The dollar was mostly higher on Wednesday following the US Treasury’s shifting focus for the financial-rescue plan. Treasury Secretary Henry Paulson said the Treasury plans to use bailout funds to shore up consumer lending instead, putting a plan to purchase illiquid mortgage-related assets on hold. US stocks fell about 5% on Paulson’s announcement and a warning from electronic retailer Best Buy of a “seismic” slowdown in spending. The euro was modestly lower, testing the 1.24-1.25 support. Sterling plunged to the lowest level in over 6 years after Bank of England Governor Mervyn King said the BOE is prepared to cut interest rates further. The Canadian and Australian dollars declined as commodity prices fell across the board.

The USD/JPY fell as investors sold risky assets funded by low-cost loans denominated in yen. The pair was pressured by Paulson’s diversion of TARP money from banks to consumer credit support and the general deteriorating consumer spending outlook. The pair continues trading in tandem with US stocks. There are resistance from the downtrend line in the 97-area and major support in the 92-area.
 

Financial and Economic News and Comments

US & Canada

US Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to relieve pressures on consumer credit, scrapping an effort to buy troubled mortgage-backed assets. “Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy,” Paulson said in a speech at the Treasury.

Federal Reserve Vice Chairman Donald Kohn said bank reserve capital should increase. “We must ensure that financial firms--especially those central to the functioning of our highly interlinked markets--have sufficient capital, liquidity, and management resources to back financial intermediation activities both on and off their balance sheets,” Kohn said in a speech in Luxembourg. Regulators have to reassess their approach to price bubbles, he added.

Confidence in the global economy stayed near rock-bottom in November, with the Bloomberg professional global confidence index standing at 6.6 for the month from 4.0 in October, the lowest level since the survey began a year ago.

G-20 leaders are meeting in Washington on November 14 to talk about the global credit crisis.

Europe

Eurozone industrial production dropped 2.4% y/y in September, the largest year-on-year fall since February 2002, after declining 0.7% y/y in August, Eurostat reported. The September IP fell 1.6% m/m, led by Germany, following August’s downwardly revised 0.8% m/m increase. The IP drop capped Q3 2008 that likely saw a recessionary eurozone economy.

UK jobless claims rose 36,500 to 980,900 in October reaching the highest level since 2001, following September’s upwardly revised 36,300 increase, the Office of National Statistics said. The claimant count rate increased to 3.0% in October, the highest since October 2006, from 2.9% in September. The ILO UK unemployment rate rose to 5.8% in the three months through September. 

The Bank of England forecast a deep UK recession for 2009, saying it was “very likely” that Britain was already in a recession. According to its quarterly inflation report, the BOE forecast that national income could shrink by one to two percentage points over the next few quarters and growth would probably be flat by the end of 2009. Consumer price inflation, which registered a 5.2% annualized rate at its last reading, will decline to its target rate of 2.0% by mid-2009. BOE Governor Mervyn King said interest rates could drop much lower than the current 3.0%, saying “we are certainly prepared to cut bank rates again if that proves necessary.”

Asia-Pacific

Australia’s consumer confidence rose in November, following the most aggressive Reserve Bank of Australia interest-rate cuts since 1991 and the government’s announcement of A$10.4 billion ($6.8 billion) in cash handouts to households. The sentiment index increased 4.3% to 85.5, according to a Westpac Banking Corp. and Melbourne Institute survey.

Australian wages growth slowed in Q3 2008 as hourly pay rates excluding bonuses increased a less-than-expected 0.9% q/q, following Q2’s downwardly revised 1.1% q/q gain, data from the statistics bureau showed. The slowing wages growth adds to the evidence the Australian economy is weakening.

Japan’s consumer confidence dropped in October to the lowest level since 1982, with the confidence index falling to 29.4 from September’s 31.4, the Cabinet Office said.

Finance Ministers from Japan, China and South Korea will hold an emergency meeting this week in Washington ahead of the G-20 Nov. 14 summit, Japanese Chief Cabinet Secretary Takeo Kawamura said.