanwhile, comes as equity markets have been rallying relatively sharply.

                                MSCI's benchmark world stock index, incorporating U.S., European, Japanese and emerging market shares, is up about 8 percent from a low January 22, the day the Fed announced an emergency rate cut to lift the U.S. economy.

                                Where a weak dollar most certainly has an impact, however, is with commodities, notably gold and oil.

                                Because these assets are priced in dollars, they rise when the currency falls as they become more attractive for non-U.S. investors. In both cases, this has added to their already soaring demand-driven prices.

                                Gold hit a record high around $975 an ounce Friday, leaving the psychological $1,000 milestone within sight this week.

                                Oil , meanwhile, breached a new high of $103 a barrel.

                                The rub is that such prices fire up inflation, making it that much trickier for central banks to make decisions.

                                "The current inflation is due primarily to commodity prices of oil and energy and other prices that are being set in global markets," Bernanke said last week.

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