Google, Microsoft Fight to Take TV White Space for Beyond Wi-Fi

June 2 (Bloomberg) -- U.S. government engineers are winding up lab tests that will help determine whether Google Inc.'s plan to beam Internet searches over vacant airwaves would interfere with digital television signals.

The findings will help regulators decide the future use of intervals between TV channel frequencies. The largest technology companies are urging the U.S. to give mobile-phone users free access to those airwaves, known as white spaces.

Google and Microsoft Corp. propose using the white spaces to expand the $24.5 billion market for mobile Web services. Google co-founder Larry Page said the unused frequencies could become ``Wi-Fi on steroids,'' blanketing the nation with high-speed Internet access. Broadcasters such as Walt Disney Co.'s ABC say the plan would disrupt TV reception.

``This is a very contentious proceeding,'' said Federal Communications Commission Chairman Kevin Martin, whose agency will decide the matter, in an interview. ``What we're doing is different. It's not testing a consumer product. Rather, it's testing prototype devices to help us set the rules at the beginning.''

Professional sports leagues including the National Football League, musicians and theatrical performers, who use wireless microphones operating on white space frequencies, also are fighting the proposal.

The FCC is evaluating devices submitted by proponents of the plan that are designed to prevent interference. If the technology works, the FCC could adopt rules this year to allow wider access to the airwaves, Martin said. Lab trials, set to end soon, will be followed by research in the field.

Contentious Tests

During a recent test in Columbia, Maryland, two engineers adjusted sensitivity levels on a Motorola Inc. prototype -- a laptop plugged into a black box five times its size -- to see whether it detected the presence of broadcast signals.

Proponents say this type of technology can be built into mobile devices, enabling them to avoid occupied channels automatically. The lab is also testing devices from Amsterdam- based Royal Philips Electronics NV and Saratoga, California-based Adaptrum Inc.

Former FCC Chairman Michael Powell proposed opening the white spaces in 2004. Microsoft and Philips submitted prototypes of sensing devices to the FCC last year. Initial tests found they didn't consistently detect broadcasters' signals. The FCC began a second round of tests in January.

Martin has allowed the public to observe the trials. Lawyers and engineers from Schaumburg, Illinois-based Motorola, microphone maker Shure Corp., located in Niles, Illinois, and broadcast industry groups visit the lab regularly. If the FCC opens the white spaces, each consumer product will need separate approval.

`Significant Problems'

Google's Page, in Washington to meet lawmakers, called interference concerns ``fiction'' during a May 22 speech. The National Association of Broadcasters last week sent a letter to every member of Congress saying technology companies want to divert attention from ``significant problems'' with the devices.

The U.S. last year ranked 15th in percentage of population subscribing to high-speed Internet service, down from 12th in 2006, said the Paris-based Organization for Economic Cooperation and Development.

Page said the white-spaces plan would help the U.S. catch up because the airwaves could form a free national wireless broadband network.

That would help Mountain View, California-based Google, owner of the most popular Internet search engine, to sell more advertising on mobile phones and Redmond, Washington-based Microsoft, the world's largest software maker, to increase revenue from mobile applications and services.

Consumer spending on U.S. wireless data services grew 55 percent to $24.5 billion last year, according to Chetan Sharma Consulting in Issaquah, Washington.

TV Plan

Broadcasters would rather see the government sell licenses letting carriers use white spaces only in rural areas. That would protect TV signals because licensees would be accountable if interference occurs, said David Donovan, president of trade group Association for Maximum Service Television.

Permitting unlicensed devices to use those channels, as envisioned by Google, would cause untraceable interference for millions of TVs that use over-the-air signals, Donovan said.

``If you're in an apartment and suddenly your set keeps going out, how do you know what's doing it?'' he said. ``Even if you did, what would you do? Knock on the guy's door and take his PDA away from him?''

`Not White Space'

Interference might endanger performers who use wireless equipment to take cues from directors, said Mark Dennis, head of audio for Cirque du Soleil's KA show in Las Vegas.

``The whole term `white spaces' itself is a misnomer,'' Dennis said. ``It's not white space. We're using it.''

Medical device makers say the plan may disrupt hospital gear that uses channel 37. General Electric Co.'s health-care unit wants the FCC to bar white-space devices on channels 36 and 38.

Google urged the FCC to set aside those channels for wireless microphones to protect medical equipment and productions like Cirque du Soleil's. Motorola and Google proposed letting microphone users set up antenna-like ``beacons'' to help white- space devices avoid the airwaves.

``We have as much interest as any other American does in making sure folks can enjoy Broadway shows and NFL football games without being hampered by interference,'' Google lobbyist Richard Whitt said.

To contact the reporter on this story: Molly Peterson in Washington at mpeterson9@bloomberg.net

Merkel, Germany Veer Toward Left, Risking Export-Fueled Gains

By Andreas Cremer and Leon Mangasarian

June 2 (Bloomberg) -- German Chancellor Angela Merkel is used to grappling over her pro-business agenda with her Social Democratic Party coalition partners. Now she's dealing with pressure from an unexpected source: her own Christian Democratic Union.

The Social Democrats have stymied Merkel for three years, blocking proposals to simplify the tax system and loosen labor laws. As they now push for a universal minimum wage, the CDU is increasingly backing policies opposed by business, including a pension-payment increase.

Driving the political shift is a rising backlash against globalization in the world's largest exporter. The anti- capitalist Left Party is gaining ground in the run-up to September 2009 elections, and even senior members of Merkel's party have taken to criticizing world financial markets.

President Horst Koehler, 65, a Christian Democrat, on May 14 depicted the markets as ``monsters,'' drawing praise from across the political spectrum. Merkel herself condemned some executive pay as ``fantasy compensation'' late last year.

The rhetoric, and the policies behind them, may threaten the economic gains that pulled Germany out of its 1995-2005 doldrums, when its expansion trailed the euro region. Nokia Oyj, Continental AG and other manufacturers already are moving jobs to Eastern Europe, where labor is cheaper.

A `Dangerous Mix'

The moves make for a ``very dangerous mix,'' says Franz Fehrenbach, 58, chief executive officer of Robert Bosch GmbH, the world's largest auto-parts maker. ``It's my concern that this mix will lead us into the next crisis.''

A weakening in Germany's economy would reverberate throughout the euro region. Germany accounts for about one-third of the 15-nation bloc's gross domestic product. It is also the biggest export market for France and Italy, and its growth has helped Europe avoid the worst of a U.S.-led economic slowdown.

``It's important for the direction of the European economy that Germany continue to do well,'' says Robert Barrie, chief European economist at Credit Suisse Group in London. ``If the German economy can continue to hold up, then maybe growth won't be that weak in the euro zone.''

Merkel promised business-friendly policies when her Christian Democrats formed a ``grand coalition'' with the rival Social Democrats in 2005, paying for a payroll tax cut with a sales-tax increase in its first year. Since then, she has shelved proposals to simplify the tax system, make further tax cuts and loosen labor-market laws.

Driving Force

The retreat signals that the Left Party ``has become the driving force in German politics,'' says Manfred Guellner, head of Berlin-based polling company Forsa.

Led by former Finance Minister Oskar Lafontaine, 64, the Left Party includes former East German communists and renegade Social Democrats. It won seats for the first time in three western state parliaments this year; its success in the city- state of Hamburg helped force Merkel's party into a coalition with the Green Party after losing its majority there.

The Left is benefiting from a perception among many Germans that they have been excluded from the country's economic advance. Economic growth accelerated to the fastest pace in 12 years in the first quarter, and the unemployment rate declined to its lowest in 15 1/2 years. Yet consumer-price inflation has outstripped take-home pay gains every year since 2001, according to the DGB trade union federation.

More Hurt Than Help

A survey for N24 television by the pollster Emnid found that 88 percent of the 1,000 Germans surveyed said they hadn't personally benefited from the economic upswing. Almost 40 percent of Germans say globalization hurts them more than it helps, Forsa's Guellner says.

That's why anti-globalization rhetoric resonates with people like Frank Dressler, 37, a factory worker at Herlitz PBS AG, which makes stationery and office products. Last year, 40 percent of the Berlin-based company's 310.5 million euros ($486 million) in revenue came from international markets, its annual report says.

``The German economy looks good for executives, but not for the working man,'' Dressler says.

Globalization has always been a tough sell in Europe, given its history of state business ownership, employment guarantees and strong unions. When Franz Muentefering was chairman of the Social Democratic Party three years ago, he compared investors seeking short-term gains to the biblical plague of locusts. French President Nicolas Sarkozy this year called for an end to a ``capitalism of lies, of frivolity.''

Waiting for Elections

In Germany, touting globalization is only getting tougher. ``The political caste no longer wants economic reforms because they're looking at the 2009 elections,'' says Sebastian Louis, head of RHL Unternehmensberatung GmbH, a Berlin-based business consultant.

Merkel, 53, won the most applause during her party's annual conference in December when she criticized compensation for departing executives and urged company supervisory boards to set ``reasonable'' pay levels. Outrage followed the Feb. 14 disclosure that prosecutors were investigating whether Deutsche Post AG CEO Klaus Zumwinkel evaded 1 million euros in taxes by transferring money to Liechtenstein. Zumwinkel, who quit Feb. 15, earned 2.96 million euros in 2006, according to the Bonn- based company's annual report.

Fanning the Skepticism

``Sentiment in Germany is now marked by skepticism toward globalization,'' says Juergen Thumann, head of the BDI industry lobby representing Daimler AG and Siemens AG among 107,000 of Germany's biggest companies. ``Politicians are fanning this skepticism.''

Germany's economic turnaround, fueled by companies exploiting the boom in emerging markets, was helped by measures passed under Chancellor Gerhard Schroeder, Merkel's Social Democratic predecessor. His government cut jobless benefits, reduced income taxes and made it easier to fire workers.

Merkel has failed to deliver on promises to further cut income taxes and rein in medical spending. She also rolled back a Schroeder policy by raising jobless benefits to people older than 50. And she bowed to Social Democratic demands by expanding the scope of a targeted minimum wage to cover workers in more industries than she wanted, and by agreeing to sell less of Deutsche Bahn AG, the state railway than she had proposed.

On April 8, her Cabinet decided to award 20 million retirees an unplanned 1.1 percent increase in pension benefits this year, almost double the budgeted figure, at a cost of 3 billion euros.

`Incomprehensible'

The pension rise was ``a catastrophe in the medium term,'' Norbert Walter, chief economist at Deutsche Bank AG in Frankfurt, said in a May 20 Bloomberg Television interview. ``It's incomprehensible how the bill for one's own splurge can be passed on to the next generation.''

The Left Party's rise has chipped away at support for both Merkel's party and its main coalition partner. Approval for the Christian Democrats fell 1 point to 36 percent while backing for the Social Democrats slid 2 points to 25 percent, the lowest in almost four years, an Infratest poll of 1,000 people published May 16 showed.

The declining popularity of the main parties is leading to new alliances. The CDU's team-up with the Greens in Hamburg is their first partnership at the state level.

Even as both the CDU and SPD rule out partnerships with the Left Party at the national level, they are embracing its policies. Merkel's Cabinet has approved measures to give workers a greater share of corporate profits and to increase child allowances, while the Social Democrats push for universal minimum pay.

Lafontaine, the Left Party leader, took credit for the shift at his party convention May 24. ``We have the wind of history in our sails,'' he said.

To contact the reporters on this story: Andreas Cremer in Berlin at acremer@bloomberg.net; Leon Mangasarian in Berlin at at lmangasarian@bloomberg.net

Hedge Funds Cut Oil Bets as Prices Rose, CFTC Probed

By Robert Tuttle and Grant Smith

June 2 (Bloomberg) -- Hedge-fund managers and speculators reduced bets on higher oil prices by 80 percent since July as crude futures rose to records and U.S. regulators started investigating trading, government data show.

So-called speculative net long positions fell to 25,867 contracts on the New York Mercantile Exchange in the week ended May 27 from a record 127,491 on July 31, according to a U.S. Commodity Futures Trading Commission report on May 30.

The decline may complicate the CFTC's probe as regulators try to determine how much of the rise in oil to more than $135 a barrel last month was caused by speculators who may have manipulated the market instead of consumer demand. The CFTC, under pressure from Congress, said May 29 it was investigating the doubling of oil prices the past year and said it will consider giving more detail on the types of oil investors and their holdings.

``The real problem is with passive investors like pension funds and index traders, who do not really qualify as speculators because they're long term'' holders of oil contracts, said Olivier Jakob, managing director of Petromatrix Gmbh, a consulting company in Zug, Switzerland. ``There are no numbers on index traders, that's why the CFTC is going to ask for them and publish them.''

U.S. Treasury Secretary Henry Paulson rejected suggestions that the oil price surge is due to the falling dollar and speculative investment funds.

Treasury View

``If you look at the facts, they show that the price of oil is about supply and demand,'' Paulson told reporters traveling with him on May 30 on a plane to Jeddah, Saudi Arabia.

Unusual fluctuations in cotton prices that disrupted sales by farmers in March are also the target of an investigation by the CFTC, two people familiar with the probe said May 31. Cotton traded on IntercontinentalExchange Inc.'s ICE Futures U.S. unit rose to a 12-year high of 92.86 cents a pound on March 5, then fell 26 percent by March 20.

Results of the cotton probe may be released as soon as June 3, said the people, who asked not to be identified because it hasn't been made public.

Scrutiny of the oil market increased as Congress held hearings May 22 and oil soared to a record $135.09 a barrel the same day, threatening the U.S. economy and spurring inflation. OPEC President Chakib Khelil on May 31 blamed record prices on speculation and the declining U.S. dollar, saying there's no shortage of crude.

Prices fell the most since March last week, when crude oil for July delivery declined 3.7 percent to close at $127.35 a barrel on the New York Mercantile Exchange.

`Driven by Fundamentals'

Some investors said the decline shows the market isn't being manipulated. Total speculative long positions in New York futures fell to 215,999 contracts in the week ended May 27, down 18 percent from a record 264,395 on July 31, according to CFTC data.

``There is good reason why prices are high, and it's driven by fundamentals,'' said Paul Tossetti, director of oil market analysis at consultants PFC Energy in Dallas. ``When you look at the number of players, the number of open positions, I don't know how anybody can manipulate anything.''

Global oil demand, forecast to increase 1.2 percent this year, may outpace supply growth as energy consumption increases, especially in China and India, the Paris-based International Energy Agency said in a May 13 report.

The CFTC has been investigating the transportation, storage and trading of crude oil in the U.S. since December. The probe includes oil futures contracts.

`No Stone Unturned'

Acting Chairman Walter Lukken said in an interview May 30 the CFTC will leave ``no stone unturned'' to make sure the oil market isn't being manipulated.

Speculators ``are playing the commodities without question, and they are taking bets on where it's going to go, but they are betting on the fundamentals,'' said Joseph Stanislaw, chief executive officer at JAStanislaw Group LLC, a consulting company. ``Demand is growing at a faster rate than production capacity.''

The CFTC's Commitment of Traders report, issued each Friday, shows how many futures contracts have been bought, referred to as ``long'' positions, or sold, known as ``short'' positions, by three types of market users.

Commercial traders, including oil producers and refiners, use the market to hedge their business, while non-commercial traders include financial speculators and hedge funds. The third category is for non-reportable traders, whose positions are too small to consider.

Futures are increasingly being bought and sold by investors that track commodity index futures such as the Reuters/Jefferies CRB Index. The CFTC provides some weekly information on index trader positions for 12 agricultural commodities, including corn, cotton and soybeans. It doesn't provide the data on oil.

The commission decided to start publishing figures for index traders in agricultural futures in December 2006, and is now considering broadening that scope to oil markets.

To contact the reporter on this story: Grant Smith in London at Robert Tuttle in New York at rtuttle@bloomberg.net

Pensions' Dollars Shorted by Hedge Funds Have History on Side

By Bo Nielsen and Anchalee Worrachate

June 2 (Bloomberg) -- Whenever pension funds, mutual funds and insurance companies decide they should own dollar assets that are out of favor with hedge funds, the hedge funds lose.

Institutional investors bought more dollars than they've sold this year, according to State Street Corp. and Bank of New York Mellon Corp., the largest money managers for institutions. That's significant because speculators such as hedge funds raised bets against the greenback by 36 percent, data from the Commodity Futures Trading Commission in Washington show.

History indicates institutional investors may be on to something. The dollar gained in 71 percent of the quarters over the past decade when they were net buyers, according to Boston- based State Street. They bought more than they sold in all of the quarters when, like now, benchmark interest rates were below inflation and the current account deficit, the broadest measure of trade, exceeded 3 percent of the economy.

``The dollar can do quite well in this slow-growth environment,'' said Richard Batty, global investment strategist at Standard Life Investments in Edinburgh, a mutual and pension fund that manages the equivalent of $283 billion. ``We've had for some time a positive position on the U.S. dollar.''

After falling to a 13-year low of 78.993 in March, the dollar has gained 2.5 percent to 80.993, according to a trade- weighted index maintained by the Federal Reserve that includes the euro and yen. It has rallied by the same amount versus the euro to $1.5554 since hitting a record low of $1.6019 on April 22.

`Next to Capitulate'

Dollar buying among institutional investors from mid-March has been twice as strong as the 12-month average, according to Bank of New York Mellon, which has $23 trillion under custody. That coincides with the Fed's bail-out of Bear Stearns Cos., a move that signaled that the central bank wasn't going to let a securities firm fail and drag down the economy.

``Institutional investors have been gradually building a long-dollar position,'' said Michael Metcalfe, the London-based head of macro strategy at State Street, which has $14 trillion under custody. ``It reflects a belief that the dollar will rebound. Bearish currency speculators will be the next to capitulate.''

The currency is forecast to gain 7 percent against the euro and 5 percent against the pound by the end of March, according to the median estimate of 42 analysts surveyed by Bloomberg.

Pension, mutual fund and insurance companies, which tend to hold their positions longer than speculators, controlled $59.4 trillion in 2006, according to an October 2007 report from the McKinsey Global Institute. Hedge funds and private equity investors had $2.1 trillion under management.

Hanging On

Dollar bears are hanging on to their pessimistic view on speculation faster inflation will keep the economy from rebounding while the trade deficit weighs on the greenback. Plus, the Fed's target rate for overnight loans between banks, at 2 percent, is 1.9 percentage points below the trailing 12- month consumer price index.

``Conditions for a dollar rebound are not yet in place,'' said Robert Kowit, senior portfolio manager who manages $3 billion of global bonds at Federated Investors Inc. in Pittsburgh. ``The dollar is going to drift lower.''

The total number of contracts, owned by hedge funds and futures trader, betting on a decline in the dollar against major currencies net of those betting on a gain rose numbered 201,103 on May 27 from 147,887 on Dec. 31, figures from the Commodity Futures Trading Commission show.

Bears Reconsider

Prospects that the Fed may need to raise rates later this year to stem inflation has even some hedge fund bears reconsidering their positions. Futures on the Chicago Board of Trade show a 31 percent chance the Fed will increase its target rate to 2.5 percent by year-end, up from 16 percent a month-ago.

ECU Group Plc of London closed out trades in mid-May betting against the dollar, and debates at the hedge fund about whether to start buying the currency are ``intense,'' said Neil MacKinnon, a former U.K. Treasury official who is now chief economist at the fund, which manages about $1.6 billion.

``The dollar may be getting to an inflection point,'' MacKinnon said. ``Its dangerous to ignore that.''

The Fed forecasts the U.S. economy will grow as fast as 2.8 percent next year, up from between 0.3 percent to 1.2 percent this year. The euro zone will slow to 1.5 percent from 1.6 percent this year, and Japan to 1.4 percent from 1.5 percent, according to the median estimate of Bloomberg surveys.

Trade Improves

Another reason why bulls like the dollar is exports. The trade deficit shrank to an annual pace of $480.2 billion in the first three months of the year, the smallest since the third quarter of 2002. Trade's contribution to growth jumped to 0.8 percentage point, four times more than previously estimated.

``Right now is not a good time to sell the dollar,'' said Max Tessier, head of foreign exchange at Caisse de Depot et Placement du Quebec, a pension fund that manages about $155 billion from Montreal. ``I've been a dollar bear since the beginning of the year, but we got the move we were looking for.''

Tessier said the dollar may end the year at $1.50 per euro and at about 127 versus the yen from TK at the end of last week. The risk of further U.S. economic weakness is keeping him from ``aggressively buying'' the dollar, he said.

To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

Dollar Snaps Gain Against Yen Before Manufacturing, Jobs Data

June 2 (Bloomberg) -- The dollar snapped a five-day rally against the yen on speculation a report today will show U.S. manufacturing contracted for a fourth month, limiting the Federal Reserve's scope to raise interest rates.

The U.S. currency may decline before a report on June 6 that will probably show U.S. companies trimmed workers for a fifth month. The British pound fell the most in two weeks after people familiar said Bradford & Bingley Plc, the U.K.'s biggest mortgage lender to landlords, needs to raise money from shareholders and will lower its profit forecast.

``Disappointing economic data may encourage dollar selling, particularly against currencies where interest rates are more likely to rise,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The rate differential is likely to work against the dollar.''

The U.S. currency bought 105.31 yen at 9:56 a.m. in Tokyo from 105.52 yen at the end of last week. The dollar traded at $1.5554 against the euro from $1.5554 late in New York on May 30. The euro was at 163.80 yen from 164.15 yen. The dollar may fall to $1.56 per euro today, Soma forecast.

The pound fell 0.3 percent to $1.9758 and declined to 78.72 pence per euro versus 78.46 late last week. Bradford & Bingley Chief Executive Officer Stephen Crawshaw quit yesterday citing health reasons. TPG Inc., a leveraged buyout firm, is in talks to buy a 20 percent stake, two people familiar with the discussions said. Bradford & Bingley plans to raise an additional 250 million pounds ($494 million) from shareholders, the people added.

`Subprime-Related Losses'

``Amid thin trading this morning, the pound fell sharply because of this news,'' said Kenichi Nishii, manager of the foreign-exchange trading department at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's biggest publicly traded lender. `There is some talk about a profit warning, raising concern over subprime-related losses in the U.K.''

The currency will decline to 81 pence per euro in two weeks, Nishii said.

The Australian dollar bought 95.48 U.S. cents from 95.59 cents late in New York. The Reserve Bank of Australia will keep its benchmark rate at a 12-year high of 7.25 percent when it announces its decision tomorrow at 2:30 p.m. in Sydney, according to a Bloomberg News survey.

The Institute for Supply Management's factory index, due at 10 a.m. New York time, fell to 48.5 in May from 48.6 in the previous month, according to a separate survey. That would be the fourth month below fifty, indicating a contraction. U.S. nonfarm payrolls declined by 60,000 workers, according to another survey conducted before the Labor Department report.

Fed Futures

Futures on the Chicago Board of Trade on May 30 showed a 26.8 percent chance the Fed will raise its target rate by a quarter-percentage point to 2.25 percent on Sept. 16, down from 33.6 percent the previous day. The central bank has cut rates seven times since September. Japan's benchmark rate is 0.5 percent and Europe's is 4 percent.

Pension funds, mutual funds and insurance companies bought more dollars than they've sold this year, according to State Street Corp. and Bank of New York Mellon Corp., the largest money managers for institutions. That's significant because speculators such as hedge funds raised bets against the greenback by 36 percent, data from the Commodity Futures Trading Commission in Washington show.

Pension Funds

History indicates institutional investors may be on to something. The dollar gained in 71 percent of the quarters over the past decade when they were net buyers, according to Boston- based State Street. They bought more than they sold in all of the quarters when, like now, benchmark interest rates were below inflation and the current account deficit, the broadest measure of trade, exceeded 3 percent of the economy.

``The dollar can do quite well in this slow-growth environment,'' said Richard Batty, global investment strategist at Standard Life Investments in Edinburgh, a mutual and pension fund that manages the equivalent of $283 billion. ``We've had for some time a positive position on the U.S. dollar.''

U.S. Treasury Secretary Henry Paulson said yesterday Middle East leaders haven't indicated concerns with their fixed exchange rates to the dollar and understand that abandoning the peg would have little impact on rising prices.

``There's quite an awareness that the dollar peg does not influence inflation to a significant degree,'' Paulson told reporters en route to Abu Dhabi after meeting with Qatari central bank Governor Abdullah Bin Saud al-Thani and Prime Minister Sheikh Hamad bin Jasim bin Jaber al-Thani in Doha. ``Ending the peg is not the solution to the inflation problem.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netKosuke Goto in Tokyo at kgoto2@bloomberg.net

Dollar Heads for Monthly Gain Against Yen on Oil, Fed Outlook

May 30 (Bloomberg) -- The dollar headed for a second monthly advance against the yen and euro as rising stocks and declining crude oil brightened the outlook for the U.S. economy, the world's biggest oil importer.

The U.S. currency traded near a three-month high versus the yen as traders increased bets the Federal Reserve will raise interest rates later this year. The yen fell against the New Zealand dollar and the Brazilian real, favorites of so-called carry trades, as a rally in stocks encouraged investors to boost holdings of higher-yielding assets funded in Japan's currency.

``The dollar looks strong,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital, the U.K.'s third-biggest bank. ``With the market turmoil calming down, people are focusing on inflation risks. Falling oil prices are positive for U.S. growth, bringing some relief to people.''

The dollar traded at 105.44 yen at 1:15 p.m. in Tokyo, from 105.50 yen in New York yesterday, when it reached 105.87, the highest since Feb. 28. The U.S. currency traded at $1.5521 per euro, from $1.5519 yesterday, when it touched $1.5486, the strongest level since May 19. The euro traded at 163.66 yen from 163.71 yen yesterday and 162.36 a month ago.

The dollar is heading for a 1.5 percent gain against the yen and a 0.7 percent advance versus the euro this month. The U.S. currency may reach 106.20 yen and $1.5450 a euro today, Ogawa forecast.

Carry Trades

The yen fell 1.3 percent to 82.31 per New Zealand's currency and 2.9 percent to 64.3922 versus the Brazilian real. It also traded at 100.75 per Australian dollar from 100.80 in New York yesterday, when it fell to 101.08, the lowest since Nov. 14, as the MSCI Asia Pacific Index of regional shares advanced for a second day.

``With investors' risk appetite improving, the yen is highly likely to weaken against major currencies across the board,'' Koji Fukaya, a senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader, wrote in a research note today. Japan's currency may fall to 107 per dollar in one month, Fukaya forecast.

In a carry trade, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is currency market moves erase those profits.

Japan's benchmark rate of 0.5 percent is the lowest among major economies. Government reports today showed Japan's consumer-price inflation slowed to a 0.9 percent pace in April and job vacancies fell to a three-year low. The central bank rate is 4 percent in Europe, 2 percent in the U.S., 7.25 percent in Australia, 8.25 percent in New Zealand and 11.75 percent in Brazil.

Yield Spread

The yield advantage on two-year Treasuries over similar- maturity Japanese government debt was about 1.8 percentage points, close to the widest since January. The gap between the yields fell below 1 percentage point in March.

The correlation between the dollar-yen rate and two-year Treasury note yields was 0.97 in the past year.

The dollar may extend gains to a three-month high of 108.62 yen should it close above so-called resistance at 105.70 yen, according to Citigroup Global Markets Inc., a unit of Citigroup Inc., the biggest U.S. bank.

Resistance at 105.70 yen represents the May 2 high, according to a Citigroup research note published yesterday. Resistance is where sell orders may be clustered.

Fed Outlook

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, climbed 0.7 percent to 72.994 this month, following a 1.2 percent rise in April. The U.S. currency traded at $1.9765 against the British pound from $1.9766 yesterday and was at 1.0483 versus the Swiss franc from 1.0494.

Futures on the Chicago Board of Trade show a 34 percent chance the Fed will raise its target rate by a quarter- percentage point to 2.25 percent on Sept. 16, up from 26 percent a month ago.

Crude oil for July delivery fell 0.4 percent to $126.08 a barrel after declining more than $4 a barrel yesterday, the biggest drop since March. The price has doubled from a year ago.

The correlation coefficient between oil and the euro-dollar exchange rate was 0.94 for the past year, indicating the two tend to move in the same direction, Bloomberg data show. A reading of 1 signals they move in lockstep.

European Inflation

The euro was poised for its second straight monthly advance versus the yen on speculation the 15 countries that share the currency are strong enough to withstand a slowdown in the U.S., allowing the European Central Bank to keep interest rates on hold to fight inflation.

A report today will probably show consumer prices in the euro region rose 3.5 percent in May, faster than the 3.3 percent gain in April, according to a Bloomberg survey.

``With the euro-dollar trading fixated by oil prices, stronger-than-expected consumer prices in the euro zone will likely lead to a rebound in the euro,'' Masafumi Yamamoto, head of foreign-exchange strategy in Tokyo at Royal Bank of Scotland and a former Bank of Japan currency trader, wrote in a research note today. The euro may rise to $1.63 by Sept. 30, he wrote.

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

Upbeat U.S. Data Boosts Asian Exporters

Exporters led Asian stock markets higher Thursday after better than expected durable goods orders in the U.S. calmed worries about a slowdown in consumer spending.

In Tokyo, a weaker yen also contributed to enthusiasm for auto and electronics stocks. The Nikkei was up 2.7% to 14,082.30 in midafternoon trading, and the Topix gained 2.2% to 1,377.89.

Consumer electronics giant Sony (nyse: SNE - news - people ) rallied 3.9% to 5,090 yen ($48.47), office equipment manufacturer Canon (nyse: CAJ - news - people ) rose 4.3% to 5,560 yen ($52.95) and automaker Toyota Motor (nyse: TM - news - people ) jumped 2.6% to 5,150 yen ($49.04).

In Tokyo trading, the dollar strengthened to 104.84 yen, up from 104.70 overnight in New York.

In Seoul, the Kospi added 1.6% to 1,834.84, with technology issues rebounding from the prior session's sell-off. Samsung Electronics shot up 2.9% at 712,000 won ($691) after Nomura upgraded its rating on the stock to "buy," citing improving fundamentals in the DRAM market. LG Electronics rose 3.7% at 139,000 won ($135).

The U.S. Commerce Department said Wednesday that orders for items such as aircraft, machinery, cars, refrigerators and computers dipped by a smaller than expected 0.5% in April. Excluding the transportation sector, orders rose 2.5%, the largest gain in nine months.

The Dow Jones industrials rose 45.68 points or 0.4% to 12,594.03 on Wednesday.

'The market got a bit of direction from U.S. markets being up on stronger durable goods data--there seems to be a feeling the U.S. economy is not as bad as had been thought but that feeling might only prove temporary,' said Michael Heffernan, a private client adviser at Reynolds & Co in Sydney.

In Australia, the S&P/ASX 200 gained 0.9% to 5,700.1, while the All Ordinaries rose 0.9% to 5,808.6.

With oil prices rebounding over $131 a barrel, mining heavyweight BHP Billiton (nyse: BBL - news - people ), Australia's biggest oil producer, rose 1.8% to 45.93 Australian dollars ($44.10). Woodside Petroleum (other-otc: WOPEY - news - people ) surged 4% to 65.50 Australian dollars ($62.86). BHP's takeover target Rio Tinto (nyse: RTP - news - people ) added 1.3% to 143.84 Australian dollars ($138.06).

Iron ore stocks also remained in demand with Fortescue Metals trading at record levels, as institutional investors short of the stock topped up their portfolios. Fortescue was up 2.3% at 10.56 Australian dollars ($10.13).

In Hong Kong, the Hang Seng index was up 0.3% at 24,313.37, while the Shanghai Composite index ticked down 1.2 points to 3,457.83.

Banks were the major gainers amid talk of a stake sale in the sector. Wing Hang Bank advanced on reports that China Life Insurance may acquire a stake in one of Hong Kong's smallest family-run banks.

Wing Hang added 1.4% to 112.50 Hong Kong dollars ($14.41). The company issued a statement denying it is in talks with a third party relating to the sale of a stake.

A mainland newspaper, the 21st Century Business Herald, quoted market sources as saying China Life had started negotiations to acquire Wing Hang shares from the Fung family.

Other banks extended gains on hopes they could be potential acquisition targets of bigger financial companies.