Finance & Business World

Shoppers appear to have given the nation’s stores a needed last-minute sales surge.

Early readings from Toys R Us, Sears Holdings Corp. and several mall operators show packed stores on Christmas Eve following a busy week fueled by shoppers who delayed buying, waiting for bigger discounts that never came or slowed by last weekend’s big East Coast snowstorm.

Stores are counting on these stragglers in a season that so far appears slightly better than last year’s disaster. The jury is still out, because the week after Christmas accounts for about 15 percent of sales as gift card-toting shoppers return to malls.

"The procrastinators were really out in force," says David Bassuk, managing director in the retail practice of AlixPartners, a global business advisory firm.

"But I think retailers needed to be more aggressive to fight for those sales. A lot of people are still willing to hold out until after Christmas because the deals weren’t as good."

A Christmas Eve snowstorm in the nation’s heartland was slowing some shoppers after snarling roads in the mountain states a day earlier.

Wally Brewster, spokesman at General Growth Properties said merchants in his centers said they had made up for lost sales.

Still, he expects overall holiday sales will be only about even with a year ago payday loans with no faxing.

Caution remained. Karen MacDonald, spokesman for mall operator Taubman Centers Inc., noted that stores said many shoppers, remembering the 80 to 90 percent clearance sales they found last year, were asking whether the discounts were going to get any deeper.

And Rebecca Stenholm, a company spokesman for mall operator Macerich Co., reported that more people were using cash to pay for gift cards than a year ago, reflecting tight credit and a desire to pay down debt.

The full picture won’t be known until merchants report December sales Jan. 7. But most expect merchants’ fourth-quarter profits should be intact because they didn’t have to cut prices more than they’d planned as they were cushioned by lean inventories.

ShopperTrak is sticking to its prediction for a 1.6 percent gain, compared with a 5.9 percent drop a year ago.

The National Retail Federation expects that total retail sales will slip 1 percent, though some experts say that might be a bit too cautious.

A year ago, they fell 3.4 percent by the trade group’s calculations.

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Ben S. Bernanke has the backing of a majority of U.S. senators on the Banking Committee for a second term as Federal Reserve chairman.

Eight Democrats and four Republicans, among the 23 lawmakers on the panel overseeing the central bank, made their views known in interviews, comments to reporters or written statements. Some said they will support Bernanke, while others said they’re leaning in his favor.

Committee Chairman Christopher Dodd, a Connecticut Democrat, said yesterday that Bernanke has “done a pretty good job,” and that anger in Congress over the Fed’s role in the financial crisis is “misplaced.” Judd Gregg, a New Hampshire Republican, said Nov. 20 he will “absolutely” vote for Bernanke.

Criticism of the central bank has mounted in Congress since President Barack Obama nominated Bernanke in August, with many lawmakers blaming the Fed for lax supervision of banks and for taking part in taxpayer-funded bailouts of companies including Citigroup Inc. Some senators said those concerns won’t stop them from backing the former Princeton University economist.

“He’s been far from perfect,” Senator Sherrod Brown, an Ohio Democrat, said in an interview yesterday. “He was not quick enough responding last year to many of these issues that we care about, particularly in housing. I want him to focus on jobs. But I think he’s generally done a decent job.”

Hearing Tomorrow

The banking panel holds a hearing on Bernanke’s nomination tomorrow in Washington. A vote hasn’t been scheduled, and the full Senate would then need to confirm the Fed chief. Bernanke’s four-year term ends Jan. 31.

Traders on Intrade, an online futures exchange, give Bernanke a 90 percent chance of Senate confirmation, up from 89 percent yesterday.

The Fed under Bernanke has slashed interest rates almost to zero and pumped more than $1 trillion into the financial system to battle the deepest recession since the 1930s. The Standard & Poor’s 500 Index has jumped 64 percent from its 2009 low on March 9 as the economy showed signs of revival.

Policy makers last month repeated their pledge to keep rates low for an “extended period” to bring down an unemployment rate at a 26-year high. A government report Dec. 4 is likely to show that companies reduced payrolls for a 23rd straight month, according to a Bloomberg survey of economists.

Dodd said in August that while he’s had “serious differences” with the Fed, reappointing Bernanke is “probably the right choice.”

‘Pins and Needles’

Asked yesterday about his vote, Dodd told reporters, “I want you to be on pins and needles and wait until Thursday to hear this exciting news.”

Jim Bunning, the Kentucky Republican who was the only senator to oppose Bernanke’s first nomination in 2005, hasn’t changed his views.

“His job rating would be zero minus F,” Bunning said in an interview yesterday. “He has catered to the big banks, to the Wall Street elitists, to every major money concern in the country and in the world.”

Senator Bernard Sanders, a Vermont independent who isn’t on the banking committee, said today that he placed a procedural hold on Bernanke’s nomination, which requires 60 votes to break. “Mr. Bernanke has failed,” Sanders said in an e-mailed statement. “It’s time for him to go.”

The other Democrats on the banking panel expressing support for Bernanke include South Dakota’s Tim Johnson, Jack Reed of Rhode Island, New York’s Charles Schumer, Evan Bayh of Indiana, Hawaii’s Daniel Akaka and Virginia’s Mark Warner.

Three said they’re undecided, including Wisconsin’s Herb Kohl, Jon Tester of Montana and Jeff Merkley of Oregon.

‘Earth Shattering’

Among Republicans, Nebraska’s Mike Johanns said Bernanke “will have my support.” Utah’s Robert Bennett said he’ll probably vote in favor, while Bob Corker of Tennessee said he is likely to back Bernanke “if nothing earth-shattering comes out of the hearings and the follow-ups.”

Alabama Senator Richard Shelby, the panel’s top Republican, declined to comment except to say, “You’ll be there Thursday.”

Bernanke, 55, has presided over the most expansive use of Fed powers since the 1930s, taking control of insurer American International Group Inc. and launching unprecedented programs to contain fallout from a run on money-market funds and to buy short-term debt from companies such as General Electric Co.

Some lawmakers have accused the Fed of overstepping its authority and failing to properly supervise the financial firms that packaged and sold the mortgage-backed securities at the heart of the crisis.

‘Abysmal Failure’

Dodd, calling the Fed’s record on banking supervision an “abysmal failure,” introduced legislation in November that would strip the central bank of that role. Also last month, the House Financial Services Committee approved a proposal to remove a three-decade ban on congressional audits of Fed interest-rate decisions.

The Fed chief said in a Nov. 29 commentary in the Washington Post that curbing the central bank’s authority to supervise the banking system and tampering with its independence would “seriously impair” economic stability in the U.S.

Frederic Mishkin, a former Fed governor who now teaches at Columbia University in New York, called the measure that would allow audits of Fed policy “incredibly dangerous.”

“If you make the central bank beholden to politicians on a short-run basis, you get very bad outcomes: high inflation and less of the ability to deal with shocks like the ones we had recently,” Mishkin said yesterday in an interview.

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New Zealand Prime Minister John Key said the nation’s currency is overvalued and the central bank is unlikely to raise interest rates this year because inflation is contained.

“The very high exchange rate is helping offset any imported inflation concerns,” Key said in an interview yesterday in Kuala Lumpur. “I would personally be surprised if they raise rates in 2009.”

New Zealand’s central bank, which acts independently of the government, will leave rates unchanged at its review on Oct. 29, according to all eleven economists in a Bloomberg survey. Consumer prices rose 1.3 percent in the third quarter, within the bank’s 1 percent to 3 percent target band. The benchmark rate is already “well above” most of its trading partners, said Key, former head of foreign exchange at Merrill Lynch & Co.

The so-called kiwi’s strength “is a really effective buffer against inflation,” said Dominick Stephens, research economist with Westpac Banking Corp. in Wellington. “That’s the key reason that the Reserve Bank is going to stay on hold over the next few meetings. The hikes will come later than they would have if the exchange rate hadn’t risen so far.”

New Zealand’s official cash rate is 2.5 percent compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nation’s higher- yielding assets and driving up its currency. Key said the New Zealand dollar, which rose to a 15-month high of 76.35 cents last week, is too strong.

Exchange Rate

“We would prefer a lower exchange rate and that would help our exports,” Key said after signing a free trade agreement with Malaysia. “It would certainly help in terms of rebalancing our economy.” He declined to give a New Zealand dollar forecast.

The currency, the best performer among 16 major currencies the past six months, traded at 74.79 U.S. cents at 5:41 p.m. in Wellington, from 74.77 cents in New York yesterday.

“His comments may bolster U.S. dollar buybacks as the New Zealand currency has risen too far and needs adjustment,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA.

Australia’s central bank unexpectedly raised its key lending rate a quarter-point to 3.25 percent on Oct. 6.

New Zealand central bank Governor Alan Bollard, who has kept the official cash rate at a record low since April, last week said a strong currency isn’t an impediment to raising borrowing costs. Rate rises were not likely until ‘the latter part of 2010,” he said Sept. 10.

Trading Bets

Traders are betting Bollard will increase rates by 2.35 percentage points over 12 months, according to a Credit Suisse Group AG index based on swaps trading. The bank may raise rates as early as March, according to two of the economists surveyed by Bloomberg. Nine expect rates will be higher by June 30.

Key, 48, graduated from the University of Canterbury in 1982 and traded currencies for Elderbank and Bankers Trust Corp. before joining Merrill Lynch in Singapore in 1995. He ran the bank’s global foreign exchange trading from London until he returned to New Zealand in 2001.

Historically, the currency has never been “sustainable in the long-term” in the 75 to 80 cent range, Key said. The “difficult, unusual circumstances” make it impossible to predict a level for the currency, he said.

Climb

The kiwi dollar reached 82.13 U.S. cents in February, 2008, the highest since it started trading freely 23 years earlier. It has climbed 50 percent since reaching a six-year low of 48.97 cents on March 4 this year.

“It is not just the New Zealand dollar that is appreciating. You are seeing the same for the Australian dollar, South African rand, Swiss franc,” Key said. “In that regard, it is very difficult for New Zealand to do a lot actually to see our currency trade at lower levels against the U.S. dollar.”

While the New Zealand dollar is “a little bit overvalued” against the U.S. unit, it is undervalued against the currencies of all the country’s major trading partners other than the U.K., Westpac’s Stephens said.

The currency is gaining with global commodity prices and will improve its performance against the Australian dollar, he said. Concerns about U.S. inflation appear overdone and a “bounce upwards” for that currency is also possible next year, he said.

Tackling Deficits

Key, sworn in as New Zealand’s 38th prime minister in November 2008, said he believes his government will be more successful in reducing the country’s deficit. The government’s cash deficit was NZ$8.64 billion ($6.4 billion) in the year ended June 30, its first budget gap in nine years.

“The Treasury in New Zealand would tell you that we’re in for a decade of deficits, but the government is working quite hard to get on top of that,” he said, citing efforts to contain spending and boost public sector efficiency.

Key’s Nationals won New Zealand’s general election last November pledging tax cuts to revive the economy, which grew 0.1 percent in the second quarter, ending the country’s worst recession in three decades. His government is not now proposing any tax increases to plug the deficit. A technical group will present the government with a range of working papers, Key said.

“Whether any will be adopted, it is too early to tell,” he said. “We are at least looking at making sure the base of our tax system is sound.”

The economy began shrinking in the first quarter of last year, curbing company profits and increasing the cost of welfare and unemployment payments.

Net debt increased to NZ$43.36 billion, or 24.1 percent of gross domestic product, as of June 30. By 2014, debt servicing costs will double from 2008 levels to NZ$5 billion and will keep rising, Finance Minister Bill English said on Oct. 17.

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India should maintain an “accommodative” monetary policy until the economy recovers and inflation flares up, a top aide to the prime minister said, highlighting political pressures on the central bank to keep interest rates unchanged next week.

“The stance of monetary policy will have to change from its highly accommodative position,” said Chakravarthy Rangarajan, economic adviser to Prime Minister Manmohan Singh. “But that has to wait and that will depend on the growth performance of the economy and also inflationary pressures.”

Governor Duvvuri Subbarao said earlier this month that there is consensus within the Reserve Bank of India on the need to boost policy rates, while there is no agreement on the timing of such a move. The central bank’s next monetary policy statement is due to be released on Oct. 27 in Mumbai.

“Given the present signs of inflationary pressures, we have to act earlier than the U.S. and European economies” on interest rates, Rangarajan said today.

The Reserve Bank has kept borrowing costs at record lows after cutting its repurchase rate six times between October 2008 and April 2009 to help shield the economy from the global recession. The central bank left its key rates unchanged in July’s policy statement.

“In the short-term, managing inflationary risks, particularly food-price inflation, is the biggest challenge to be faced by our policy makers,” Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said at a news conference in New Delhi today.

Faster Inflation

The Economic Advisory Council forecast inflation to accelerate to around 6 percent by March 2010, more than the central bank’s 5 percent year-end estimate payday loans. The council also said India’s economy may expand 6.5 percent in the year through March, slower than the 8.7 percent average growth of the previous four years.

India’s economic growth is likely to slow in the current fiscal year due to the impact of the global recession and a reduction in farm output due to the weakest rains in almost four decades, Rangarajan said.

Total food grain production is likely to decline by 11 million tons in the current year to 223 million tons, compared with 234 million tons last year, the council said in a report. That will put pressure on food supplies, it said.

Rangarajan said stimulus measures introduced to protect India’s $1.2 trillion economy from the impact of the global recession must continue until the end of March 2010.

Interest-rate cuts and government tax reductions have together provided a stimulus worth more than 12 percent of India’s gross domestic product, according to central bank estimates.

“The stance of monetary policy will have to be calibrated taking into account growth prospects and the inflationary pressures,” Rangarajan said.

Overseas inflows into stocks may rise to $24.1 billion in the year to March and India may get foreign direct investment worth $36.9 billion. The council expects export orders worth $188.9 billion in the current year.

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Luxembourg’s Jean-Claude Juncker, who heads the group of euro-area finance ministers, warned that further gains by the European currency could threaten the region’s recovery from the deepest recession in six decades.

“I’m not too worried about the euro’s current level,” Juncker told a press conference today in Luxembourg, where he serves as premier and Treasury minister. “However, if the euro were to continue in the direction it did in the last few weeks, there’s a risk that there’ll be an exchange rate that could slow down economic recovery in Europe.”

The euro has risen 15 percent against the dollar in the past seven months, eroding export returns for European companies just as the region is starting to recover from the global slump. European Central Bank President Jean-Claude Trichet yesterday said it is “extremely important” that U.S. authorities pursue policies supporting a strong dollar and called excessive currency volatility “an enemy” of global economic stability.

The euro this week reached a 14-month peak against the dollar and Goldman Sachs Group Inc. yesterday projected that the European currency will advance to $1.55 in the next three to six months before retreating to $1.35 a year from now. The euro was down 0.4 percent at $1.4890 at 6:04 p.m. in London today, still up more than 10 percent in the past 12 months.

“I could become concerned at a certain juncture” in the euro’s rate against the dollar, Juncker told journalists today. “Don’t ask me where this juncture is exactly.” Juncker said the euro-area finance ministers will discuss the currencies at their next regular meeting, on Oct. 19 in Luxembourg.

Monday’s Meeting

Juncker said he “would suppose that in the course of Monday’s meeting we’ll address the subject together with the president of the European Central Bank.” The ministers also discussed the euro at their previous meeting, two weeks ago in Gothenburg, Sweden.

“We’ll tell you after the meeting if there’s something new to be said, a kind of extension to the normal poem,” Juncker said. “But I guess the poem will stay as the poem was,” adding that “we don’t like excessive volatility in exchange rates and disorderly movements.”

That echoed the view of Group of Seven finance chiefs, who met in Istanbul on Oct. 3. “Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” the G-7 ministers and central bankers said in a statement after the meeting, repeating language they used in April.

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The global financial crisis is probably not completely over and banks are likely to experience further setbacks, European Central Bank Governing Council member Axel Weber said in a newspaper interview released on Sunday.

“We will probably not be spared small aftershocks on the financial markets,” Weber told Germany’s Handelsblatt business daily.

He added, however, that the magnitude of such aftershocks would be far smaller than the hit the global economy took after the collapse of U pay day loan.S. investment bank Lehman Brothers in September 2008.

“Economic activity and financial markets are currently in a stabilization phase globally. Nonetheless, the economic crisis will bring further costs for banks,” said Weber, who is also president of Germany’s Bundesbank.

(Writing by Paul Carrel; editing by John Stonestreet)

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Former Federal Reserve chairman Paul Volcker said the rise of China and other emerging economies has underscored a decline in the comparative economic and intellectual leadership of the U.S.

“I don’t know how we accommodate ourselves to it,” Volcker, an economic adviser to President Barack Obama, said in an interview with PBS’s Charlie Rose taped yesterday in New York. “You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”

The former Fed chairman also said unemployment at 9.7 percent will slow the pace of recovery from the U.S. recession as Americans default on mortgages and consumer loans. Moreover, commercial real estate loans are likely to cause further losses for banks.

“This recovery will be slower,” he said. “We can’t just pump up consumption and pump up housing again.”

Group of 20 leaders, meeting in Pittsburgh last week, announced plans for more durable economic growth, including reducing U.S. dependence on overseas capital and cutting the reliance of emerging nations such as China on exports.

World leaders decided that the G-20, which includes emerging economies such as China and Brazil, will replace the Group of Eight as the main forum for global economic coordination. The shift illustrates how the excesses that led to the financial crisis have compelled industrial nations to share governance of the world economy.

Less Dominant

The growth of emerging economies is “symbolic of the relative, less dominant position the United States has, not just in the economy but in leadership, intellectual and otherwise,” Volcker said.

The G-20 accounts for about 85 percent of global gross domestic product and was created after a spate of currency devaluations plagued emerging markets from Russia to Thailand in the 1990s. The G-8, which comprises the most advance industrial economies of Europe and North America plus Japan and Russia, accounts for about half of global GDP.

China has overtaken Germany to become the world’s third- largest economy and may soon become the biggest exporter. It passed Japan a year ago as the main foreign investor in U.S. government debt. China, Russia, Brazil and India together hold about 42 percent of international reserve assets, excluding gold.

Herding Cats

“I would like to think that given the history of the past, given the strength, actual and potential of the American economy, we can still provide a kind of indispensable element of leadership here,” Volcker, 82, said. “But it’s not going to be dictatorial, I’ll tell you that. It is very hard to herd these cats together.”

Volcker repeated that under a new regulatory structure the Fed should be given primary responsibility for supervising banks rather than a council of regulators led by the U.S. Treasury.

The Treasury has “no professional background and no traditions in the area of banking supervision,” Volcker said.

“In the distribution of authorities among regulatory institutions, it’s really the Federal Reserve that naturally should to be surveying the whole world, so to speak,” he said.

Volcker has criticized the Obama administration’s plan to give the Fed authority to supervise “systemically important” financial firms. Such a designation would imply government readiness to support the firms in a crisis, encouraging excessive risk-taking, he said in said in testimony to the House Financial Services Committee on Sept. 24.

Independent Agency

The central bank should instead oversee bank regulation carried out by an independent agency, Volcker has said. The chairman of that agency could also be a vice chairman of the Fed, to increase accountability and ensure the Fed is fully informed.

Volcker is chairman of the Economic Recovery Advisory Board, a body created by Obama in February to recommend responses to the crisis.

Since January, Volcker has advocated that regulators prohibit financial companies whose collapse would pose a risk to the economy — those considered “too big to fail” — from engaging in certain types of trading and investing. The administration wants stricter oversight for such companies and tighter capital and liquidity requirements.

Volcker said the Fed and the White House “were right in providing massive support” to financial markets after the collapse of Lehman Brothers Holdings Inc. Sept. 15, 2008, and to bail out American International Group.

“Faced with those emergencies, they did what they had to do at the time,” he said.

Giving Succor

While more might have been done ahead of time to prevent Lehman’s demise, “I think if it had been rescued somehow and kept alive, I still think you would have had an attack on the other institutions,” he said. The government’s actions give “succor to the next institution that gets in trouble and to their creditors in particular,” Volcker said.

The interview will air in two parts, on Tuesday and Wednesday on PBS, and will be rebroadcast on Wednesday and Thursday on Bloomberg Television channels around the world as part of a new partnership between Rose and Bloomberg.

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Belgian drugs, chemicals and plastics maker Solvay said on Monday it would sell its drugs unit to U.S. partner Abbott Laboratories for 4.5 billion euros ($6.61 billion) in cash and reinvest in chemicals and plastics.

Abbott had agreed to buy the unit to bolster its flagging prescription drug business by giving it a number of new medicines in late-stages of testing, sources familiar with the deal had earlier told Reuters.

“We are building a new refocused group with the financial means to further accelerate sustainable growth,” Solvay’s board chairman Alois Michielsen said in a statement.

The enterprise value of the deal is 5.2 billion euros, including 4.5 billion in cash, additional potential milestone payments of up to 300 million euros between 2011 and 2013 and liabilities of about 400 million euros.

Solvay said the proceeds from the deal will be reinvested in external and organic growth in strategic projects in chemicals and plastics with a sharp focus on long term value creation.

Studies about such reinvestments are ongoing, it added.

Abbott co-markets with development partner Solvay the cholesterol treatments TriLipix and Tricor. It is also working in the U.S. on a combination cholesterol treatment with AstraZeneca using Trilipix as Solvay pursues the development of a combination treatment for Europe and elsewhere.

The transaction is expected to be closed in the first quarter of 2010, pending approval by competition authorities and Solvay said it communicate the impact of the deal on its results when finalised.

($1=.6810 Euro)

(Reporting by Aaron Gray-Block; Editing by Hans Peters)

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The International Monetary Fund will raise its forecasts for the global economy when they are published in coming days, Managing Director Dominique Strauss- Kahn said.

“For a long time the IMF has been predicting a recovery in the first half of 2010,” Strauss-Kahn said today on France’s Europe1 radio. “When we come out with our latest forecast in the next few days, they will be a bit better,” he said, adding that 2009 will also be stronger than previously expected.

The Washington-based lender’s official forecast is currently for a global contraction of 1.4 percent this year, followed by growth of 2.5 percent in 2010. It is scheduled to release a new set of estimates on Oct. 1.

The pickup in the global economy has been helped by government stimulus packages and record-low interest rates. Straus-Kahn said that Group of 20 leaders gathering in Pittsburgh today need to be careful not to withdraw that economic support too quickly.

“We must continue the support for the economy that is already engaged,” he said, likening the coordinated fiscal and monetary effort to putting out a fire. “This is not yet the time for sponges, we’re not completely sure the fire is out. For now, the biggest risk would be to stop too quickly.”

The G-20 leaders need to look for new motors of growth as U.S. consumers collectively shift from being net borrowers to net savers, he said. While China and India will take up some of that slack, they can’t take all of it, he said.

“What happened in the past year has never existed before - - it was international coordination never seen before,” he said. “Everyone was so afraid they wanted to work together. Will the will to work together persist? That’s the question on which everything is staked.”

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Investors are buying Indian rupees, South Korean won and Brazilian reais, betting developing nations will raise interest rates even after the Group of 20 said it’s too early to end central bank support for the global economy.

Swap contracts, in which traders exchange a fixed rate for a floating one, indicate the market is pricing in the fastest increases in borrowing costs in the G-20 in India and South Korea. The cost of a one-year agreement in India has risen to 1.61 percentage points over the central bank’s benchmark, up from 0.95 point on June 30. Spreads in Indonesia and Brazil have also grown and are wider than the U.S., Germany and Japan.

Threadneedle Asset Management Ltd., Schroders Plc and Ashmore Investment Management Ltd. say they are buying emerging- market currencies as policy makers in New Delhi, Seoul and Brasilia become more focused on avoiding inflation and stock- market bubbles than on supporting the global recovery. The won and the rupee will be the world’s best-performing currencies in the year ahead, each gaining about 7 percent, median estimates in Bloomberg strategist surveys show.

“It’s going to be the emerging-market world that sees rate hikes first, and that should support currencies,” said Richard House, who manages $2 billion in developing-nation fixed income at Threadneedle in London and started buying the rupee and the real in the past month. “India will be among countries that will be first.”

The International Monetary Fund forecasts developing nations will expand 4.7 percent next year, almost eight times faster than the 0.6 percent growth in advanced economies. Consumer prices will rise 4.6 percent, dwarfing developed countries’ 0.9 percent inflation rate, the IMF predicts.

‘Imbalances’

Brazilian central bank President Henrique Meirelles, a Harvard Business School graduate, told reporters in Brasilia on Sept. 15 there was a danger accelerating growth could cause “imbalances” in demand and supply. Latin America’s largest economy created jobs in August at the fastest pace in 11 months, the Labor Ministry said Sept. 16. The real is the second-best performing emerging-market currency against the dollar this year with a gain of 29 percent to 1.8055 per dollar.

Bank of Korea Governor Lee Seong Tae told reporters in Seoul on Sept. 10 he would “consider a revision to our policy direction.” Spending at the nation’s three biggest department- store chains climbed 7.6 percent from a year earlier in August, government data released yesterday showed. The won climbed 4.2 percent this year to 1,208.7 per dollar.

Challenge

Reserve Bank of India Governor Duvvuri Subbarao, a former fellow at the Massachusetts Institute of Technology, said at a conference in New Delhi on Sept. 15 that balancing growth and inflation has become a challenge for India. The Sensex stock index has rallied 73 percent this year. The rupee has gained 1.4 percent this year to 48.1525, after plunging to a record low of 52.18 on March 3.

By contrast, Federal Reserve Chairman Ben S. Bernanke, who studied at both Harvard University and MIT in Cambridge, Massachusetts, said on Sept. 15 the U.S. economy isn’t strong enough to reduce the 9.7 percent unemployment rate quickly. European Central Bank President Jean-Claude Trichet said on Sept. 4 that it’s “premature to declare the financial crisis over,” while Bank of Japan Governor Masaaki Shirakawa said on Aug. 31 he’s not yet confident in his nation’s recovery.

‘Exit Strategies’

President Barack Obama and other G-20 leaders will pledge in Pittsburgh next week to keep stimulus policies in place until a recovery is certain, Michael Froman, a deputy assistant to Obama, said in a Sept. 16 interview. Finance officials from the group said after talks in London Sept. 5 that they would engage in “coordinated exit strategies” when growth returned. The collection of industrial and emerging economies includes Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

Rate increases would boost the appeal of selling currencies from nations with lower borrowing costs to buy assets where they are higher, a tactic known as the carry trade. The three-month London interbank offered rate, or Libor, for dollar loans has fallen to 0 personal loans for people with bad credit.29 percent from 1.43 percent at the end of 2008 after the Fed reduced its key rate to 0.25 percent. Brazil’s benchmark rate is 8.75 percent, a record low.

The Israeli shekel has gained 5 percent this quarter to 3.7389 per dollar as the Bank of Israel became the first central bank to tighten monetary policy in the past year, increasing its benchmark rate by a quarter of a percentage point to 0.75 percent on Aug. 24.

Won, Rupee

Developing nation currencies will continue to outperform, with the won forecast to climb 7.2 percent by Sept. 30, 2010, the rupee estimated to rise 6.4 percent and the Israeli shekel 5.8 percent, according to the median estimates by strategists in Bloomberg surveys. The Brazilian real will advance to 1.79 per dollar from 1.80, according to the forecasts.

Emerging-market central banks may try to limit appreciation and protect exports by selling their own legal tender, according to Allianz SE, Europe’s biggest insurer.

Global foreign-exchange reserves have climbed by $441 billion in the past five months to a record $7.088 trillion, reflecting increased dollar purchases by China, South Korea, India and Brazil, data compiled by Bloomberg show. They declined by $340 billion in the eight months ended March as the global credit crisis forced investors to dump emerging-market assets and hoard dollars.

Stability

“Gains in currencies won’t be huge because there is a desire for stability among central banks,” said Nikhil Srinivasan, who oversees $20 billion of assets as chief investment officer for Asia and the Middle East at Munich-based Allianz.

The Asian Development Bank warned in a Sept. 15 report that premature interest-rate increases could disrupt financial markets. Merrill Lynch & Co. and Banco Votorantim SA predict Brazil will keep rates on hold next year, Bloomberg data show.

The search for higher yields helped emerging-market bond funds take in a net $3.6 billion in a 21-week stretch that ended Sept. 2, the longest streak of weekly inflows in two years, according to EPFR Global in Cambridge, Massachusetts.

Foreign holdings of Indian bonds climbed 28 percent since March 31 to $6.4 billion, stock exchange data show. Japanese investors bought a net 1.66 trillion yen ($18.2 billion) in overseas debt in the week ended Sept. 12, the most since June 2005, the Ministry of Finance said yesterday.

‘Value’

“We do see value in both emerging-market debt and emerging-market currencies,” said Nicholas Gartside, head of global fixed income at Schroders in London, who oversees $31 billion. “Asia could be the first region to raise rates.”

The spread between the benchmark monetary-policy rate and the one-year swap rate, a measure of expectations for rate changes, has increased by 38 basis points in South Korea this quarter to 1.42 percentage points, 53 basis points to 1.48 percentage points in Indonesia and 55 basis points to 0.57 percentage point in Brazil. In Germany, the U.S. and Japan, the spreads are 0.18 percentage point, 0.36 point and 0.42 point.

Goldman Sachs Group Inc. forecasts India, Indonesia and South Korea will raise interest rates in the first quarter of 2010. The Reserve Bank of India may increase 300 basis points to 6.25 percent and Bank of Korea by 75 basis points in 2010 to 2.75 percent, Goldman Sachs chief Asia-Pacific economist Michael Buchanan wrote in a Sept. 8 note.

Doug Smith, chief economist for the Americas at Standard Chartered Plc in New York, predicts Brazil will add 50 basis points by March 31.

Inflation will accelerate to 4.4 percent in Brazil in 2010, from 4.3 percent in 2009, according to a Bloomberg survey of 13 economists. For the U.S., the median prediction of 66 analysts is for 0.5 percent deflation this year and 1.9 percent inflation in 2010.

“The interest-rate turn will come first in emerging markets for the simple reason they don’t have a credit crunch,” said Jerome Booth, head of research at Ashmore Investment Management in London, which manages $25 billion of developing- nation assets.

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