U.S. Stocks Rally on Speculation Bank Rescue Plan Will Pass

Sept. 30 (Bloomberg) -- U.S. stocks rose as growing expectations that lawmakers will salvage a $700 billion bank- rescue package helped the Standard & Poor's 500 Index recover more than a third of yesterday's 8.8 percent plunge.

JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. jumped more than 9 percent as President George W. Bush urged the passage of bailout legislation and congressional leaders vowed to resume work on the bill after its defeat spurred the S&P 500's biggest decline in two decades. Hess Corp. and Schlumberger Ltd. rose more than 5.3 percent as speculation about the plan's revival helped oil rebound from a $10-a-barrel drop.

``The market appears hopeful something will happen,'' said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees about $300 billion. ``There's the thought Congress will come back to this bailout proposal. That's the expectation. The market debacle yesterday seems to have gotten people's attention in Washington.''

The S&P 500 rose 32.78 points, or 3 percent, to 1,139.17 at 11:03 a.m. in New York. The Dow Jones Industrial Average gained 233.76, or 2.3 percent, to 10,599.21 after falling a record 777.68 points yesterday. The Nasdaq Composite Index added 2.8 percent to 2,038.42. European stocks rose, while Asian shares declined. Government bonds in the U.S. and Europe fell. The dollar climbed the most against the euro since the shared currency's 1999 introduction.

`Black Monday'

The gains helped the S&P 500 pare losses in its worst September since 1937. More than $1 trillion in market value was erased yesterday in the worst day for stocks since the ``Black Monday'' crash of 1987 after the House of Representatives voted down the plan designed to rid financial institutions of bad loans.

The S&P 500 has declined 11 percent in September and the Dow average has lost 8.1 percent. The Nasdaq is down 14 percent. The S&P 500 has retreated 11 percent since the end of June for its fourth-straight quarterly decline, the longest stretch since 2001. The Dow has slipped 6.6 percent and the Nasdaq is down 11 percent.

The MSCI World Index of 23 developed nations has dropped 13 percent this month as almost $600 billion of credit losses and writedowns at financial institutions worldwide prompted banks to hoard cash, forced Lehman Brothers Holdings Inc. into bankruptcy and spurred government seizures of American International Group Inc. and the U.K.'s Bradford & Bingley Plc.

Financial companies in the S&P 500 this month traded at 1.1 times their book value, the lowest valuation since Bloomberg began tracking the data in 1995. Commercial banks in the gauge trade at 0.8 times book value, also a 13-year low.

JPMorgan, Goldman

JPMorgan, the biggest U.S. bank by deposits, climbed 10 percent to $45.22. Citigroup rose 11 percent to $19.79. Bank of America surged 9.8 percent to $33.20. Goldman Sachs Group Inc. increased 4.2 percent to $125.79 and Morgan Stanley gained 5.2 percent to $22.09.

Bush said yesterday's defeat of the plan ``is not the end of the legislative process'' and failure by Congress to act would cause ``painful and lasting'' damage to the economy.

Christopher Dodd, chairman of the Senate Banking Committee, said senators may deal with the bill as early as tomorrow. Democratic presidential candidate Barack Obama called for calm after the House vote, saying the plan ``will get done.'' Republican nominee John McCain urged lawmakers to ``go back to the drawing board'' and come up with legislation that will pass.

The S&P 500 Regional Banks Index of 12 stocks climbed 13 percent after plunging 24 percent yesterday, its biggest tumble since the gauge was created in 2003.

Regionals Rebound

Sovereign Bancorp, which plummeted 72 percent yesterday, recovered 71 percent to $3.99. National City Corp., Ohio's largest bank, climbed 38 percent after losing 63 percent yesterday.

Speculation the plan will be revived overshadowed the biggest-ever jump in the cost of borrowing dollars overnight. The British Bankers' Association said the London interbank offered rate, or Libor, rose 4.31 percentage points to 6.88 percent, an all-time high.

Hess, the fifth-biggest U.S. oil company, added 6.8 percent to $81.26 and Schlumberger climbed 5.3 percent to $77.67. Crude for November delivery rose $1.50, or 1.6 percent, to $97.87 a barrel after falling the most in seven years yesterday.

Officials from Microsoft Corp. to Office Depot Inc. and Schering-Plough Corp. said the government's failure to bail out the U.S. banking industry put the entire economy at risk unless a deal comes soon. They called on lawmakers to put aside partisan differences and work to restore credit supplies and confidence to the financial markets.

Microsoft, Schering-Plough

Microsoft, the world's biggest software maker, added 3.3 percent to $25.83. Schering-Plough, the Kenilworth, New Jersey- based drugmaker, rose 1.3 percent to $17.74. Office Depot, the second-largest office-supplies company, gained 1.8 percent to $5.78.

Dr Pepper Snapple Group Inc. advanced 6.7 percent to $25.91. The drinks maker spun off by Cadbury Plc this year was picked to replace Wm. Wrigley Jr. Co. in the S&P 500.

Transportation stocks are signaling U.S. shares may be poised for more losses, according to Dow Theory, which holds that the 30-stock industrial average takes cues from the Dow Jones Transportation Average. The gauge of companies such as FedEx Corp. and Ryder Systems Inc. slid to the lowest since March 17 yesterday, suggesting the industrials' plunge won't mark its bottom, some investors said.

Europe's Dow Jones Stoxx 600 Index added 0.6 percent today as Dexia SA, the world's biggest lender to local governments, surged 12 percent on a 6.4 billion-euro ($9.2 billion) state- backed rescue.

Anglo Irish Bank Corp. Plc climbed 35 percent after Ireland's government said it will guarantee bank deposits and debts for two years, seeking to restore confidence in the country's financial industry.
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Lehman bros files for bankruptcy

Sept. 15 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history.

The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.

Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94 percent of its market value this year. Chief Executive Officer Richard Fuld, who turned the New York-based firm into the biggest underwriter of mortgage-backed securities at the top of the U.S. real estate market, joins his counterparts at Bear Stearns Cos., Merrill Lynch & Co. and more than 10 banks that couldn't survive this year's credit crunch.

``There is likely to be a domino effect as other firms and individuals who relied on Lehman for financing feel the effects of its meltdown,'' said Charles ``Chuck'' Tatelbaum, a bankruptcy lawyer with Lauderdale, Florida-based Adorno & Yoss and former editor of the American Bankruptcy Institute Journal. ``The whole thing is frankly frightening for the U.S. economy.''

Shares, Bonds

Lehman shares dropped 81 percent in Frankfurt trading to 75 cents from their $3.65 close in New York on Friday. UBS AG, HBOS Plc, and Axa SA led a decline of more than 3 percent for European stock markets on speculation a forced sale of Lehman's assets could lead to further writedowns at other banks.

Benchmark gauges of corporate credit risk rose by a record in Europe, and traded at an all-time high in North America as investment banks sought to minimize losses from Lehman's collapse. U.S. two-year Treasuries climbed, pushing yields below 2 percent for the first time since April, as investors sought the relative safety of government debt.

Lehman bondholders may get about 60 cents on the dollar if the investment bank is forced into liquidation, analysts at CreditSights Inc. said. The filing is by Lehman's holding company and won't include any of its subsidiaries. Lehman owes its 10 largest unsecured creditors more than $157 billion, including debts to bondholders totaling $155 billion.

Aozora Bank, Mizuho

The largest single creditor listed in today's filing is Tokyo-based Aozora Bank Ltd., owed $463 million for a bank loan. Other top creditors include Mizuho Corporate Bank Ltd., owed $382 million, and a Citigroup Inc. unit based in Hong Kong owed an estimated $275 million. Lehman listed $639 billion of assets. Citigroup and The Bank of New York Mellon Corp. are among trustees for bondholders who Lehman owed about $155 billion.

Barclays, which emerged as a leading candidate to acquire Lehman, pulled out first yesterday, saying it couldn't obtain guarantees from the government or other Wall Street firms to protect against losses on Lehman's assets. Bank of America withdrew about three hours later, before saying it would acquire Merrill Lynch. Brokers sought yesterday to consolidate trades linked to Lehman to minimize the impact of a bankruptcy filing.

Founded in 1850 by three immigrants from Germany, Lehman has managed to avert previous potential disasters and was among the handful of U.S. financial firms that had endured for more than a century.

`Chain Reaction'

Fuld, the longest-serving CEO on Wall Street, attempted to shore up the firm's finances in the second quarter by raising $14 billion of capital, selling $147 billion of assets, increasing cash holdings and reducing reliance on short-term funding to create a buffer against a bank run.

Instability in the financial and credit markets left Lehman officials struggling to keep the firm afloat, Ian Lowitt, the firm's chief financial officer, said in a court filing in the bankruptcy case. Liquidity problems plagued Lehman earlier this year, he said.

``This loss of liquidity created a chain reaction of adverse economic consequences,'' Lowitt said.

Lehman, which has about 25,000 employees worldwide, last week reported the biggest loss in its history and said it planned to sell a majority stake in its asset-management unit, spin off real-estate holdings and cut the dividend in an effort to shore up capital and regain investor confidence. The efforts failed to stem speculation that the firm's mortgage holdings would lead to more losses.

Talks Fail

``The uncertainty, particularly among the banks through which the company clears securities trades, ultimately made it impossible for the company to continue to operate its business,'' Lowitt said in the filing. The firm had sought about $4 billion for the asset-management unit, he added.

The U.S. Treasury and the Federal Reserve negotiated with Wall Street executives for the past three days in New York, trying to strike an agreement that would prevent the investment bank from failing before markets open today. Treasury Secretary Henry Paulson indicated that he didn't want to use U.S. taxpayer funds to ease a sale of the company.

Fuld, 62, is exploring the sale of its broker-dealer operation and continues to hold talks on the sale of its asset- management unit, including fund manager Neuberger Berman, the company said today in the statement.

The U.S. Securities and Exchange Commission said customer accounts at Lehman are protected and agency staff will remain at the brokerage firm in the coming weeks.

SEC Statement

Securities rules require segregation of Lehman's securities and cash, and accounts are covered by insurance provided by the Securities Investor Protection Corp., the Washington-based agency said last night. SEC employees working inside the broker's office will continue that assignment, the agency said.

``We are committed to using our regulatory and supervisory authorities to reduce the potential for dislocations from recent events, and to maintain the smooth functioning of the financial markets,'' said SEC Chairman Christopher Cox in a statement yesterday.

Brokerage units that fail usually are handled by the SIPC, which appoints a trustee to liquidate the business and protect its customers. Lehman's customer accounts may also be farmed out to other firms that could protect cash and securities, on the model of the failed junk-bond firm Drexel Burnham Lambert, which filed for bankruptcy in 1990.

`A Big Mess'

Lehman's trades in commodities, derivatives and other financial instruments could be unwound by the bank's counterparties, said Andrew Rahl, co-head of bankruptcy in New York at law firm Reed Smith LLP and a specialist in financial companies.

A liquidation of the brokerage unit might be ``a big mess'' if Lehman used customer accounts to raise cash, and sale and repurchase agreements had to be unwound, Rahl said.

The trigger for SIPC to take over the Lehman brokerage would be a freezing of customer accounts, or a Chapter 11 filing that implied the unit was insolvent and its customers might not be able to access their property, the official said.

``First there will be chaos and then an adjustment process as losses distribute themselves through the market,'' said Gilbert Schwartz, a former Federal Reserve attorney and now a partner at Schwartz & Ballen LLP in Washington. ``There won't be any lasting turmoil. Treasury and the Fed have determined that markets have adjusted to the situation since Bear Stearns. If every time a big institution went bust the markets expected the government to step in, no one would ever adapt.''

`Uncharted Territory'

Ladenburg Thalmann & Co. analyst Richard Bove wasn't as sanguine.

``We will be entering uncharted territory,'' he said. ``Forcing liquidation will set off problems in other companies and markets everywhere.''

Rival banks and brokers today held a session for netting derivatives transactions with Lehman to reduce uncertainty in the derivatives market. That move means canceling trades that offset each other, the International Swaps and Derivatives Association said in a statement. The ISDA includes 218 banks, brokerages, insurance companies and other financial institutions from the U.S. and abroad.

In the U.K., the Financial Services Authority asked banks to disclose their exposure to Lehman, spokeswoman Teresa LaThangue said in a statement today.

Any sale of Lehman's investment management units is subject to court approval and creditor scrutiny under bankruptcy rules, according to Tatelbaum.

``Bankruptcy severs all counterparty contracts, and therein lies the systemic risk,'' said David Kotok, chief investment officer of Vineland, New Jersey-based Cumberland Advisors Inc., which manages $1 billion. ``This would be the first time we've tested how much damage will be done by a bankruptcy.''

Lehman's filing was made by lawyers from New York's Weil Gotshal & Manges LLP led by Harvey Miller.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned

Oil Falls to Six-Month Low as Refineries Escape Major Damage

Sept. 14 (Bloomberg) -- Crude oil fell to a six-month low in New York and gasoline tumbled amid signs that refineries along the Gulf of Mexico coast will soon resume operations after escaping major damage from Hurricane Ike.

Almost 20 percent of the U.S.'s oil refining capacity was shut, limiting fuel deliveries and prompting the Department of Energy to release 309,000 barrels from its strategic reserves. New York Mercantile Exchange electronic trading opened early to allow traders to respond to Ike.

``It looks like we've dodged another bullet,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``The refineries in the Houston area seem to have come out of the storm remarkably intact.''

Crude oil for October delivery fell $2.10, or 2.1 percent, to $99.08 a barrel at 1:22 p.m. on the Nymex. Futures touched $98.55, the lowest since Feb. 26. Prices are up 25 percent from a year ago. Gasoline for October delivery fell 12.91 cents, or 4.7 percent, to $2.6405 a gallon in New York.

CME Group Inc., the world's biggest futures exchange, began Nymex electronic trading of energy contracts at 10 a.m. New York time today. Trading normally opens at 7 p.m. Sundays.

Oil in New York has fallen 33 percent from a record $147.27 a barrel on July 11 as high prices and slowing global economic growth reduce demand for fuels. Sales at U.S. retailers dropped in August for a second straight month and July inventories at American businesses increased the most in four years, Commerce Department reports showed last week.

Trumping Ike

``Growing fears about the economy are trumping any fears about the damage caused by Hurricane Ike,'' said John Kilduff, senior vice president of risk management at MF Global Inc. in New York. ``The broader issue is the weakness of the financial system. Given the Lehman and WaMu watch, cash looks better than any speculative investment.''

Barclays Plc, the U.K.'s third-biggest bank, pulled out of talks to buy Lehman Brothers Holdings Inc. today as the U.S. government raced to find a solution for the faltering investment bank. Washington Mutual Inc. plummeted in New York trading last week on speculation about its financial health.

At least 13 refineries in Texas including plants operated by Exxon Mobil Corp., Valero Energy Corp. and Royal Dutch Shell Plc shut 3.64 million barrels a day of refining capacity as Ike approached Texas.

Lake Charles

Calcasieu Parish, Louisiana, which is home to three refineries, reported ``widespread'' power outages and flooding in Ike's aftermath, Tom Hoefer, the parish's public information officer, said in an interview. Hoefer said the refineries located in Lake Charles likely escaped damage.

The three local refineries, which can process a combined 772,000 barrels a day, are owned by ConocoPhillips, Citgo Petroleum Corp. and Calcasieu Refining Co.

``It looks like the storm surge was greater to the east- northeast so we got a lot of flooding in Lake Charles instead of the Houston area,'' Beutel said. ``The possible damage of the three Lake Charles refineries instead of the 13 in Houston is a trade I would take any day.''

Heating oil dropped 9.41 cents, or 3.2 percent, to $2.845 a gallon. Heating oil touched $2.8325 a gallon, the lowest since March 5. Trades of all the futures contracts will be recorded as part of the Sept. 15 session.

``The crude oil price should be lower because with the refineries down, there is nowhere for it to go,'' Kilduff said. ``The drop in product prices may be short-lived because some of these refineries could be down for weeks.''

Regular gasoline, averaged nationwide, rose 6.2 cents to $3.795 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices reached a record $4.114 a gallon on July 17.

Ike Weakens

The National Hurricane Center released its last advisory on Ike at 10 a.m. Houston time when the remnants of the hurricane were centered 60 miles (72 kilometers) east-northeast of St. Louis. Ike had winds of 110 mph at its landfall in Galveston at 2:10 a.m. yesterday.

The storm idled about 99.7 percent of oil production and 98.5 percent of natural-gas output in the Gulf of Mexico, the U.S. Minerals Management Service said yesterday. Gulf fields produce 1.3 million barrels oil a day, about a quarter of U.S. output, and 7.4 billion cubic feet of gas, 14 percent of the total, government data showed.

Natural gas for October delivery fell 4.4 cents, or 0.6 percent, to $7.322 per million British thermal units in New York.
by Mark Shenk
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OPEC agrees to curb oil overproduction

VIENNA, Austria (AP) -- OPEC oil ministers agreed Wednesday to trim overall output by more than 500,000 barrels a day in a compromise meant to avoid new turmoil in crude markets while seeking to bolster falling prices.

The news sent oil prices rising. Light, sweet crude for October delivery rose 97 cents to $104.23 a barrel in electronic trading on the New York Mercantile Exchange.

The OPEC announcement reflected the organization's efforts to cover all bases in an oil market that saw prices spike to a record high just short of $150 a barrel in July, only to shed nearly 30% off those peaks in subsequent months.

Oil prices had lost more ground Tuesday ahead of the decision, falling $3.08 to settle at $103.26 on the Nymex, the lowest settlement price since April 1.

A statement issued by the Organization of Petroleum Exporting Countries issued after oil ministers ended their meeting early Wednesday said the organization agreed to produce 28.8 million barrels a day.

OPEC President Chakib Khelil said that quota in effect meant that member countries had agreed to cut back 520,000 barrels a day in production over the established quota.

Saudi Arabia alone accounts for more than that amount of output over its official quota -- all members of the 13-nation OPEC have such formal production limits allotted to them except violence-torn Iraq. But Khelil said that the cutbacks in overproduction would apply proportionally to all OPEC members bound by quotas.

OPEC overall regularly churns out oil above the organization's overall quota, last set in November at 27.3 million barrels a day, and it remained unclear whether group members would abide by the decision to keep to their limits.

Still, the decision could have the psychological effect of steadying eroding prices at or above the $100 mark -- the red line for many OPEC nations concerned about their rapid loss of revenue in recent months.

Meeting quotas
While the new production limit of 28.8 million barrels a day is above that set in November, the statement said it reflected adjustments to include new members Angola and Ecuador and exclude Iraq, as well as Indonesia, which used the Vienna meeting to announce it was suspending its full membership.

Saudi Arabia was widely believed to be leaning toward maintaining the status quo heading into this week's meeting -- a view shared by its Arab Gulf neighbors. Wednesday's compromise, while promising to tighten up global supplies, does not amount to an official cutback by the cartel.

"At the end of the day, all they're saying is: 'we've been cheating for the past year,"' said analyst and trader Stephen Schork, who was monitoring the meeting in Vienna. "I wouldn't say the Saudis backed down. I'd say it was a respectful nod to the other members of the group."

Saudi Arabia and others opposed to a major pullback are concerned that high oil prices will kill demand -- a trend that has already begun in the U.S. and other big oil-consuming nations.

But at the same time, OPEC countries' economies are being buoyed considerably by crude's historically high price and members are not eager for the flow of money to ease.

Some observers said Saudi Arabia and other U.S. allies in the Middle East also do not want OPEC to become more of a target for American consumers fuming over historically high fuel prices in a highly charged presidential election season. The impact of Wednesday's compromise remains to be seen.

The half a million barrels OPEC said it will shave from the market is similar to the amount of additional crude Saudi Arabia unilaterally promised to pour onto the market over the summer when prices were setting new weekly, if not daily, highs.

Stemming the slide
OPEC's statement Wednesday noted that "prices had dropped significantly in recent weeks driven by a weakening world economy ... with its concomitant lower oil demand growth, coupled with higher crude supply, a strengthening of the U.S. dollar and an easing of geopolitical tensions."

And it warned of the possibility of further price erosion, forecasting a possible "shift in market sentiment, causing downside risks to the global oil market outlook."

But analysts said several factors could stem any further slide in prices over the next few months. "There are good reasons ahead for prices to turn toward the upside," said Johannes Benigni, managing director of JBC Energy in Vienna. "Take the next hurricane," he said, alluding to the chances that -- after a few near misses in recent weeks -- further storms could savage oil installations in the Gulf of Mexico.

He also warned against expectations that non-OPEC suppliers could make up for any added demand for crude in the traditionally high-use Western Hemisphere winter season, saying "OPEC will have to step in to fill the gap" if other suppliers come up short.

Others said that OPEC's concerns were well founded. Oil analyst Cornelia Meyer said she expected OPEC to "wait and see what is happening to the global economy and depending on whether China and India are (also) affected, we will see them do a cut" in December.

Oil demand from China's and India's booming economies have helped fuel oil demand and drive up prices.

Ehsan ul-Haq, head of research at JBC Energy, also said it that OPEC "might have to cut production below its set target." He mentioned a further downturn in the U.S. economy and the possibility of a mild winter as possibly depressing the world's appetite for crude by year's end.

Khelil said the request to curb overproduction was effective immediately with a 40-day window for it to take effect. And he suggested bigger cuts may be in the offing if prices continue to slide, telling reporters that OPEC would "swiftly respond to energy developments which may threaten oil (market) stability."

At the next OPEC meeting Dec. 17, in Oran, Algeria, the organization would "reassess the market situation," he added.

Since crude surged to a record $147.27 a barrel on July 11, it has tumbled by over $40, or more than 27%. Still, prices remain close to 14% higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.
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Euro Slides to 11-Month Low Versus Dollar on Recession Risks

Sept. 5 (Bloomberg) -- The euro slumped to an 11-month low against the dollar on speculation a credit-market slump will push European economies into recession.

The currency headed for its biggest weekly decline versus the yen in more than a year after European Central Bank President Jean-Claude Trichet said the economy is ``weak'' and Luxembourg Finance Minister Jean-Claude Juncker said the euro is ``overvalued.'' The yen jumped to two-year highs against the Australian and New Zealand dollars as declines in stocks and commodities prompted investors to reduce holdings of higher- yielding assets funded in the Japanese currency.

``This is a global recession story,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. ``We're seeing a reversal of what's been happening over the past two years. Now the dollar and the yen are benefiting as risk appetite is on the decline.''

The euro fell to $1.4269 at 12 p.m. in Tokyo, from $1.4325 yesterday. It earlier touched $1.4214, the weakest since Oct. 24. The euro slid to 150.60 yen, the lowest since Aug. 17, 2007, before trading at 152.52 yen from 153.40 yen. It fell 4.2 percent this week. The yen reached 105.69 per dollar, the highest since July 17, and traded at 106.84. The euro may decline to $1.40 in six months, Umemoto said.

Carry Trades

The Australian dollar dropped 3 percent to 87.65 yen from late Asian trading yesterday. It touched 85.88 yen, the lowest since July 2006. New Zealand's dollar slumped 3.7 percent to 71.39 yen, reaching 69.96, the lowest since July 2006. The UBS Bloomberg Constant Maturity Commodity Index reached a seven- month low and the Standard & Poor's 500 Index tumbled the most in three months.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to is that currency moves may erase profits.

Volatility implied by dollar-yen options expiring in one- month rose to 12.59 percent, the highest in a more than a month.

``These currency moves are huge,'' said Toru Tokoyoda, head of foreign exchange sales in Tokyo at Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm. ``Volatility is likely to squeeze higher on further gains in the yen as that would spur demand to hedge against that move.''

One-month volatility may rise to 15 percent provided that the yen rises to 105 per dollar today, he said.

Korean Won

South Korea's won rose 0.2 percent to 1,126.70, reversing an earlier drop of as much as 1.2 percent, on speculation the central bank is buying the currency after it two days ago breached 1,150 for the first time in four years. The nation's foreign-exchange reserves fell by $21 billion in the five months through August to $243 billion as the Bank of Korea bought won to try to halt the currency's slide.

A 10 percent drop in the won in the past month sparked concern South Korea may be headed for a repeat of 1997, when the currency lost half its value versus the dollar and the country turned to the International Monetary Fund for a $57 billion bailout to help companies repay overseas debt. Central bank Governor Lee Seong Tae yesterday told lawmakers there is no need to worry that the country is facing a financial crisis.

The euro dropped for a seventh day against the dollar, its longest decline since October 2006. The ECB yesterday kept its main refinancing rate at a seven-year high of 4.25 percent and Trichet told a press conference growth risks are on the ``downside.''

`Effectively Overvalued'

Europe's currency extended its decline after Luxembourg Juncker told reporters the currency is ``effectively overvalued.'' The euro has dropped more than 10 percent against the dollar from the record high of $1.6038 set on July 15.

``Juncker's comments pushed the euro lower,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``It's a bit of an overshoot. It reflected a market that really wants to buy dollars.''

The ICE future exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, rose 0.3 percent to 78.822 after yesterday touching 79.077, the highest in almost a year.

U.S. nonfarm payrolls probably shrank by 75,000 last month, following a drop of 51,000 in July, according to the median forecast of 76 economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. in Washington.

``The dollar faces downside risks against the yen,'' said Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. ``A worse-than-expected payrolls number would stoke fears about a global recession.''

The dollar may fall to 103.70 yen in the next few days, he said.

`Financial Tsunami'

The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' said Bill Gross, co-chief investment officer of Newport California-based Pacific Investment Management Co., manager of the world's biggest bond fund, on the firm's Web site yesterday.

The ECB lowered its 2008 economic growth forecast yesterday to about 1.4 percent from 1.8 percent and its 2009 prediction to 1.2 percent from 1.5 percent. The central bank raised its inflation forecast for this year to 3.5 percent from 3.4 percent and 2.6 percent from 2.4 percent for 2009.

Sterling fell for a ninth day, reaching a two-year low of $1.7538 after the Bank of England yesterday kept its target lending rate at 5 percent. Policy makers judged the fastest inflation in more than a decade outweighed the risk that the British economy is sinking into a recession.

European Haircut

Banks in the U.K., Spain and Ireland that have relied on the ECB for low-cost funding will have to pay more as it tightens lending rules to prevent abuses.

The ECB will increase the so-called `haircut' on most asset-based securities from Feb. 1 to 12 percent from as little as 2 percent, the central bank said yesterday. That means it will lend just 88 percent of the value of the paper.

``The liquidity situation continues to be severe and this could be one reason for the euro to weaken,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``This also focuses attention on the divergence in banks and economies in the euro region.''

The euro may fall to $1.40 this month after breaking below a cloud on its weekly ichimoku chart used to show support levels, he said.

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