Earlier in the week, the dollar was hammered in the wake of the Federal Reserve’s historic rate cut in an attempt to combat recession and facilitate lending. However, the tables were turned on Thursday as traders bet that the Bank of Japan would cut its key lending rate on Friday.

Meanwhile across the Atlantic, the European Central bank cut its deposit rate and boosted lending rates.
The dollar rallied away from a 13-year low versus the yen amid signals that Japanese officials will take extraordinary action to put a stop to the yen’s rapid ascent. Japan’s export-reliant economy, now in recession, is crippled by the surging yen, as it makes Japanese-made goods more expensive for foreign consumers.

The buck fought back to 90 before leveling off, an big improvement from Wednesday’s 13-year low of 87.11. The Bank of Japan is expected to cut rates to 0.15 percent on Friday.

It was a similar pattern versus the euro Thursday, with the dollar clawing back a fraction of its heavy losses from the past month. After hitting a 2 1/2 month low of 1.4718 overnight, the dollar improved to 1.4200 by mid-day.

Still, its been a dramatic descent for the dollar over the past weeks. As recently as a month ago, the dollar was challenging October’s 2-year high near 1.2300.

The dollar soared versus the sterling on Thursday as its British counterpart neared parity with the euro for the first time ever. The buck settled near 1.5000 after earlier touching 1.4880. With the advance, the dollar moved back towards a 6-year high of 1.4466 from earlier this month.

Even with the price of oil plunging another few dollars to settle at a 4 1/2 year low near $37, the dollar did not get much of a lift against the petro-linked loonie. The dollar was stable near 1.2000 Thursday afternoon, up slightly from its month and a half low of 1.1814.

In economic news from the US Thursday, conditions in the Mid-Atlantic region’s manufacturing sector continued to deteriorate in the month of December, according to a report released by the Federal Reserve Bank of Philadelphia on Thursday, although the pace of contraction in the sector slowed.

After reaching a twenty-six-year high in the previous week, first-time claims for unemployment benefits decreased by a little more than expected in the week ended December 13th.

A report released by the Labor Department on Thursday showed that initial jobless claims for the week fell to 554,000 from the previous week’s revised figure of 575,000.

Economists had expected jobless claims to slip to 558,000 from the 573,000 originally reported for the previous week.

by RTT Staff Writer

WASHINGTON, Dec 18 (Reuters) - U.S. Democratic congressional leaders were negotiating details on Thursday of a huge plan to jolt the American economy, including $85 billion for road, water and other construction projects in a bill that could total at least $600 billion.

Senior Democratic aides in the House of Representatives and Senate said the overall price tag of an economic stimulus plan had not yet been settled.

But one government official said a bill in the range of $675 billion to $775 billion over two years was being considered.

House Speaker Nancy Pelosi said on Monday she thought “consensus” would likely emerge around a bill in the range of $600 billion, with some of the money spent in 2009 and some later.

She noted there were pressures for even more spending.

A senior Senate Democratic aide, who asked not to be identified, said that given the downward slide of the economy, the legislation “has to be on the higher end” of the $500 billion to $700 billion range.

Congress is likely to try to pass legislation in January and is working closely with President-elect Barack Obama’s transition team on the specifics.

The new Democratic-led Congress will be seated on Jan. 6, giving lawmakers a two-week head start on writing bills before Obama, a Democrat, takes over the White House from Republican President George W. Bush.

Early this year, Bush and Congress enacted a two-year, $168 billion economic stimulus bill composed mainly of tax cuts for families and tax breaks for small businesses.

But as the grip of the yearlong recession has rippled through the economy, Democrats have been clamoring for another round of emergency funds to help reverse the situation that has brought rising unemployment and major industries to the brink of collapse.

Minnesota Rep. James Oberstar, a Democrat who chairs the House Transportation and Infrastructure Committee, said he and party leaders were finalizing plans to spend $85 billion on transportation and public works projects. Those would upgrade crumbling roads, bridges, sewers and other aging infrastructure.

Oberstar said the bill’s language would require that federally funded projects “can be started with people on the construction site working in 90 days.”

‘OUT OF THE DITCH’

Rep. Bart Gordon, chairman of the House Science and Technology Committee, told reporters the economic stimulus package would likely have billions of dollars to spur research in nanotechnology that could be applied to energy projects. Nanotechnology involves developing highly efficient materials or devices on a microscopic scale.

The Tennessee Democrat said money would also be be included to improve the nation’s Internet capability and monitor climate change.

Sen. Robert Casey, a Pennsylvania Democrat, told reporters, “If the president-elect and his team think we need $850 billion, I’ll support that.” He added, “There may be cuts we want to make (in Congress) or changes.”

He also said an aggressive economic stimulus bill was needed to “get this car (the U.S. economy) out of the ditch and get it back on the road.”

Besides large investments in road building, water projects and other infrastructure, the gigantic spending bill is expected to contain a middle-class tax cut and more federal money to help the poor pay winter heating bills and buy food.

Scores of other undertakings could be included, from beefed-up law enforcement to expanding loans to small business and helping those facing mortgage foreclosures stay in their homes.

House and Senate leaders have said they would try to pass the economic stimulus bill in January, possibly even having it on Obama’s desk his first day in office, Jan. 20.

Talking Points
• Japanese Yen: BoJ Talks Intervention
• Pound: Retail Sales Unexpectedly Rises
• Euro: Continues Gains Despite Record Low German IFO
• US Dollar: Philadelphia Fed On Tap

Euro Continues To Soar Despite A Drop In Sentiment, Pound Jumps On Improved Retail Sales

The Euro soared during overnight trading reaching above 1.4700 for the first time since September 25th, despite a drop in German investor sentiment. The single currency was trending higher when a positive U.K. consumption report sparked broad based risk appetite leading to a spike higher. The 200-Day SMA at 1.4718 stopped price action in its tracks and will be the next formidable level to hurdle. The significant technical indicator could cap current bullish sentiment; however a break above it could see 1.500 targeted.

The German IFO reading fell to 82.6 from 85.8 which was the lowest reading since records began in 1982. The drop in sentiment signals that the region’s economy could be headed into a prolonged recession as businesses cut back on spending and hiring. The decline in optimism surpassed economists expectations of 84.0, as a fifth straight month of declining manufacturing has dimed the outlook for future growth. The ECB’s recent record size rate cut was not enough to improve optimism as many still believe the central bank is behind the curve in monetary policy. Additionally, recent hawkish comments from President Trichet has lowered expectations for continued easing which many business leaders believe is necessary to prevent an even deeper contraction.

The Pound jumped over a 150 bps as U.K. retail sales unexpectedly rose for the first time in three months with a gain of 0.3% in November. A rise in purchases at food and discount stores led to the improvement in consumer consumption signaling that spending hasn’t completely died. A 3.9% jump in household goods purchases was the biggest driver as it reversed its declining trend which saw losses of 3.6% and 2.5% over the past two months. However, yesterday’s dismal labor report could be a sign that the declining trend may continue going forward as mounting job losses could lead to Britons tightening their wallets. The sterling would give back most of its gains following the report as traders are reluctant to become too bullish on the currency with the BoE expected to cut rates again and signs that the current recession will deepen.

The Yen saw some weakness overnight as a bout of risk appetite and more talk of intervention led to increased selling. Finance Minister Shoichi Nakagawa told reporters in Tokyo he is “keenly watching” currency markets and has “the means” to limit the yen’s advance. The BoJ has talked intervention in the past but has‘t had the opportunity to take measures as the one way price action would make their efforts futile. The central bank will need to see signs that the current bullish trend is beginning to reverse in order to generate the biggest impact from their actions.

The dollar continues to be under assault and a lack of a top tier economic indicator on the economic calendar may see current price action continue. We may see dollar weakness over the medium term as the country’s interest rate now stands at the lowest among developed nations which will turn it into a funding and as global risk appetite rises the greenback will find itself on the short end of the trade. Fed Chairman Bernanke’s comments that interest rates will remain low for sometime will see the greenback hold this status for the foreseeable future. Manufacturing activity in the Philadelphia area is expected to decline in December to -40.5 from -39.3 the month prior. Meanwhile, the leading indicator gauge which is expected to fall by another 0.4% after a 0.8% drop the month prior signaling that the U.S. economy will continue to contract into the first few quarters of 2009.

‘The economic outlooks of many countries are heading towards recession, therefore our interest rates should be on a downward trend in 2009 to help stimulate growth,’ the Bank of Thailand’s economist, Amara Sripayak, told reporters.

Amara, agreeing with forecasts of some private economists and officials, said the Thai economy may contract in some quarters next year.

(Reporting by Sayanya Suksomkij; Writing by Vithoon Amorn; Editing by Alan Raybould) Keywords: THAILAND ECONOMY/RATES

Key Overnight Developments

Critical Levels

The British Pound gradually advanced past 1.50 through Asian trading but volatility linked to the auto bailout (see below) suddenly spooked the pair, with GBPUSD first pushing through 1.51 then falling 225 pips in a matter of minutes to hit 1.4974. Sterling corrected back above 1.50 as pandemonium subsided ahead of the opening bell in London. The Euro too saw knee-jerk price action, but EURUSD failed to break out of the 1.33-1.34 band it had occupied since early afternoon in New York trading.

Asia Session Highlights

New Zealand Retail Sales shrank -1.3% in October, down from 0.1% in the preceding month and lower than the 0.0% expected. The largest monthly drop in over 4 years, the result came as consumers shied away from big-ticket purchases eyeing rising unemployment, scarce credit, and shaky financial markets. Motor vehicles led the decline, falling -14.5%. Data released yesterday showed house sales tumbled -45.4% in the year through November. Despite continuously dour economic data, RBNZ Governor Alan Bollard has said that he expects the economy to resume growth in the second half of 2009, backing off explicit promises of further rate cuts. Traders have taken notice, paring back rate cut expectations by close to 60% just since last week.

The Japanese Yen roared higher late into the overnight session as US Senators debating a bailout for America’s top three automakers exchanged some choice words regarding a possible vote on the measure. Senate Majority Leader Harry Reid said lawmakers will not make it to the “finish line”, adding that he will “dread” watching Wall Street tomorrow. The comment was quickly followed by news that the Senate failed to pass a procedural vote would have allowed policymakers to weigh in on the measure itself. This sent US stock index futures lower by a whopping -4.5% in a matter of minutes.

The sudden evaporation of risk appetite across financial markets pushed USDJPY below the 90.00 level for the first time since 1995. The Yen is typically used as a funding currency for carry trades and tends to gain if risk appetite sends investors out of risky assets (including high-yielding currencies). Indeed, USDJPY is now 95% correlated with the Dow Jones Industrial Average.

Euro Session: What to Expect

France’s Current Account is likely to see the deficit continue to widen in October. Earlier this week, we saw the trade balance portion of the report show a greater-than-expected shortfall of -7.1 billion euro, down a staggering -85.8% from a year before. Exports fell -4.5%, the most in close to a year, as spreading global slowdown trimmed demand for French-made products. Imports too were in decline, down -1.0% as French consumers cut back spending with the economy inching toward recession and unemployment at the highest level in nearly a year. The capital side of the equation is unlikely to provide a counter-balance with the CAC 40 benchmark stock index down -6.9% and the Euro down -2.46% in October.

On balance, equity markets are likely to retain their status as primary drivers for forex price action. Hefty US economic data is on tap: Retail Sales are set to print down for the fourth consecutive month while Producer Prices expected at an annualized 0.2%, the lowest in nearly 2 years. Continued haggling over the bailout of the US’ top three automakers will only compound event risk, making for a volatile end to the trading week.

Looking ahead to Friday, the Commerce Department’s release of US retail sales at 8:30 ET is forecasted to fall negative for the fifth straight month in November at a rate of -2.0 percent. Such a decline won’t be entirely surprising given the combination of the jump in the unemployment rate to a 15-year high, the continuing collapse in the housing sector, and persistently tight credit conditions. Later in the morning, the preliminary reading of the University of Michigan’s consumer confidence survey is forecasted to fall even further to a 28-year low of 54.8 in December from 55.3. Traders should beware that while this report has a 10:00 ET official release time, it tends to hit the wires a few minutes early, which can sometimes spark a bit of a “surprise” factor in the markets. Overall, disappointing retail sales and sentiment figures could weigh on the US dollar, especially as the Federal Reserve is anticipated to cut rates on December 16 by at least 50 basis points to 0.50 percent.

Related Article: US Dollar Forecast to Drop Against Euro and Japanese Yen on Extreme Sentiment

British Pound Falls to Record Low Versus Euro - Will These Moves Continue?
The British pound gained some ground on Thursday thanks to broad US dollar weakness. In fact, GBP/USD was able to break above major trendline resistance at 1.49, suggesting that a bigger bullish retracement may be in store despite the dour outlook for the UK economy. One place where UK fundamentals are hurting the British pound, though, is in EUR/GBP, as the pair hit fresh record highs of 0.8910 on Thursday. The moves helped EUR/USD break above resistance at 1.3070 and rocket higher throughout the day.

Conditions in the Euro-zone are by no means strong, but they are comparatively better than in the UK as the credit crunch has choked off the finance sector that has previously allowed the country to thrive for so long. Furthermore, European Central Bank Governing Council member Axel Weber indicated today that he “would like to avoid” cutting rates below 2 percent, as it would imply that real interest rates were negative. With the ECB benchmark rate already at 2.50 percent, Mr. Weber’s comments suggest that monetary policy will not be made much more accommodative in coming months. In the UK, on the other hand, the Bank of England is anticipated to continue cutting rates aggressively, as BOE Governor Mervyn King has declined to rule out cutting rates to zero in the past. As a result, the odds remain in favor of EUR/GBP strength. Focusing on EUR/USD, Thursday’s rally led the pair headlong into trendline resistance going back to mid-July at 1.3405, but it may only be a matter of time before we see a break above this level to target 1.3750.

Related Articles: Euro Accurately Forecast to Rally Against US Dollar, British Pound Outlook Unclear Against Sinking US Dollar

Japanese Yen Remains Strong Against Greenback, Intervention Speculation Mounts
The Japanese yen remains exceptionally strong against the US dollar, which is partially a function of broad greenback weakness but also the result of lingering risk aversion, as the DJIA ended the day down 2.24 percent. Overnight, consumer confidence in Japan is forecasted to turn increasingly pessimistic during the month of November, as the index excluding one-person households is likely to drop to the worst levels in at least 26 years, as record-keeping began in 1982. With the Japanese economy already in recession thanks to lackluster consumption and waning foreign demand for exports, indications of weakening consumer sentiment will not bode well for domestic demand going forward. The bigger concern amongst traders though is what will happen if USD/JPY falls below 90. There’s quite a bit of speculation that the Bank of Japan will step in and intervene if this actually happens, and seeing as though they have a long history of doing so successfully, it seems feasible.

The Financial Index soared 4.9% in afternoon trading. Canadian Imperial Bank (CM.TO) surged 6.7% to lead the big six banks higher. The Bank of Nova Scotia (BNS.TO) soared 6.1%, the National Bank of Canada jumped 5% and Toronto-Dominion (TD.TO) added 4.4%.

Industial stocks climbed 3.1%, the Consumer Discretionary Index jumped 2/9%, the Information Technologies Index added 2.3% and Healthcare stocks climbed 2.2%.

Resource stocks saw little change. Mining stocks added 1%, while gold stocks added 0.3%. Materials stocks were slightly lower. Metal-related stocks had seen sharp gains in recent days on the Chinese interest rate cut.

Energy stocks were up about a half-percent in afternoon deals. Petro-Canada (PCA.TO) soared 3.8% and Encana (ECA.TO) surged 3.7%. Crude oil closed at $54.43 on Friday, down 1 cent.

Cameco (CCO.TO) dropped 2.1% after announcing it has temporarily suspended uranium hexafluoride production at its Port Hope plant in Canada after a dispute over supplies used in the production of nuclear fuel.

In other corporate news on Friday, Jean Coutu Group (PJC.A.TO) climbed 3.75% after the drugstore chain was upgraded to Outperform from Neutral by Credit Suisse.

On the economic front, Statistics Canada said Friday morning that Canada’s current account surplus dropped with the rest of the world in the third quarter. The surplus was a seasonally-adjusted $5.6 billion, compared to the $6.8 billion in the second quarter.

Meanwhile, Bank of Canada Deputy Governor Pierre Duguay said another interest rate may be required to boost the economy’s growth. Governor Mark Carney made similar comments earlier this month. A 25-basis point cut is expected on Dec. 9.

For comments and feedback: contact editorial@rttnews.com

Copyright(c) 2008 RealTimeTraders.com, Inc. All Rights Reserved

You needn’t look far to find stocks trading at significant discounts to their 52-week highs. With a volatile stock market and a troubled economy, many companies’ shares have taken a beating over the past year.

While hordes of investors have fled the markets, others have been picking through the rubble for potential long-term winners. Warren Buffett recently announced that he’s diving back into U.S. stocks in his personal portfolio. Meanwhile, Buffett’s Berkshire Hathaway (NYSE: BRK-A) has made fresh investments in Goldman Sachs (NYSE: GS), ConocoPhillips (NYSE: COP), and General Electric (NYSE: GE), among others.

To help navigate the sea of bargain stocks, we’re looking at companies that have fallen more than 50% from their 52-week highs. But to avoid the value traps, we’re also leaning on our Motley Fool CAPS community to help us pick the best of this bunch. Our data has shown that companies earning four or five stars from CAPS tend to outperform the market.

Conversely, companies eking out a lowly one-star CAPS rating have lagged the market. That eliminates companies such as Salesforce.com (Nasdaq: CRM), General Motors (NYSE: GM), and National City (NYSE: NCC), which might otherwise be in the running.

Help us decide which company is the best bargain stock for Black Friday. Read each analysis below, cast your vote in CAPS, and check back next week for the winner. (Just in time for the last of the turkey leftovers to run out.) We’re glad that you could join us after the Thanksgiving holiday to look for amazing stock discounts. Now let’s get bargain-hunting!

Worries about consumer spending helped weigh on U.S. and European shares, while the low-yielding yen gained ground.

Extreme risk aversion and repatriation flows have been supporting the U.S. currency recently.

The euro weakened against the yen and sterling on growing expectations that slowing euro zone inflation may lead the European Central Bank to cut interest rates more aggressively next week from the current benchmark rate of 3.25 percent.

Trading volumes were lower than usual as U.S. markets reopened for only half a day after Thanksgiving Holiday.

“Trading is very thin, with the dollar getting support from a drop in global equities and fear the start of this shopping season is going to be really bad,” said Greg Salvaggio, a currency trader at Tempus Consulting in Washington D.C. “Euro/dollar is going to be stuck in a narrow trading range between 1.26 and 1.30 for now.”

In mid-morning trading in New York, the euro was 1.1 percent lower at $1.2746 , while the dollar was up 0.7 percent against a basket of six currencies at 86.378 .DXY.

Some traders also mentioned sizable month-end dollar buy-orders at the London (1600 GMT) currency fixing was adding support to the U.S. unit.

Political jitters may also have helped the dollar after militants killed more than 100 people in Mumbai, India’s financial center, in coordinated attacks. For details, see [ID:nLR648031]

“It’s another ‘negative’ looming in the markets,” said Salvaggio. “It may also be giving a bit of a lift to Treasuries and the dollar this morning.”

Looking ahead to next week, markets were bracing for interest rate decisions by several central banks next week, including the Bank of England, the ECB, the Reserve Bank of Australia and the Reserve Bank of New Zealand.

Provisional figures showed euro-zone annual inflation slowed to 2.1 percent in November from 3.2 percent in October. [ID:nBFA000814]

“The ECB seems to be lagging behind the curve. Now that the region has officially hit a recession, it is possible that they will be more aggressive in easing rates,” said Kathy Lien, director for currency research at GFT Forex in New York.

“The only factor holding them back is inflation pressures. Although producer and consumer prices have been easing, the central bank is not entirely convinced that the upside risks to prices have alleviated,” she added.

The euro dropped 1.2 percent to 121.58 yen , while the dollar was little changed at 95.42 yen .

For the UK, economists polled by Reuters on Thursday expect the BoE will follow up November’s 150 basis point interest rate cut with at least a 50 point reduction when it meets next week.

“The Bank of England has been the most aggressive and proactive of the G-10 central banks in their attempts to ease monetary policy,” Lien said. “With the economy in a recession according to UK officials, interest rates could fall as low as 1 percent if the crisis continues well into the New Year. (Additional reporting by Veronica Brown and Jessica Mortimer in London; Editing by Tom Hals)

- Timothy Geithner, president of New York Federal Reserve
Bank, expected to be nominated U.S. Treasury secretary
- Citigroup shares skid for second day, speculation that
bank might sell major businesses
- Data shows Euro zone demand has plunged
- Bank of Japan leaves benchmark interest rate at 0.3 pct
- U.S. Federal Reserve expected to cut rates to 0.5 percent
next month.
- Letting U.S. auto industry die not an option, House of
Representatives speaker says
- Goldman Sachs lowers U.S. growth forecast, expects GDP to
fall 5 pct in current quarter
- U.S. President George W. Bush heads to Asia-Pacific summit
to seek support for global financial reform

MARKETS

- U.S. stocks rally on reports of Geithner nomination, Dow and the S&P up more than 6 pct
- Oil rises from a 3-1/2-year low. Exxon Mobil up more
than 10 pct
- European stocks slip in a broad selloff, dropping for
seventh time in nine sessions. Pharmaceuticals the biggest drag
- Nikkei share average hits a three-week low, bounces
back to close 2.7 percent higher
- Dollar surges vs yen, bond yields rise off historic lows

QUOTES

“I think (Geithner) is a brilliant pick, for no other reason

than that it creates continuity in the middle of one of the

greatest crises to ever face this country.” - William O’Donnell,

head of U.S. interest rate strategy at UBS Securities LLC in

Stamford, Connecticut.

“It’s fear that businesses and consumers will stop doing

business with Citigroup. It’s fear that they won’t be a survivor

and fear of possibly unknown off-balance sheet items or exposures.

It’s a bit of a witch hunt and we have to have the next victim.” -

Tim Ghriskey, chief investment officer at Solaris Asset

Management.

“Fear is going to take over. We have a new president and the

faster we can get the policies out there and tell us where we’re

going to go and what this administration is going to do, the

better off we’re going to be.” - former GE chief Jack Welch.

“The darkest hour is just before dawn. The actions being taken

are the key difference between the 1930s and now.” - Justin

Urquhart Stewart, director at Seven Investment Management.

“I would not rule out that over one or two months we might

have a falling price index” — European Central Bank Governing

Council member Yves Mersch to Dow Jones news agency.

EVENTS

Saturday, Nov 22

- Leaders from 21 Pacific Rim economies gather in Peru’s

capital for the Asia Pacific Economic Cooperation (APEC) forum.

Keywords: FINANCIAL/SNAPSHOT

(Compiled by World Desk, Americas, +1 202 898 8457)

Copyright Thomson Reuters 2008. All rights reserved

CEO Vikram Pandit told managers earlier in the day he opposes breaking up the company, but the bank’s board of directors was meeting Friday to discuss whether to do exactly that, the Wall Street Journal reported.

What investors are worried about is that all the risky debt sitting on Citigroup’s balance sheet will eventually turn into losses as the economy worsens and the markets stay turbulent — losses that could be nearly impossible to reverse.

Investors were also fearful that the government might orchestrate a takeover of Citigroup over the weekend that could wipe out common shareholders, said Paul Miller, a Friedman Billings Ramsey banking analyst.

The government was instrumental in JPMorgan Chase & Co.’s buyout of Bear Stearns and Washington Mutual Inc., deals that left shareholders with little or no payouts.

The Treasury Department, the Federal Reserve and other banking regulators are monitoring the situation, government officials said. They spoke on condition of anonymity because of the sensitive nature of the matter.

Concerns about the solvency of financial institutions were starting to ebb after the downfall earlier in the year of Bear Stearns Cos., Lehman Brothers Holdings Inc., and American International Group Inc. But now they are back with a vengeance as the recession deepens, raising the prospects of even more massive loan losses.

Just a couple months ago, Citigroup was the largest bank in the world by assets, stretching into everything from credit cards to consumer banking to high-stakes corporate dealmaking. The company was the result of an idea spawned by the financial deregulation in the late 1990s — that consumers and corporations alike would be better served by a bank that could meet all of their needs.

Almost from the start, though, investors complained Citigroup was too sprawling and too complex to manage properly. And when the subprime mortgage crisis ripped through Wall Street starting last year, Citigroup was hit especially hard because of its high exposure to bad debt. Now, it has failed to turn a profit during the past four quarters, and its shares are trading for less than the cost of a pint of beer at a Wall Street pub.

As a result, analysts consider Citigroup the most vulnerable among the major U.S. banks — especially after it failed to nab Wachovia Corp., bought instead by Wells Fargo & Co., a missed opportunity that put Citi behind in the race for U.S. deposits.

Citigroup’s shares tumbled as low as $3.05 a share Friday before recovering to close at $3.77 a share, a decline of 20 percent that left them at their lowest level in nearly 16 years. It was a continuation of a sharp, weeklong plunge that could not be stemmed by Saudi investor Prince Alwaleed bin Talal’s decision Thursday to raise his stake in the company to 5 percent from less than 4 percent.

The shares have shed 60 percent of their value since last Friday.

Citigroup has already raised $75 billion in capital this year, including a $25 billion cash investment from the government — and none of it has been enough to muster confidence.

Raising more money on the open market is “pretty much off the table,” given the recent plunge in the bank’s shares, said William Fitzpatrick, an equity analyst at Optique Capital Management Inc. And raising more cash from outside investors or the government would be “a Band-Aid.”

“You’re going to have to see more sizable divestitures,” Fitzpatrick said. “They’re going to have to make changes here, and they don’t have time on their side anymore.”

People familiar with CEO Pandit’s call Friday morning with senior managers, who spoke anonymously because the comments during the call were not made public, said his message was similar to that at his town hall meeting with employees on Monday — that Citigroup has adequate capital, and that he supports the universal bank model for Citigroup, including arms such as Smith Barney.

On Monday, Pandit said the universal banking model is “the right model,” and that Citigroup’s strategy is “to be the world’s truly global universal bank.”

Still, one person said, “it’s clear everything is on the table. That wasn’t explicit, but I think it’s clear.”

An outright sale shouldn’t be ruled out, but it appears unlikely, said Alois Pirker, an analyst at financial services research firm Aite Group. Not only are there few potential buyers right now, but “firms prefer to cherry pick,” he said. “If you don’t have a well integrated shop, the benefit of taking over the whole versus pieces diminishes.”

Pirker said sale opportunities include Citi’s Global Transaction Services business and its brokerage, Smith Barney. Pandit has said that these two businesses are important to Citigroup — but these two franchises are not core to retail banking and would be attractive to potential buyers, Pirker said, because they have performed well in the recent turbulent environment.

Selling off the businesses in a particular region is another option, Pirker said. Recently, Citigroup sold off its retail banking business in Germany — it could do the same with Japan, for example, he said.

Citigroup could also consider a merger rather than an outright sale.

“A merger is indeed a possibility at this point,” Fitzpatrick said. He said there are a number of firms that would be eager to take over some of Citigroup’s businesses — particularly a company like Goldman Sachs Group Inc., an investment bank that recently turned into a bank holding company and is now on the prowl for deposits.

The bank has been rushing to get leaner and wind down its assets backed by risky debt. Monday, Citigroup said it will cut 53,000 jobs, on top of 22,000 cuts previously announced. On Wednesday, the bank said it is acquiring the remaining $17.4 billion in assets held by complex debt products known as structured investment vehicles that it previously ran off its balance sheet.

The subprime residential mortgage crisis has swelled into a full-blown debt crisis for not just Citigroup, but other banks as well, leading to defaults in everything from leveraged loans to credit card debt to commercial real estate loans.

Even JPMorgan Chase, one of the nation’s stronger large banks, is shedding about 10 percent of its investment bank staff to better navigate the tough climate.

On Monday, Citigroup’s Pandit said the company’s consumer portfolio losses could rise between $1 billion and $2 billion each quarter through mid-2009. With Citigroup reporting net credit losses of $4.9 billion during the 2008 third quarter, the forecast means losses could swell to more than $10 billion by the middle of next year.

Pandit also said at the time that Citigroup plans to move $80 billion worth of marked-down assets on its balance sheet into a held for investment, held to maturity or available for sale category — instead of listing them on their trading portfolio. Pandit said the accounting change “allows us to benefit from the inherent upside from these marked-down assets,” but some investors saw the move as a tactic to hide bad assets, Fitzpatrick said.

Citi is “a great franchise, but it’s damaged right now,” Fitzpatrick said. “No one knows what the ultimate losses are going to be on a $2 trillion balance sheet.”

Deutsche Bank’s Mike Mayo estimated in a note Thursday that Citi will probably have to take an additional $7 billion to $20 billion in markdowns on its investments in the capital markets.

AP Economics Writer Jeannine Aversa and AP Business Writer Marcy Gordon contributed to this report from Washington.

The Federal Reserve also signaled in its minutes, published overnight, that it is likely to cut interest rates again as both growth and prices continue to fall. “Yesterday’s … decline in U.S. inflation did offer up some dollar weakness in the short term but this has since proved to be unsustainable at least against the likes of the pound and euro,” Gary Thomson, an analyst at CMC Markets said.

Analysts at Bank of New York said this may be because the extent of the U.S. economy’s troubles are already widely known, whereas the depth of Europe’s economic slowdown has yet to be fully revealed. On Tuesday, the U.S. government also released its producer price index. Wholesale prices in October fell 2.8 percent, another record drop. Falling prices give central banks such as the Federal Reserve room to cut interest rates as worries about inflation subside. Cutting interest rates can spark economic activity, but currencies often suffer as investors move their money in search of better returns.

Thomson said traders are eyeing further data and continue to favor anything that looks like a safe haven from continuing equity market fallout. In other trading, the British pound bought $1.4944 Thursday, down slightly from $1.5025, while the dollar bought 95.24 Japanese Yen, down from 96.37 yen late Wednesday in New York.

“It feels like we’ve reached a point where total fear is receding a little. There’s an inkling of hope that we may be near a bottom, which is reflected in equities and high-yielding currencies today,” said Boris Schlossberg, senior currency strategist at GFT Forex in New York.

Geoffrey Yu, currency strategist at UBS in London, said “the market is trying to be optimistic but not get carried away.”

Early in New York, the euro was up 0.9 percent at $1.2575 though it was off a $1.2640 session high. It rose 1.8 percent to 119.22 yen . Sterling added 1.6 percent to $1.4964 . The dollar rose 1 percent to 94.90 yen .

Asian and European shares also rose and Wall Street opened on a firm footing, lifted partly by news that Citigroup (C.N: Quote, Profile, Research, Stock Buzz), which lost half its market value this week, was considering selling parts of its business or merging with another company.

Citigroup’s board of directors is scheduled to meet on Friday to discuss options, the Wall Street Journal reported, citing people familiar with the situation. For details, see [ID:nN20470744]

Worries about the future of Citigroup on Thursday had pushed the bank’s shares to their lowest in more than a decade, helping drive the S&P 500 index to its weakest point since 1997.

But while the reports about Citi on Friday eased some concern about another major bank failure, some said it would not be enough to improve lending conditions and pull markets out of their malaise.

Analysts at Brown Brothers Harriman said both the euro and sterling are overbought and are ripe for a reversal before the day is through, as neither has been able to move above key resistance levels of $1.2660 and $1.51, respectively.

Schlossberg said the test will be whether investors feel confident enough to remain long U.S. equities and higher risk currencies such as the euro and sterling through the weekend.

“If you see people buying equities into the close today, that will be euro and sterling positive, but if stocks sell off in late trade, currencies will react and the dollar and yen should benefit,” he said.

Earlier, euro zone data showed the manufacturing and service sectors contracting much more quickly and deeply than expected in November, rekindling worries about global growth.

The weaker-than-expected PMI survey “likely will feed the recession fears gripping markets and pose more downside for risk assets,” JP Morgan currency strategists said in a note.

The yen was mostly a victim of renewed risk appetite on Friday, though it also buckled when Finance Minster Shoichi Nakagawa said authorities must be ready to deal with market price swings [ID:nTKG003105]. Analysts said investors saw that as a warning that Japan could still step in to slow yen gains.

The yen was mostly a victim of renewed risk appetite on Friday, though it also buckled when Finance Minster Shoichi Nakagawa said authorities must be ready to deal with market price swings [ID:nTKG003105]. Analysts said investors saw that as a warning that Japan could still step in to slow yen gains.

(Additional reporting by Naomi Tajitsu in London; Editing by Chizu Nomiyama)

IZHEVSK, Russia, Nov 18 (Reuters) - Russian President Dmitry Medvedev said on Tuesday that the global financial crisis has spread to the real economy, and that the many sectors that need state aid will get it.

“Today it is clear that the crisis is spreading, unfortunately, from the financial sector into the sectors of the real economy,” Medvedev told reporters.

“Every industry is affected in its own way. It is impossible to say that one among them is sitting pretty and will not get state money,” he said.

Russia is pushing ahead with a $200 billion state aid package, and the central bank has spend tens of billions of dollars propping up the local currency in recent weeks as investors pulled money out of the country and its stock markets.

Medvedev added that some sectors vying for state assistance had been heavily leveraged before the onset of the credit crisis.

“In a number of cases we are having to help industries that were living on debt, for example the retail sector,” he said.

The comments were notably more downbeat than previous ones made by Medvedev, who has sought to reassure investors and the Russian public by saying the crisis could pass Russia by and will allow it to emerge stronger on the world stage. (Reporting by Denis Dyomkin, writing by Simon Shuster; editing by Patrick Graham)

Fifty days later, British Treasury Secretary Stephen Timms told a conference of G-20 nations gathered in Sao Paulo, Brazil: “We are in extraordinary times, the global economy is facing shocks which are wholly without precedent and we need a new approach. … It is a global crisis. It therefore requires an international response.”

In other words, what goes around, comes around. Global schadenfreude toward a stupid and greedy United States and its subprime mortgage meltdown has rapidly become global concern about how to rescue the world from an all-encompassing financial disaster. Here’s just a smattering of companies large and small that recently announced lowered outlooks for the year: Under Armour (NYSE: UA), News Corp. (NYSE: NWS), Starbucks (Nasdaq: SBUX), Vodafone (NYSE: VOD), Electronic Arts (Nasdaq: ERTS), ADP (NYSE: ADP), and Hormel (NYSE: HRL). (Yes, in these tough times, even the outlook for Spam is grim.)

And if that were not enough, the International Monetary Fund (IMF) recently lowered its outlook for the entire global economy.

One country’s plan to step up
Against that backdrop, China announced a 4-trillion-yuan ($586 billion) stimulus package for its domestic economy this past Sunday. It plans to fund extensive infrastructure construction, aid poor farmers, and cut export taxes.

While China’s plan has clear beneficiaries, and should help keep more laborers in their jobs and prop up domestic consumer spending, the most important (and underreported) aspect of the plan is how it will fundamentally change the economic relationship between the U.S. and China.

Here’s how it was
One of the big debates over the past half-decade was whether China had reached a point in its economic development at which its internal economic gravity would allow it to “decouple” from the global economy. If so, it could continue along its fantastic growth trajectory, even as growth in the U.S. or Europe ceased or reversed.

That may sound like gobbledygook, but it’s important. The U.S. has a $20 billion monthly trade deficit with China. It’s funded by China’s willingness to hold U.S. treasuries in its Central Bank (essentially, we’re borrowing the money). China manages the arrangement by pegging its currency (the yuan) to the dollar at an artificially low rate, and by not worrying so much about certain niceties like environmental regulation and labor protection.

It’s a mutually beneficial arrangement — a weak yuan supports Chinese exporters, helping the country industrialize and quickly integrate rural migrants into its urban workforce, with the salutary effect of keeping inflation and potential political unrest low. For its part, the U.S. has gotten dirt cheap financing, by virtue of China parking more than a trillion dollars in U.S. government securities. That has supported the dollar and allowed the Federal Reserve to fuel consumer spending by keeping interest rates low.

China’s stimulus package heralds the unwinding of this relationship.

Here’s how it will be
This is why the decoupling argument matters. Many analysts have pointed to the thousands of factories that have shut down in China in these past few months as evidence that a slowdown in American spending will cause a depression in China — potentially even leading to regime change. But in fact, our trade imbalance with China is artificially preserved by the aforementioned currency peg, and by the decision of China’s state-run banks to make uneconomic loans to businesses it deemed worth propping up.

China has paid heavily for this relationship. Rather than invest its surplus cash in its own country, the Chinese poured money back into the U.S. to further spur our debt-fueled consumption. (Put less artfully, some poor Chinese guy in Shaanxi province was essentially helping you pay your mortgage.)

The announced stimulus package reverses that. Hundreds of billions of dollars that would have gone to propping up the greenback are now being reinvested in China, helping it to transition from its reliance on exports to a self-sustaining economy. So while China isn’t yet decoupled from its export markets, this new spending plan will help it along that path.

China’s huge currency reserves are about to be put to use, and while there will be some real and perhaps severe bumps along the way, the China that comes out on the other side will be a heck of a lot stronger, more independent, and more decoupled than the one we’ve seen up to now.

Chinese premier Wen Jiabao called his country’s stimulus the “biggest contribution to the world.” We don’t know whether that’s true, but we do know that China’s ability to reach deep into its huge coffers to finance further growth gives it a significant advantage over the rest of the world’s struggling economies. This is why we continue to believe in the Chinese miracle, and why we think more American investors should be taking advantage of this current temporary downturn to diversify their portfolios into previously expensive Chinese stocks.

We’ve recommended some Chinese companies at our Motley Fool Global Gains service that can help you do just that. A few of them are now poised to profit mightily from China’s domestic bailout plan. You can read all about them by clicking here to join Global Gains free for 30 days.

Starbucks is a Motley Fool Inside Value recommendation. Vodafone is a former Inside Value selection. Starbucks and Electronic Arts are Stock Advisor picks. Under Armour is both a Rule Breakers and a Motley Fool Hidden Gems selection.

We were in the middle of nowhere, but all around our little town, land was being chewed up to build golf courses that offered memberships primarily to businessmen from Okayama and Osaka, cities that were each a multi-hour ferry and train ride away. The cost of membership ran in the hundreds of thousands of dollars, and there was a long waiting list.

It didn’t last.

The trouble with the Japanese miracle was that its basis wasn’t management superiority — though the country had some of the most admired companies in the world, including Toyota (NYSE: TM) and Sony (NYSE: SNE). Rather, the miracle in Japan was based upon over-loaning from the government to industrial conglomerates, which led, inevitably, to a bubble.

Unfortunately, the aftereffects of the Japanese bubble persist to this day, and they have deep implications as the American government considers making bailout loans to the Big Three: General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler.

Why Japan continues to fail
In late 1989 the Nikkei 225, Japan’s leading stock index, hit an intraday high of 38,957. Today, 19 years later, it’s at 8,800. This multi-decade loss speaks to two things — one, just how out of control Japan’s asset bubble was, and two, for the sake of maintaining jobs, the Japanese government has not not made the hard decisions that would have allowed the country to grow.

In the aftermath of the bubble, Japan’s government rushed in to prop up its banking system, which was teetering under the weight of nonperforming loans. Rather than letting businesses fail, this has had the effect of propping them up to continue operating. To this day the scope of the problem is still not known.

Without this information, investors both in Japan and outside have made a logical conclusion — to take their investment dollars elsewhere. Japan’s industrial sector has failed to meet its cost of capital over the last 20 years, in large measure because the government has allowed capital-destroying companies to continue to operate. Had these companies been allowed to fail, Japan long ago could have flushed out its system and gotten back on the road to economic health. In the name of protecting jobs, Japan’s economy has continued to sputter, punctuated by spectacular bankruptcies in cases where the facade could not hold up. The cost of propping them up has been much, much more economic pain. Japanese call the long economic downturn ushinawareta junen, the lost decade.

Sure, but it’s not your job we’re talking about
As I look at the pressure being placed on the U.S. government to bail out or even nationalize American auto manufacturers, I see the same faulty logic being used. So desperate is the government to protect these jobs and these massive companies that it is willing to spend taxpayer money to keep Detroit afloat. It might be a good use of capital if the Big Three were thriving companies that had simply suffered from exogenous events that they’d reacted to improperly. But they aren’t. These companies are sick and dying, and they have not generated a positive capital return in decades.

It’s not as if this were an unpredictable outcome, as I noted in 2003 when GM raised $13 billion in debt to shore up its pension system. To what end would we bail out these companies? To keep them from collapsing? Wake up — they have already collapsed.

The “end,” of course, would be to keep thousands of jobs, particularly in Michigan and Indiana, from disappearing, to keep pensioners from being mauled at a point in their lives when they cannot afford it. These are loyal, good company people. What is happening at the Big Three affects them deeply, and it is both unfair and cruel. To think otherwise would be inhumane. I have some experience here, as my own grandfather’s pension withered away as the textile company he devoted his life to collapsed, in no small part because it refused to relocate its factories to cheaper places.

But economic growth only comes when capital is allowed to flow to its most productive uses. I am very sorry, but propping up Detroit’s dinosaurs is not productive. They have destroyed capital for a generation. They have too much debt, they have above-market labor costs, they have shown minimal aptitude at developing automobiles that people want to buy at prices that allow the companies to turn a profit. They are losing to Toyota and Honda (NYSE: HMC). Their parts suppliers are, as a group, collapsing, with Dana Holding Corporation (NYSE: DAN) and Visteon (NYSE: VC) teetering on the precipice.

Pain delayed is not pain avoided
There are no good answers here — none at all. Whichever way we go, there is going to be substantial pain in the American auto industry. But a government bailout of recidivist capital destroyers is a particularly bad idea, as it perpetuates the destruction, and delays capital formation for more productive uses. It is a bitter, bitter pill. Better to let the Big Three take their medicine, attempt to reorganize in bankruptcy and attempt to emerge anew as smaller, more nimble competitors.

At a minimum, it helps keep the Japan scenario off the table. It’s been easy to see that the political decisions made in Japan to protect companies and jobs have been destructive. I’ve often thought that one of the reasons American capitalism is superior is our willingness to allow companies to fail. Now I’m not so sure.

By Bill Mann

The Japanese yen retreated against the euro and the dollar after soaring on Wednesday on a flight-to-quality. Other Asian currencies fell, while Australia’s central bank stepped in to support its tumbling Australian dollar.

Evaporating confidence in the global economy boosted regional bonds, while knocking down oil and metals such as platinum.

“It’s pretty much weakness across the board,” said Yutaka Miura, senior technical analyst for Shinko Securities in Japan.

“There is a renewed recognition of the weakness in the economy and corporate earnings,” Miura said.

Asian shares followed Wall Street lower after the U.S. Treasury on Wednesday backed away from using a $700 billion bailout fund to cleanse bank balance sheets of bad mortgage debt to focus on buying stakes in U.S. banks.

The shift in focus not only created uncertainty, but came as Europe reported more gloomy economic news, heightening fears of a global recession.

News that Intel Corp (INTC.O: Quote, Profile, Research, Stock Buzz) slashed its fourth-quarter revenue forecast, citing weak demand across the world for all its products, added to the worries.

The MSCI index of Asian stocks outside Japan .MIAPJ0000PUS fell more than 4.5 percent to its lowest level since October 30.

Japan’s Nikkei average .N225 dropped 5 percent, with exporters such as Honda Motor (7267.T: Quote, Profile, Research, Stock Buzz) hit amid concerns about the impact from a stronger yen.

Other stock markets were also battered: South Korea .KS11, Australia , Hong Kong .HSI and Taiwan .TWII tumbled more than 4 percent each, and Shanghai .SSEC fell about 1 percent.

AUSSIE DOLLAR RESCUE

The U.S. dollar edged up to around 95.57 yen, as investors took profits on the yen’s strong gains the previous session.

The euro also rebounded, rising to 119.15 yen, up 0.3 percent from late U.S. trade, after briefly falling as low as 117.65 yen on trading platform EBS earlier in Asian trade.

Traders said thin liquidity in the market was exaggerating price movements.

Other Asian and Pacific currencies fared worse. The battered Australian dollar edged up to $0.6410 after the central bank said it had intervened to support a sliding currency that fell to $0.6347 on Wednesday — its lowest in two weeks.

Regional government bonds gained from the volatility elsewhere, with Japan’s December 10-year JGB futures up 0.45 point to 138.54, after climbing as high as 138.79.

Commodities dropped amid concern that sputtering economic growth would curb demand for everything from oil to grain and on widespread risk aversion.

U.S. crude futures fell 72 cents to $55.45, while platinum sank to $785.00 from its New York notional close of $810.

(Editing by Dhara Ranasinghe)

Sterling hit a six-year low against the dollar and a record trough against the euro after the BoE’s quarterly Inflation Report predicted the UK economy will shrink sharply next year and inflation may fall to just below 1 percent [ID:nBOE001620].

A tentative improvement in European share prices offered some support to the euro, but the currency stayed on the back foot after data showed euro zone industrial production fell more than expected by 1.6 percent on month in September [ID:nLC724790].

This bolstered the view that a further fall in European Central Bank rates, now at 3.25 percent, was inevitable [ECB/INT] to counter the effects of a worldwide downturn.

“The production data confirms that the euro zone is in a technical recession. It confirms that more rate cuts are coming from the ECB,” said Lena Komileva, G7 market economist at Tullet Prebon in London.

Eonia interest rate futures indicate that markets are pricing in another big rate cut, with ECB rates seen around 2.5 percent by next month.

By 1204 GMT, the euro rose 0.4 percent to $1.2570, but hovered well below a session high of $1.2632. It hit a two-week low of $1.2481 earlier in the day, according to Reuters data.

European stocks traded 0.6 percent higher, paring gains made earlier in the day.

The euro rose 0.3 percent to 122.66 yen but stayed in range after hitting 121.23 yen, its weakest level since late October, on electronic trading platform EBS earlier in the day.

The dollar fell slightly to 97.60 yen . Analysts said risk aversion would keep higher-yielding currencies like the euro under selling pressure, supporting lower-yielding currencies like the dollar and the yen.

“Given risks to the global economy, investors are holding cash and holding safe-haven which means heading back into Treasuries and the U.S. dollar,” said Geoffrey Yu, currency strategist at UBS in London.

STERLING STUNG

Sterling dropped roughly one percent against the dollar to $1.5204 according to Reuters data, its weakest level since 2002, after BoE Governor Mervyn King told reporters that the central bank was prepared to ease monetary policy even more after a stunning 150 basis point cut to 3.25 percent last week.

The UK currency also fell around one percent against the euro, hitting an all-time low of 82.37 pence according to Reuters data, after the BoE’s gloomiest forecast in more than a decade.

Against a basket of currencies, sterling <=GBP> hit a 12-year low.

“The overall message of this report is that the UK economy is in recession and likely to stay there for the time being, and that, without further monetary easing, inflation is likely to undershoot the BoE’s target,” said Daragh Maher, deputy head of currency strategy at Calyon in London.

Sonia interest rate futures indicate that markets have fully priced in another 50 basis point cut by next month.

(Additional reporting by Tamawa Kadoya; Editing by Ruth Pitchford)

Dollar Congestion Belies High Volatility, Bigger Fundamental Problems

Fundamental Outlook for US Dollar: Bullish

- Non-farm payrolls contracts for the 10th consecutive month, sending the jobless rate to a 14 year high
- Fourth quarter GDP numbers may be months away, but data suggests a recession is already underway
- Factory activity hits its lowest level since 1982, while the service sector is in a record-breaking contraction

Throughout last week, grim economic data was met by seeming indifference by the US dollar. After five years of steady depreciation, the greenback has been well prepared for data to confirm what international investors have long expected. However, speculation doesn’t happen in a vacuum; and the deterioration of US fundamentals – and, more importantly, speculation of the eventual rebound – has to be measured against the economy’s counterparts. It is the knowledge that the US economy is already well ahead of the global recession curve, policy officials have shored up the domestic markets with liquidity and guarantees, and the US dollar was hovering at record lows just months ago that will keep the US dollar fundamentally buoyant in the weeks ahead. We have seen conditions just like these many times before – when a bullish market will ignore all bad news but rally when a positive reading crosses the wires and visa versa.

Another source of strength for the US dollar is the constant presence of risk and the currency’s status as a safe haven. While it may seem that the tumble in capital markets has tapered over the past two weeks, volatility (a good measure of fear) has barely budged from historical highs. This is clearly seen in day-to-day dollar price action. The average true range for the dollar index over the past ten trading days has surged to 290 points from 77 at the beginning of September and 106 through the middle of October. This level of volatility isn’t unique to the dollar either. All risk-sensitive pairs have traced exaggerated price swings; and the threat that another momentous trend could develop from these wild market moves is therefore very high.

Knowing that the dollar is fighting the fundamental current, it will be important to measure the probable turning point for the US economy and measure its progress against the Euro Zone, the UK, Japan and other developed nations. This will keep some level of focus on this week’s economic docket. There are a number of notable indicators scheduled for release later in the week; but once again their influence will be distorted somewhat by the perception of risk in the market. The trade balance is no longer a source of optimism after the US dollar appreciated so dramatically and just when the realization that a global recession was dawning on market participants. Far more influential will be the consumer data. Representing the single largest component of GDP and the best hope for the eventual economic rebound, the outlook for American consumption trends will be shaped by October retail sales and the preliminary sentiment gauge for the current month. Forecasts are discouraging on both accounts; but therein lies the chance for an amplified response to a better-than-expected reading. - JK

Visit our recently updated EUR/USD Currency Room for more resources dedicated to the US Dollar.

Initial optimism quickly faded, however, as U.S. stocks surrendered early gains on concerns that China’s plan may not be enough to help avert a global recession, helping the safe-haven yen regain some strength versus the greenback.

China launched an economic stimulus package on Sunday worth nearly $600 billion in what could mark the start of a round of big spending or interest rate cuts to stave off a recession in many countries.

“There has been some renewed hope that since China is a key driver of global growth, that might lead to some recovery in market sentiment,” said Samarjit Shankar, director for global strategy at The Bank of New York Mellon in Boston.

“(But) it remains to be seen how much is followed through, which sectors get the additional spending and most importantly, whether that translates into improved quarterly growth,” he added. “The jury is still out.”

In midday New York trading, the euro rose 0.3 percent against the dollar to $1.2772. It had jumped to an intraday high at $1.2927 as some analysts said the currency could be the main beneficiary of China’s stimulus package.

Against the yen, the dollar gave up early gains and last traded down 0.3 percent at 97.94 yen, while the euro was down at 125.13 yen.

The ICE Futures U.S. dollar index .DXY, which tracks the greenback against a basket of six currencies, last traded down 0.1 percent at 85.822.

Growing speculation that the leaders of the Group of 20 nations will agree to make a concerted effort to shore up the global economy when they gather in Washington this weekend also injected some optimism into the market, analysts said.

SENTIMENT REMAINS JITTERY

Currency markets remain jittery about a global recession, ensuring that any recovery in risk appetite remains tentative.

Countries around the world have been slashing interest rates to buffer their economies against the negative impact of the global downturn, while many nations are mulling fiscal measures to essentially spend their way out of recession.

Analysts said while the initiative from China was a step in the right direction, it was unlikely to provide an immediate fix to the struggling global economy.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said China, like many countries including the U.S., Japan, Germany and the UK, is supplementing its monetary accommodation with fiscal steps.

“This is important but medium- and long-term investors should not take the headline figures at face value,” he said. “Some parts of the program have already been announced, such as tax breaks for exporters and property developers. Other parts, like the spending for the reconstruction of Sichuan from the earthquake, will simply be front-loaded.”

Overall, analysts said major currency pairs remain trapped in ranges and the foreign exchange market will continue to eye developments in the equity market for direction.

“At this point, most of the trade in the currency market is very range-bound because on a macro basis, everybody is still trying to get some visibility into the next year,” said Boris Schlossberg, director of currency research at GFT Forex in New York.

“At this point, most of the trade in the currency market is very range-bound because on a macro basis, everybody is still trying to get some visibility into the next year,” said Boris Schlossberg, director of currency research at GFT Forex in New York.

By Wanfeng Zhou
(Editing by James Dalgleish)