Plame charges could sink dollar, bonds, stocks

[Greg]

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Plame charges could sink dollar, bonds, stocks

10/27/05 08:54 pm

CHICAGO (AFX) - The U.S. dollar, Treasurys and American stocks could sell off if top White House aides are indicted on charges they leaked the identity of a CIA employee, analysts said Thursday.

Speculation has mounted that formal charges could be announced Friday by special counsel Patrick Fitzgerald, the final day of a grand jury session.

Karl Rove and I. Lewis "Scooter" Libby are the prime targets of Fitzgerald's investigation, press reports have said. Rove, a long-time political adviser to Bush, is deputy White House chief of staff. Libby is chief of staff for Vice President Dick Cheney.

Any charges could create "political paralysis" at the White House, said Brian Dolan, head of currency research at New Jersey-based trading firm Gain Capital.
Charges would be "detrimental to the dollar, a psychological blow," said Alex

Beuzelin, senior market analyst with Ruesch International in Washington. They would distract Bush from important economic issues like high energy prices, patches of slower growth and deficit reduction, he said.

The dollar's year-to-date run may be in jeopardy should confidence in Bush's ability to steer the economy be shaken.

A weaker dollar, because it cuts U.S. purchasing power, could raise inflation risks at a time that the Federal Reserve is working furiously to stamp out its spread from high energy prices.

U.S. bond yields could rise further if foreigners become less willing to hold so much U.S. debt, raising borrowing costs. Stocks, too, might suffer, but the damage would likely be less than in the "emotional" currency market that tends to be more politically sensitive, said Dolan.

"A spike in interest rates from current levels could potentially prick the housing bubble, which Fed Chairman nominee Ben Bernanke is convinced does not exist," said Peter Schiff, president of Euro Pacific Capital.

"If corporate malfeasance is bad for a firm's stock where senior executives run amuck, it should follow that government malfeasance should impact negatively a country's debt and currency," said David Gilmore, a partner in Connecticut-based currency consultancy FXA. "If it were only so easy ... exceptions are the rule not the exception."

"The key question for markets on pending indictments," said Gilmore, "is how far up the food chain they run?"

The two-year-old investigation is so far believed to be targeted at discovering whether Libby, Rove and others in the White House blew the covert Plame's cover because her ambassador husband, Joseph Wilson, had challenged intelligence Bush used to justify the Iraq war.

Resignations would be expected following any indictments and Bush would presumably move quickly to distance himself from the alleged leaks.

These developments come at a time when Bush's ratings have dropped to the lowest of his presidency, following the administration's handling of the emergency response to Hurricane Katrina, an Iraq war that is losing some popular support, high oil prices and a bungled Supreme Court nomination.

The exact course for financial markets is uncertain. Any reaction may be limited to a day or two, Gilmore said.

The best historical reference for investors may be the fallout of the Watergate scandal, which was limited to Nixon aides, although did ultimately lead to the president's resignation, said Dolan.

But the U.S. was just coming off the gold standard at that time, so currency markets behaved differently than they do today.

More recent memory reminds that the dollar was hammered leading up to and in the immediate wake of the impeachment of President Bill Clinton on perjury and obstruction of justice charges tied to the cover up of his affair with intern Monica Lewinsky.

Over a five-day period in January 1998 that followed the first mention of Lewinsky on Internet gossip site, The Drudge Report, the dollar shed a swift 3.3% against the German mark, the pre-euro proxy for European currencies. The dollar reclaimed that decline during the following week.

The greenback fell over several days to a four-month low against the Japanese yen during December 1998, when the House approved two articles of impeachment against Clinton.

But that example differs from the current situation somewhat, says Dolan, because it directly touched the president.

If anything, investors are looking for any excuse to lighten some dollar holdings; it's made a six-week charge without much pause against the yen, to two-year highs, driven almost exclusively by bets for higher U.S. interest rates. The dollar is just off three-month highs against the euro.

But the dollar never gets too far from the albatross of a huge U.S. financial imbalance, one that relies on foreign savings - buying U.S. debt -- to fund a shortfall in trade. These factors pushed the dollar to its lowest ever against the euro in late 2004.

Ultimately, however, financial market focus will return to how aggressive the Federal Reserve will be with interest rates, Beuzelin said.

Higher rates have helped the dollar recover this year. Bond yields are also rising, with short-term rates at over four-year highs and benchmark 10-year yields grazing six-month highs this week.

This story was supplied by MarketWatch. For further information see www.marketwatch.com.

 

[Greg]

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Durable goods orders plunge

By Tim Ahmann
Thu Oct 27,12:38 PM ET

Government reports on Thursday suggested a possible cooling in the housing market and some economic slowdown due to high energy prices, but analysts said the economy remained robust enough to permit the Federal Reserve to keep raising borrowing costs.

The Commerce Department said sales of new homes rose more slowly than expected last month and house prices dropped, while new orders for durable goods fell sharply.

However, another report from the Labor Department showed a bigger-than-expected drop in first-time claims for jobless benefits last week. Claims had shot up in the wake of Hurricanes Katrina and Rita, but have come down in the past two weeks.

"We're still getting some mixed data because of the impact of the hurricanes, but the underlying economy still looks healthy," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis. "So I don't think today's data change the Fed's thinking about raising interest rates."

The Fed has increased overnight borrowing costs 11 times since June 2004 in a bid to head off inflation concerns. Policy-makers meet again next week and are expected to boost benchmark interest rates again.

Sales of new single-family homes rose 2.1 percent in September to a seasonally adjusted annual rate of 1.222 million units. But the sales pace for June, July and August were all revised lower, and September's rate came in below the 1.250 million unit pace expected by Wall Street economists.

The department said Hurricane Katrina had a minimal impact on new residential sales for September, which were 0.1 percent slower than a year earlier.

While sales rose, the supply of homes available for sale shot up to a record 493,000 at the end of September and the median price fell 5.7 percent to $215,700 -- two signs of a possible cooling in the housing boom.

Low mortgage rates have sustained a long rally in the sector, but recent data have begun to suggest some slowdown. Earlier this week, a trade group said home resales came in flat in September but would have been lower if not for aggressive buying around hurricane-impacted areas.

Mortgage interest rates, too, have begun to climb after largely ignoring rising short-term borrowing costs. The rate on the 30-year mortgage loan, considered the industry benchmark, averaged 6.15 percent in the week ending Thursday, according to mortgage finance company Freddie Mac.

The last time interest rates on 30-year mortgages were higher was during the week of July 1, 2004, when they averaged 6.21 percent.

BIG-TICKET ITEMS

In its report on demand for long-lasting manufactured goods, the Commerce Department said transportation orders fell 4.7 percent in September as civilian aircraft orders plummeted 41.6 percent. But even stripping out the drop in demand for transportation goods, new orders fell 1 percent.

The often-volatile report was weaker than Wall Street expected, but upward revisions to August tempered concerns. Economists had forecast orders for durable goods, which are meant to last three years or more, to fall just 1.1 percent in September, with orders outside transportation up 0.8 percent.

"It is not a big surprise. Some of it is kind of a backlash to this saw-tooth pattern that we have seen in durable goods in the past -- July was weak and August was very strong and now September is relatively weak," said Alan Ruskin, research director at 4CAST in New York.

The durables report showed a 1.2 percent decline in orders for non-defense capital goods, excluding aircraft, which economists view as an indicator of future business spending.

Shipments of durable goods edged up just 0.1 percent. That was less than some had expected and could lead forecasters to reduce projections for overall economic growth.

The Commerce Department is to release its first snapshot of third-quarter growth on Friday. Analysts forecast gross domestic product to expand at a 3.6 percent annual rate in the July-September period, up from 3.3 percent in the second quarter.

The Labor Department said initial claims for state unemployment aid fell 28,000 to 328,000 last week from an upwardly revised 356,000 the prior week.

The department said some 24,000 claims reflected workers idled by the hurricanes, although that number, unlike the headline figures, was not adjusted for seasonal variations. That brought the unadjusted cumulative total of claims stemming from the storms, which slammed into the U.S. Gulf coast in late August and September, to 502,000.

U.S. Treasury prices rose on the weaker-than-expected durable goods and home sales data, while the dollar and Wall Street stocks fell, hit by news of a Securities and Exchange Commission probe of General Motors Corp.'s accounting.