Dollar Plunges on Fannie Mae and Freddie Mac Scare
The dollar was sharply lower versus other key currencies Friday after mortgage lenders Fannie Mae and Freddie Mac saw their stocks plummet on fears they may have to be nationalized for a lack of capital. US Treasury Secretary Henry Paulson offered no hint of a bailout but said the government would work to help the companies recover in their current form. “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said. Stocks pared some losses after a Reuters report that Federal Reserve Chairman Ben Bernanke had told Freddie Mac CEO Richard Syron that the two government-sponsored enterprises could access the discount window.
The USD/JPY fell as stocks slumped on record crude oil prices and growing concern about the health of the US mortgage market. The relatively close relationship between the USD/JPY and US stock market has diminished. Since early-June the pair has stayed in a narrow trading range between 106 and 108 despite heavy equity losses. If the 106-area support is broken, the pair is likely to fall to 103.
Financial and Economic News and Comments
US & Canada
The US deficit in international trade of goods and services unexpectedly declined 1.2% m/m to $59.79 billion in May, smaller than expected, from a revised $60.50 billion trade deficit in April, data from the Commerce Department showed. US exports rose 0.9% m/m to $157.55 billion in May from $156.16 billion in April, led by fuel oil, chemical fertilizers, and other petroleum products. Exports rose 17.8% y/y. May imports increased 0.3% m/m to $217.34 billion from $216.65 billion. Imports rose 12.5% y/y. US trade deficits with major trading partners generally narrowed in May, although the deficit with China expanded to $21.05 billion from April's $20.24 billion.
US import prices rose a more-than-expected 2.6% m/m, a fourth straight monthly increase in June and matching May's upwardly revised increase, suggesting rising oil and food prices and the weak dollar remain a significant upside risk to inflation, data from the Labor Department showed. Import prices soared 20.5% y/y, the largest annual rise since the data were first published in September 1982. Excluding petroleum, import prices rose 7.3% y/y, a 20-year high, and increased 0.9% in June. Export prices increased 1.0% m/m and 8.6% y/y in June. Export prices ex-agriculture increased 0.9% m/m and 6.4% y/y. The increase in year-onyear export prices, both overall and excluding agriculture, is the most since 1988.
The Reuters/University of Michigan preliminary index of US consumer sentiment registered 56.6 in July, higher than forecast, from 56.4 in June that was the lowest since May 1980. The consumer expectations index fell to 48.3 in July, also the lowest since 1980, from 49.2 in June. The current conditions index increased to 69.5 from 67.6. Overall, the figures indicate US consumer confidence remained close to the lowest level since 1980.
Treasury Secretary Henry Paulson, seeking to calm nervous investors about the financial state of Fannie Mae and Freddie Mac, said the government's primary policy focus now is to leave the congressionally-created mortgage giants intact. “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission. We appreciate Congress' important efforts to complete legislation that will help promote confidence in these companies. We are maintaining a dialogue with regulators and with the companies. OFHEO will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission,” according to the statement by Treasury Secretary Henry Paulson on Fannie Mae and Freddie Mac.
Canada's unemployment rate rose to 6.2% in June, the highest since April 2007, as the slowing economy unexpectedly shed jobs for the first time this year, Statistics Canada reported. Employers shed 5,000 jobs in June, after a 8,400 gain in May.
Europe
Germany's wholesale prices rose 0.9% m/m and 8.9% y/y in June, registering the highest year-on-year rate since January 1982, following an 8.1% y/y rise in May, the Federal Statistics Office said.
Monday's release of eurozone industrial production is forecast to show a 2.4% m/m drop in May, following a 0.9% m/m increase in April. Industrial production is estimated to increase just 0.3% y/y in May from 3.9% y/y in April.
Asia-Pacific
The consumer confidence index slid to 32.6 in June, indicating Japanese consumer confidence fell to the lowest level since June 1982, from 33.9 in May, the Cabinet Office said. The sub-index for willingness to buy durable goods fell to 30.9, hitting a record low, from May's 32.7.
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