Money and Metals

Bloomberg reports on currencies. "The yen fell against the euro and the dollar on speculation investors resumed borrowing in the Japanese currency to invest in higher-yielding countries. The yen dropped against all of the 16 most active currencies including the Australian and New Zealand dollars on expectations investors will resume what is known as the carry trade. U.S. stocks advanced for a second straight day."

"'Equities are the leading indicator of investors' risk appetite right now and their willingness to re-establish the carry trade,' said C.J. Gavsie, managing director for foreign- exchange trading in Toronto at BMO Capital Markets."

"The yen fell 0.53 percent to 155.64 per euro and dropped 0.40 percent to 117.56 per dollar at 4:49 p.m. in New York."

"The dollar weakened against the euro after Federal Reserve reports showed manufacturing grew in New York state at the slowest pace since May 2005 and unexpectedly stalled for a second straight month in the Philadelphia region."

"'We're starting to see some very strong signs that the decline in the housing market is seeping into the manufacturing and retail sectors,'' said Boris Schlossberg, senior currency strategist in New York at Forex Capital Markets LLC 'If that theme continues to play out, the Fed lowering rates just to salvage a decline in housing becomes very real.'"

"The dollar fell 0.12 percent to $1.3239 per euro. The U.S. currency may weaken to $1.36 per euro before year's end, according to Schlossberg."

"The Swiss franc, another currency used in the carry trade, fell less than the yen against higher-yielding currencies. The Swiss central bank today raised interest rates for a sixth time since late 2005 to keep an expanding economy from stoking inflation. The Swiss currency dropped 0.19 percent to 1.6116 against the euro, 0.06 percent to 1.2173 against the dollar, and 0.13 percent to 2.3586 against the pound."

"The New Zealand dollar was the biggest gainer against the yen among the most active currencies, rising 0.98 percent to 81.85 per yen, as central bank Governor Alan Bollard suggested the country may have to raise its benchmark rate from 7.50 percent. The yen fell 0.80 percent against the Australian dollar to 92.84."

From MarketWatch. "Gold futures logged their first gain in five sessions on Thursday, after producer price data showed a surprising surge in U.S. wholesale inflation for February, bolstering the metal's appeal as an inflation hedge. Gold for April delivery closed up $4.60 at $647.10 an ounce on the New York Mercantile Exchange."

"The release of February's PPI showed prices up 1.3%, outpacing expectations for a 0.6% increase. Excluding food and energy prices, core PPI rose 0.4%, twice the 0.2% gain that was expected."

"'The big problem is that the economy is showing some significant signs of slowing right now and the real estate/homebuilder/mortgage debacle isn't helping,' said Neal Ryan, director of economic research at Blanchard. The real question is 'can the Fed continue to walk down the middle of the road on the growth or inflation equation without being hit by trucks traveling in both directions?'"

"'With the current relationship of the equity markets and gold locked together on sharp sell-offs, investors will soon see a nasty divorce take place,' said Peter Spina, chief investment strategist at GoldSeek.com. At some point, gold will benefit from the 'subprime fiasco,' Spina said: 'The implications it holds for the real estate market and the general economy will drive additional safe-haven investors into the metal.'"

"Other metals prices were mixed. May silver rose 24.5 cents to close at $13.075 an ounce and April platinum added $14.70 to end at $1,215.70 an ounce, while June palladium fell $1.80 to close at $351.70 an ounce."

From Fitch Ratings. "Fitch Ratings has today downgraded Iceland's foreign and local currency Issuer Default ratings to 'A+' and 'AA+' from 'AA-' (AA minus) and 'AAA' respectively. The Outlook on both ratings is Stable. The Short-term foreign currency rating is also downgraded to 'F1' from 'F1+' and the Country Ceiling is lowered to 'AA-' (AA minus) from 'AA'."

"'The downgrade reflects new data on the balance of payments and the international investment position that points to a material deterioration in Iceland's external balance sheet, amplifying concerns about external debt sustainability' says Paul Rawkins, Senior Director in Fitch's Sovereign team in London."

"Significantly higher net investment income outflows - primarily external interest payments - contributed to an unprecedented current account deficit of 27% of GDP in 2006, up from 16.3% in 2005, while net external debt rose to over 200% of GDP and 429% of current account receipts, compared to Fitch's previous end-2006 forecasts of 161% and 323% respectively."

"'Such elevated ratios depict a highly leveraged economy poorly positioned to surmount a prolonged bout of global risk aversion and/or higher international interest rates' says Mr Rawkins. 'Moreover, with the current account deficit having continued to deteriorate during the course of 2006, it is becoming increasingly hard to conceive of a smooth unwinding of Iceland's macroeconomic imbalances.'"

"A macroeconomic policy mix which exhibits little appetite for fiscal tightening in an election year - the general government surplus is set to decline to 1.1% of GDP in 2007 from 5.3% in 2006 - leaves monetary policy to shoulder most of the burden of policy adjustment in the guise of ever higher interest rates. Set against this background, Fitch believes that the risks of a 'hard landing' - entailing a severe contraction of private sector demand over a sustained period - have increased."

"Fitch says that with interest payments now accounting for more than half the current account deficit, the magnitude of external adjustment - a swing of some 15% of GDP in the primary (non-interest) balance - required to stabilise the net external debt/CXR ratio would exceed anything that Iceland has experienced in the past."

"Few countries have attained this degree of adjustment without sustaining a period of low or negative growth and the agency expects Iceland's current account deficit to remain in double digits for some time to come. Meanwhile, Iceland's negative net international investment position of 119% of GDP in 2006 (up from 84% in 2005) now ranks among the highest of any sovereign in the 'AA'/'AAA' rating ranges."

"The rising cost of servicing external liabilities relative to the return on external assets also intensifies concerns about the sustainability of higher external borrowing, chiefly by Icelandic banks, to fund investments abroad."

"The agency cautions that countries with seemingly sound public finances cannot afford to be indifferent to private sector-driven macroeconomic imbalances and spiralling net external indebtedness, particularly when banks are the main obligor."

"Fitch takes comfort from the fact that Icelandic banks have addressed concerns about a bunching of foreign debts maturing in 2007, but points out that their net external liabilities remain high at 168% of GDP, while their domestic operating environment could become more difficult, should a 'hard landing' materialise."