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On the Matter of European Bailouts: “They are Making Stuff Up as They Go Along”

“As Greece lurched toward its first bailout in early 2010, the largest bank in Cyprus was stocking up on Greek bonds.

That lethal misjudgment helped drive the government in Nicosia toward a rescue of its own, a 10 billion-euro ($13 billion) project involving measures so novel — beyond an unprecedented raid on bank deposits that sparked a global uproar — that policy makers initially kept them under wraps.

Neither a plan for Cyprus to sell gold reserves nor one to repay a loan from the Cypriot central bank with real estate was disclosed in a statement by euro-area finance chiefs in the early morning hours March 16. The measures were cited by Jeroen Dijsselbloem of the Netherlands, the group’s chief, in a confidential recap, which was obtained by Bloomberg News.

“It’s clear they’re making stuff up as they go along: every bailout is different in an unexpectedly horrible new way,” Alexander Apostolides, an economics lecturer at European University Cyprus in Nicosia and a member of the Cypriot government’s economic-advisory council, said in an interview. “They’re not really thinking ahead.”

With another small country, Slovenia, fighting to avoid the euro region’s sixth bailout, the Cypriot misadventure raises the question of how much policy makers have learned in more than three years of straining against the debt crisis.

Hemmed in by an election campaign in Germany, along with demands of the European Central Bank and the International Monetary Fund, policy makers are fighting record unemployment, a second year of recession and austerity and bailout fatigue to keep the 17-nation currency bloc whole.

Building Institutions…”

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The $DXY Falls to an Eight Week Low

“The Dollar Index (DXY) dropped to an eight- week low amid speculation the Federal Reserve will affirm its commitment to maintaining bond purchases when it announces its policy decision today.

The U.S. currency weakened for a fourth day against the euro before an industry report forecast to show America’s private employers added the fewest jobs in six months. The Fed is buying $85 billion of bonds a month as part of its quantitative-easing strategy to put downward pressure on borrowing costs. The pound strengthened after U.K. manufacturing shrank less than economists predicted last month. Australia’s dollar fell after Chinese manufacturing growth slowed.

“Into the Fed meeting I think that we’re going to see further U.S. dollar selling pressure,” said Hans-Guenter Redeker, head of global foreign-exchange strategy at Morgan Stanley in London. “The Fed is going to signal that it’s going to stay accommodative, that it’s going to reconfirm the link between unlimited quantitative easing and the state of the economy.”

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, fell 0.2 percent to 81.58 at 7:01 a.m. in New York after dropping to 81.569, the lowest since Feb. 28.

The dollar declined 0.2 percent to $1.3191 per euro after depreciating to $1.32, the weakest level since April 17. The greenback was little changed at 97.53 yen. The euro strengthened 0.3 percent to 128.66 yen.

The U.S. currency may decline below 94 yen within the next three weeks, Morgan Stanley’s Redeker said.

Fed Purchases…”

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Commodities Fall for a Second Day on Slowing Global Growth Data

“Commodities dropped for a second day, led by metals and oil after data showed weaker manufacturing growth in China. U.K. stocks and U.S. equity futures rose on bets the Federal Reserve will continue its stimulus efforts.

The Standard & Poor’s GSCI gauge of 24 commodities fell 1.2 percent as of 8:03 a.m. inLondon, as aluminum slipped 2.2 percent and oil declined 1.5 percent. The U.K.’s FTSE 100 Index rose 0.6 percent, while S&P’s 500 Index futures added 0.1 percent. Japan’s Topix Index fell 0.6 percent after posting its best month since 1999. The Dollar Index (DXY) slipped for a fifth straight day. Most European markets were closed for a holiday.

Chinese and Australian reports today signaled a slowdown inmanufacturing as a U.K. Purchasing Managers’ Index showed a third month of contraction. U.S. private employers probably added the fewest jobs in six months, after business activity unexpectedly shrank, according to a Bloomberg survey. The Federal Reserve may consider maintaining its bond-buying program at a two-day meeting concluding today, a separate survey shows.

“There is little doubt that risks to global economic growth for 2013 are tilted to the downside,” said Matthew Sherwood, the Sydney-based head of investment market research at Perpetual Ltd., which manages about $25 billion. “Earnings growth after several years of very subdued performance still seems a bit of a stretch.” …”

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The Aussie Dollar Holds Gains on Expectations of Global Easing

Australia’s dollar held a two-day gain versus the U.S. currency on bets the Federal Reserve will affirm its commitment to so-called quantitative easing at the end of a policy meeting today.

New Zealand’s kiwi dollar maintained its biggest monthly advance against the greenback since September ahead of U.S. data forecast to show manufacturing activity cooled and private employers added the fewest jobs since October. Factory production expanded in China, the biggest trading partner of both South Pacific nations.

“Not everything is all bright and rosy” in the U.S., Janu Chan, a Sydney-based economist at St. George Bank Ltd., said on a conference call with clients. “QE from the Fed and elsewhere can only mean further upside for the Australian dollar.”

The so-called Aussie slid 0.2 percent to $1.0353 as of 5:01 p.m. in Sydney, following a 0.9 percent gain over the previous two days. The New Zealand dollar added 0.1 percent to 85.72 U.S. cents, after rising 2.3 percent in April.

Two-year Australian bond yields touched 2.56 percent, the lowest since Nov. 1. Ten-year rates were little changed at 3.1 percent.

Prospects the Fed will taper its $85 billion of monthly bond purchases have diminished amid a slowing economic recovery. Minutes from the March meeting show several Fed officials discussed slowing the pace of stimulus.

Private employment rose by 150,000 in April after gaining 158,000 the previous month, data from the Roseland, New Jersey- based ADP Research Institute will probably show today, according to the median estimate of economists surveyed by Bloomberg News.

U.S. Manufacturing

The Institute for Supply Management manufacturing index, sank to 50.6 in April from March’s 51.3, a second consecutive decrease, according to a separate Bloomberg poll ahead of today’s release. Readings above 50 signal expansion….”

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Japan Teams Up With Germany in Opposing Fed Liquidity Rule

Japan joined Germany in opposing a proposed U.S. Federal Reserve rule aimed at compelling large foreign bank holding companies to hold more capital and liquidity in their American subsidiaries.

Bank of Japan Executive Director Hiroki Tanaka asked the Fed Board of Governors in an April 30 letter to “carefully consider major concerns” it has about the proposed rule. Japan’s Financial Services Agency asked that the proposed rule take into account “deference to home country regulation and supervision” in a letter signed by Masamichi Kono, the regulator’s vice commissioner for international affairs.

The letters followed an April 26 note by Bundesbank Vice President Sabine Lautenschlaeger and Bafin President Elke Koenig to the Fed board that “‘go it alone’ national initiatives can tend to weaken the global setup and stability” of systemically important banks “instead of stabilizing them.”

The Fed’s proposal would affect Deutsche Bank AG, Germany’s biggest lender, which last year dropped its bank holding company status so that it could meet U.S. requirements without assigning additional capital and liquidity to its unit in the country. Mitsubishi UFJ Financial Group Inc. (8306), Japan’s biggest publicly traded bank, has operations in the U.S. including its San Francisco-based UnionBanCal Corp. unit.

Global Efforts…”

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