Dollar Declines to Record Low Against Euro as U.S. Sheds Jobs

The dollar fell to the weakest ever against the euro and to an eight-year low versus the yen after a government report showed the U.S. unexpectedly lost jobs for a second straight month in February.

The U.S. currency touched an all-time low against the euro for the eighth trading day in nine as the report bolstered speculation the Federal Reserve will cut the benchmark interest rate as much as a full percentage point to 2 percent at a policy meeting on March 18.

``There is the view that we're quickly sinking into recession and that the Fed only has a limited ability to offset that,'' said Michael Woolfolk, senior currency strategist in New York at the Bank of New York Mellon Corp. ``We certainly see more dollar weakness from here.''

The dollar traded at $1.5426 at 8:44 a.m. in New York from $1.5380 yesterday, and touched $1.5459, the weakest level since the euro's debut in 1999. The U.S. currency traded at 101.68 yen from 102.67 yesterday, and fell to the lowest since January 2000.

The economy lost 63,000 jobs in February, after a decline of 22,000 in January, the Labor Department said. The median estimate in a Bloomberg survey was for a gain of 23,000 last month.

Futures showed traders saw about a 70 percent chance the Fed will lower its target rate to 2.25 percent at a meeting on March 18, for the sixth cut since September. The balance of bets was on a cut to 2 percent, from 3 percent currently.

The euro surged yesterday after European Central Bank President Jean-Claude Trichet held rates at a six-year high of 4 percent and said there is ``strong upward pressure on inflation'' in the euro region, suggesting he's in no hurry to cut interest rates.

``The dollar's decline will not stop until we see a turnaround in employment and the housing market,'' said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Limited in New York, before the release of the report. ``I don't see that change any time soon.''

U.S. Fed Says March TAF Auctions to Expand to $50 Billion Each

The Federal Reserve said it will expand two short-term auctions this month to $100 billion, from $60 billion, to address ``heightened liquidity pressures in term funding markets.''

The Fed said it will increase the amount of its March 10 and March 24 term auction facility sales to $50 billion each from $30 billion each. The Fed also said it will initiate a series of 28-day term repurchase agreements.

The Fed has loaned $160 billion in funds since mid-December in six auctions through the Term Auction Facility, known as TAF, in an effort to increase the supply of funds available for lending.

The auctions began as part of a coordinated effort with central banks in the U.K., Canada, Switzerland and the euro region to increase temporary funds after losses on subprime mortgages made banks reluctant to lend. The European Central Bank and Swiss National Bank have halted their auctions

U.S. Unexpectedly Lost 63,000 Jobs in February

The U.S. unexpectedly lost jobs in February for the second consecutive month, adding to evidence the economy is in a recession.

Payrolls fell by 63,000, the biggest drop since March 2003, after a decline of 22,000 in January that was larger than initially estimated, the Labor Department said today in Washington. The jobless rate declined to 4.8 percent, reflecting a shrinking labor force as some people gave up looking for work.

A weakening job market, combined with lower home values, higher fuel bills and stricter lending rules, raises the odds consumer spending will keep slowing. Falling employment is one reason Federal Reserve Chairman Ben S. Bernanke has signaled central bankers are prepared to lower interest rates again.

``All the lights are flashing red,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts, in an interview with Bloomberg Television. ``We're in a recession. I don't think there is any doubt about it at this point.''

Minutes before the figures were released, the Fed said it will expand two short-term auctions this month to $100 billion, from $60 billion, to address ``heightened liquidity pressures'' in markets. Treasury notes surged and the dollar weakened after the employment figures.

Worse Than Anticipated

Economists had projected payrolls would rise by 23,000 following a previously reported 17,000 drop in January, according to the median of 76 forecasts in a Bloomberg News survey. Estimates ranged from a decline of 110,000 to a gain of 70,000.

The jobless rate was forecast to rise to 5 percent from January's 4.9 percent, with projections ranging from 4.8 percent to 5.2 percent.

Revisions reduced by half the 82,000 increase in payrolls previously reported for December.

Service industries, which include banks, insurance companies, restaurants and retailers, added 26,000 workers last month. Retail payrolls fell by 34,100, the biggest drop in more than five years.

Payrolls at builders fell 39,000, the eighth consecutive month of cutbacks.

Homebuilders are trimming staff as the biggest housing slump in a quarter century deepens. To make matters worse, commercial construction projects are now also on the decline, indicating firings at non-residential builders are likely to increase.

Housing Meltdown

The real estate recession and meltdown in financial markets have led to growing dismissals at banks, mortgage and management companies.

``There's significant weakness in the job market because of construction declines,'' said David Berson, chief economist at Walnut Creek, California-based PMI Group Inc., the second- largest U.S. mortgage insurer. ``For the next six months or so, we may get small negative numbers on payrolls.''

Manufacturing payrolls dropped by 52,000, the biggest decline since July 2003, after falling 31,000 a month earlier. Economists had forecast a drop of 25,000.

Government payrolls increased by 38,000. That means the total decline in private payrolls for the month was 101,000, the biggest drop since March 2003.

Working Week

The average work week was unchanged at 33.7 hours. The average factory work week and overtime hours were unchanged. Average weekly earnings rose $1.68 to $599.86.

Workers' average hourly wages rose 5 cents, or 0.3 percent, to $17.80, in line with forecasts. Hourly earnings were up 3.7 percent from February 2007. Economists surveyed by Bloomberg had forecast a 3.6 percent gain for the 12-month period.

Americans, whose spending accounts for more than two-thirds of the economy, are less upbeat about finding work, a Conference Board report showed last week. The share of consumers who said jobs are plentiful fell and the proportion who said jobs are hard to get jumped, pushing consumer confidence down to a five- year low in February.

``The economic situation has become distinctly less favorable,'' Bernanke said in testimony to Congress last week.

The Fed chairman referred to ``downside'' risks for the economy four times, including ``the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.''

Investors project the Fed will lower the benchmark interest rate by at least half a point between now and its next meeting on March 18, futures prices show.

Fed Outlook

The central bank's regional economic survey this week said ``the hiring pace slowed in various sectors and labor markets loosened somewhat in many districts,'' as economic growth cooled in eight of 12 regions since the start of 2008.

Adecco SA, the world's biggest temporary-employment company, said this week that fourth-quarter profit declined as hiring slowed in the U.S. The Swiss company also said it may miss its long-term goal of sales growth of 7 percent to 9 percent.

``We've been seeing a weak U.S. market for more than a year now,'' Chief Executive Officer Dieter Scheiff said in a March 4 interview.

Retailers could be shocked as potential economic slowdown overshadows optimism

A recession south of the border and an ensuing economic slowdown in Canada could deliver a new set of challenges to Canadian retailers - including some who've boasted that they're relatively recession proof.
Executives from the country's biggest retailers met with several U.S.-based industry giants at a CIBC World Markets industry conference on Wednesday and some expressed confidence in the face of the possible economic troubles.

But their optimism follows ominous data released by Statistics Canada last month that suggest a slowdown in the U.S. economy could erode local spending later this year, especially in Central Canada.

Metro Inc. (TSX:MRU.A) executive vice-president Eric La Fleche told the audience that major supermarket chains could reap the rewards of tightening consumer purse strings.

Instead of eating at restaurants, Canadians might decide to stay home and cook a meal, which means they'll continue to shop at grocery stores, La Fleche told the conference.

That kind of hopeful outlook echoes recent comments from Shoppers Drug Mart (TSX:SC) chief executive Jurgen Schreiber.

Last month, he shrugged off suggestions that a U.S. recession could migrate into Canada and trample the pharmacy chain's steady sales growth.

"We have a significant amount of categories which are relatively independent from recessions," he said, pointing to pharmacy, over-the-counter medications, and cosmetics as Shoppers' saving grace.

But such confidence sounds like wishful thinking to some industry watchers.

"They're recession-proof in terms of absolute needs, but they're not recession-proof in terms of wants and desires," said John Torella, a senior partner with retail consultancy J.C. Williams Group.

"In Shoppers' case, there are many products within their assortment that run into that hope and wants category."

Aside from medications, Shoppers stores stock up on junk foods, magazines and glamour products - aside from cosmetics - which might be considered less necessary by consumers.

Torella suggested that companies should be reacting faster to the potential slower spending.

"Somebody said you can either act, react or pray - and unfortunately many, many marketers are just praying this (economic slowdown) will go away - and it's not," he added.

The latest data on consumer spending from Statistics Canada are mixed.

In December, retail sales rose 0.6 per cent to $35.1 billion, helped by new car sales. Retailers also saw an uptick of 5.8 per cent over the same month in 2006, selling about $412.2 billion of goods.

Despite the somewhat positive results, economists have predicted that sales growth will slow this year.

UBS shares sink on writedown talk

Shares in Swiss bank UBS AG (UBSN.VX) fell on Thursday on speculation it had sold a huge portfolio of risky mortgages at a deep discount and planned to announce another massive writedown in the first quarter.

Analysts said they believed UBS had sold its Alt-A investments -- U.S. mortgages ranked between prime and subprime -- to U.S. bond manager Pimco (ALVG.DE) for 70 cents to the dollar, taking a deep discount on a 26.6 billion Swiss franc ($25.7 billion) portfolio.

Analysts also see the ailing bank making further possible writedowns on a massive 400 billion franc portfolio of repurchase agreements as it rushes to cut its exposure to the capital markets in general and to risky assets in particular.

While the Alt-A sale would help free UBS of some of the uncertainty that has dogged its share price, it could come at a steep price and force additional losses. Any losses resulting from repricing its repo portfolio amid turbulent markets may, however, introduce new doubts about more losses lying in wait.

"UBS may choose to sell down its workout book of mortgages, taking larger upfront losses to reduce uncertainty on capital ratios," Morgan Stanley said in a note to clients.

UBS declined to comment.

UBS shares were down 3.3 percent at 4:19 a.m. EST at 31.18 francs, after touching a new five-year low of 30.88 francs, more than the 1.22 percent fall in the DJ Stoxx European bank index

(.SX7P).

Analysts at J.P. Morgan said they now expected UBS to write down 18.5 billion francs in total assets in the first quarter, compared with J.P. Morgan's previous estimate for 15 billion in writedowns, as a result of the Alt-A sale.

Merrill Lynch analysts said potential further writedowns at UBS could total $21 billion.

Analysts at Morgan Stanley said they had raised their worst-case potential loss estimates for UBS to $15-25 billion from previous estimates of $10-15 billion as a result of any Alt-A sale and repo repricing.

Analysts at bank Exane BNP Paribas said the Alt-A sale, if confirmed, would weigh on shares, as would reputational damage to the franchise.

"Worries on the eventual damage stemming from the bank's fall from the once-world-class wealth management franchise as well as uncertainty on the actual value of the toxic securities will inevitably continue to weigh on the stock price," Exane BNP Paribas said in a note to clients.

Lehman suspends two London equity traders

Investment bank Lehman Brothers has suspended two London equities traders after identifying "issues" with some of their trades, a spokesman for the bank said, adding their suspension is not related to fraud.

"Two traders in our European equities division have been suspended," the spokesman said on Thursday.

"Normal internal controls identified the issues," he added, "The matter is not related to fraud." The spokesman declined to elaborate on the reasons for the suspensions.

Lehman's shares were trading down 4.1 percent at $46.12 at 1619 GMT.

Global banks are re-checking their risk control systems following French bank Societe General's (SOGN.PA: Quote, Profile, Research) rogue-trader scandal to make sure they are properly armed against illegal trades.

Lehman Brothers topped European equity trading with a 17.4 percent market share in the first two months this year, according to Thomson Financial. Trading accounted for 33 percent of the Wall Street investment bank's revenues in 2007.

"Sums involved are not material but the matter is being reviewed in line with our usual procedures," the spokesman added.

Just over a month ago, SocGen revealed 4.9 billion euros ($7.51 billion) of losses which it blamed on a single 31-year-old trader, Jerome Kerviel.
The losses have made the Paris-based bank a potential takeover target.

Zurich-based rival Credit Suisse (CSGN.VX: Quote, Profile, Research) last month suspended some traders, in a "normal control procedures", after finding pricing errors on its books.

Credit Suisse at the time said it appeared the suspended

traders had been slow to adjust the value of their portfolios to fast-moving developments in volatile markets

Corporate Bond Risk Soars as Concerns of Bank Failures Grow

The cost to protect corporate bonds from default soared to a record as hedge fund failures and rising bank funding costs stoked concern that a financial institution may collapse.

Credit-default swaps tied to Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp., the nation's four biggest banks, climbed to the highest on record. Benchmark gauges of credit risk in the U.S., Europe and Asia also set records. Contracts on CIT Group Inc., the largest independent commercial finance company in the U.S., approached distressed levels.

``There's so much concern about a market failure,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``It's a situation where there's just a general lack of trust, and there's a heightened fear of the unknown.''

The perceived risk rose as Carlyle Group's publicly traded mortgage bond fund failed to meet margin calls and investors speculated that Ambac Financial Group Inc., the world's second- biggest bond insurer, won't be able to raise enough capital to keep the AAA rating that it stamped on $556 billion of securities.

Washington Mutual Inc., the largest U.S. savings and loan, had its credit ratings lowered to two steps above junk by Standard & Poor's as a report showed mortgage foreclosures rose to an all-time high at the end of 2007. Speculation also increased that New Mexico mortgage lender Thornburg Mortgage Inc. will be forced into bankruptcy after the company said it received a default notice from its bankers.

`Never, Ever'

Credit-default swaps on the benchmark CDX North America Investment-Grade Index climbed as much as 21.5 basis points to a record 186 basis points, according to Deutsche Bank AG. The index, which ended the day at 185, has surged more than 107 basis points this year.

``I've been in this market for 30 years, I'm one of the senior citizens of the bond market, and I have never, ever seen such a confluence of negative events,'' said Marilyn Cohen, who manages $215 million in fixed income investments as president of Envision Capital Management in Los Angeles. ``Clearly the Fed has been rendered impotent on doing anything to end this credit crisis.''

Credit-default swaps on New York-based Citigroup, the biggest U.S. bank by assets, climbed 17 basis points to 207 basis points, according to broker Phoenix Partners Group. Contracts on Bank of America and JPMorgan, the second- and third-biggest banks, rose 15 basis points to 135, Phoenix prices show. Charlotte, North Carolina-based Wachovia jumped 55 basis points to 305 basis points.

Risk of Default

Sellers of contracts on CIT demanded 16 percent upfront and 5 percent a year to protect the New York-based company's bonds from default for five years, according to Phoenix. That means it costs $1.6 million initially and $500,000 a year to protect $10 million in CIT bonds. The cost is up from $740,000 a year yesterday. Upfront payments are demanded when investors see a heightened risk of imminent default.

Contracts on Seattle-based Washington Mutual increased 158 basis points to a record 700 basis points, according to CMA Datavision.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

The extra yield investors demand to own investment-grade bonds rather than Treasuries widened 8 basis points to 272 basis points, matching a record high set in 2002, according to Merrill Lynch & Co. Spreads last reached that level on Oct. 10, 2002, according to Merrill Lynch index data, three months after WorldCom Inc. filed for the largest bankruptcy in history.

Raise Capital

Ambac, which needs to raise capital to preserve its AAA rating because of potential losses on mortgage-linked securities it guaranteed, said yesterday it will seek to raise $1.5 billion through equity offerings. That disappointed investors who were expecting as much as $3 billion in capital that would be backed by banks. It also fueled concern that bank balance sheets are being squeezed, said Chuck Moon, head of investment-grade credit at Hartford Investment Management Co. in Hartford, Connecticut.

``It put a lot of fear in the marketplace as to whether or not that meant any concerns by the banks themselves about their capital or liquidity situations,'' Moon, who manages about $30 billion in investment-grade credit, said in an interview.

The world's banks and securities firms have reported $181 billion in asset writedowns and credit losses since the beginning of 2007.

Bear Stearns

Credit-default swaps on Bear Stearns Cos., the securities firm that had its first-ever loss last quarter because of mortgage-asset writedowns, rose 60 basis points to 405, Phoenix prices show.

The widening on the banks and securities firms contracts has been exacerbated by growing concerns that clients on the other side of trades will lose money if companies can't meet their obligations.

A hedge fund, for example, that has $200 million in trades with a bank may seek to limit some of that risk by buying credit- default swap protection on the bank itself.

``Everybody is keyed on risk management in this environment,'' said John Tierney, a strategist at Deutsche Bank in New York. ``I would suspect a fair amount of institutions are basically just hedging more as standard operating procedures.''

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 14.5 basis points to 142, JPMorgan Chase & Co. prices show. The Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 35 basis points to 617.

In Asia, the Markit iTraxx Japan index rose 10 basis points to a record 134.5 in Tokyo, Morgan Stanley prices show.