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Federal Reserve Chairman Ben S. Bernanke didn’t call it a recession today, but he might as well have.
In his semiannual congressional testimony on the economy, the Fed chief delivered a sober assessment that left no doubt about the central bank’s priorities.
Remember his tone in June, hinting that the Fed might soon raise interest rates to battle inflation pressures? Forget that -- despite another scary inflation report today.
 Bernanke’s speech "strongly suggests that Fed officials do not have their fingers on the tightening trigger," Goldman Sachs economists said in a note.
The Fed chief said policymakers felt that "considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside."
Asked whether he thought the country was officially in recession, he said: "People are very worried, so I certainly would never make the claim that even if we were not in a technical recession, that it wasn’t a serious situation."
The stock market took this hard at first, with the Dow Jones industrial average diving 227 points early on. But the market has since rebounded, helped by a drop in oil prices that also appears to be driven by Bernanke’s recession-like tone.
Near-term crude futures in New York were down $6.71 to $138.47 a barrel at about 11 a.m. PDT. The Dow was basically flat at 11,060.
But Bernanke’s comments brutalized the dollar. The euro spiked to a record high of $1.604 today from $1.592 on Monday.
Photo: Ben Bernanke before the Senate Banking Committee today. Joshua Roberts/Bloomberg News
Asian stock markets were mostly lower in midday trading on Monday, suggesting that investors across the Pacific weren't drawing much encouragement from the Bush administration's proposal to bolster the finances of mortgage giants Fannie Mae and Freddie Mac.
In currency trading, the dollar was mixed against its major rivals. U.S. Treasury bond yields were slightly higher. All in all, it looked like many Asian investors were staying on the sidelines, waiting to see what happens when Wall Street opens.
 The bigger picture: Americans who were hoping that foreign stock markets would be a haven this year from the turmoil in the U.S. financial system have had a rude awakening, as the accompanying chart shows.
Most major foreign stock indexes have suffered significantly larger declines from their 2007-08 highs than the U.S. Standard & Poor's 500 index, which as of Friday was off 20.8% from its record high reached in October.
Many smaller foreign markets are simply showing their usual volatility, of course: They rose faster than the U.S. market in the good times, and they're falling faster now that things don't look so blissful for the global economy.
Some foreign equity markets -- China, in particular -- were bubbles that everybody figured would burst at some point. Maybe America's troubles accelerated that process, or maybe the bubbles would have exploded without the buzz-kill fallout from Wall Street.
U.S. investors in foreign shares still are getting some benefit from the dollar's continued weakness against many other currencies. That is acting as a cushion against foreign market declines by making foreign shares denominated in stronger currencies worth more when translated into dollars.
Germany's DAX stock index, for example, is down about 24% this year measured in euros, but for U.S. investors the decline is 16.6% when measured in dollars.
Still, even with the currency advantage, chances are your foreign stock investments are deeper in the red this year than your U.S. holdings. Through Friday, the average foreign stock mutual fund was down 14.6% year-to-date, according to Morningstar Inc. The average domestic fund was off 11.9%.
The question still to be answered: Will the ugly turn in overseas stock markets sour Americans on foreign investing? The vast majority of the cash that U.S. investors have shoveled into stock mutual funds since 2002 has gone into foreign funds, not domestic funds. That money has helped to keep those overseas bull markets kicking.
If those hefty cash inflows give way to sustained outflows, foreign markets could be looking at more serious losses unless their local investors take up the slack.
The stock market looks like it dodged a couple of bullets today, but the modest rebound in the Dow Jones industrial average during the half-day session couldn’t salvage the week.
And take a guess which commodity closed at yet another record high.
The Dow added 73.03 points, or 0.6%, to 11,288.54, but lost 0.5% for the holiday-shortened week and stayed in bear-market territory, off 20.3% from its October peak.
 The broader market was much worse, for the day and the week. Investors continued to unload some of the stocks that held up best for them in the second quarter, particularly smaller issues. The Russell 2,000 small-stock index lost 1% today and 4.6% for the week, and is down 22.2% from its all-time high reached nearly a year ago.
The slow-motion crash in bank stocks also continued, suggesting no easing of the latest jitters over the financial system. On the new-lows list today yet again: Bank of America, Wachovia, Comerica, U.S. Bancorp and Zions Bancorp, among others.
The government’s report of a net loss of 62,000 jobs in the economy in June nearly matched expectations, so that was a relief to some on Wall Street.
Should it have been? The debate over whether we are, or aren’t, actually in a recession will go on, but to some analysts there’s no question anymore.
Merrill Lynch & Co.’s econo-bear, David Rosenberg, says the lesson from history is that "you don't have six consecutive monthly declines in payrolls and not be in an outright recession."
For stock investors, the issue is what the slowdown/recession/whatever will mean for corporate earnings. Analysts have a dismal view of results for the quarter just ended: Operating earnings of the S&P 500 companies are expected to be down 12.4% from a year earlier, according to Wall Street estimates tracked by Thomson Reuters.
Yet those same analysts still believe the second half will bring a big turnaround. They’re expecting a 12.7% year-over-year gain in S&P earnings in the third quarter. . . .
Read on »
Thursday is looking like a big mess for financial markets. And since everybody's bracing for trouble, maybe we won't get it, and investors can limp off to their July 4th barbecues without much additional damage to their portfolios or their psyches.
Maybe.
In any case, it'll be a short day for Wall Street ahead of the Friday holiday: Stock markets will close three hours early, at 10 a.m. PDT, because who needs an extended holiday weekend more than the New York Stock Exchange's overworked mainframe computer?
Here's what on tap today:
--Pared payrolls: The government will release its June employment report at 5:30 a.m. PDT. The consensus expectation is that the economy lost a net 60,000 jobs last month, according to Bloomberg's regular survey of about 80 economists. That would make it a sixth straight month of job losses.
A much bigger number could fan the belief that a recession is underway, which would hardly be a confidence-builder for the stock market, fresh into an official bear market Wednesday on the Dow index and the Nasdaq.
 What's scary is that, if we're about to fall into recession, we aren't even close to the level of payroll cuts in previous downturns. The economy lost an average of 65,000 jobs a month from January through May. That was just about one-third the 181,000-a-month average of the last recession (March-November 2001).
--Euro rate hike: Jean-Claude Trichet, head of the European Central Bank, has been threatening for months to raise interest rates to fight inflation -- because, hey, that's what central bankers are supposed to do, oui? At their meeting today ECB policymakers are almost certain to make good on that threat, lifting their key rate from 4% to 4.25%.
Not a big deal? Tell that to the dollar, which is nearing a new low against the euro. The European currency jumped to $1.589 on Wednesday from $1.579 on Tuesday. Its record high was $1.599 on April 22.
The Federal Reserve's key rate is 2%. Higher rates in Europe give the continent an edge in attracting capital. That underpins the euro.
And what happens as the buck weakens? Commodity exporters, who price their stuff in dollars worldwide, earn less. We just hand them another reason to keep prices of raw materials, including (especially?) oil, on the rise.
So let's get out there and enjoy the weekend, before the next $10-a-barrel jump in crude.
Photo: A wag of my finger to you, Monsieur Bernanke! Jean-Claude Trichet. Pier Paolo Cito/Associated Press
No more waiting: We’re now in a genuine bear market for the Dow Jones industrials and, for the second time this year, for the Nasdaq composite.
Zapped by another jump in oil prices, the Dow closed today at 11,215.51, down 166.75 points, or 1.5%. That left the blue-chip index off 20.8% from its record closing high of 14,164.53 reached on Oct. 9.
 The tech-heavy Nasdaq slid 53.51 points, or 2.3%, to 2,251.46, leaving it down 21.2% from its 2007 peak. The Nasdaq already had visited bear territory briefly in March, when it was off as much as 24% from its high before rebounding.
A drop of at least 20% is considered the threshold for a bear market. Many other broad-market indexes haven’t yet joined the bear fest, but they’re all close. "I'd say it's only a matter of time," said Art Hogan, veteran market analyst at Jefferies & Co. in Boston.
The Dow’s slide under the 20% threshold wasn’t a shock, given that the index has been battling to stay above it for days. But this still is a bell-ringer for investors, Hogan says. The last broad-based bear market on Wall Street was in 2000-02.
Crossing the 20%-loss line "says the market is struggling, and it’s struggling for some very credible reasons," he says.
The catalysts for today’s sell-off: the usual suspects, and a few more.
Oil rose to a fresh record high, nearing $144 a barrel. And just to stick the inflation knife deeper into financial markets, copper, too, surged to a record because of miners’ strikes in Peru. (Here's your bull market: The CRB index of 19 major commodities now is up 32% year to date.)
Meanwhile, the dollar slumped, an index of home builders’ stocks fell through its previous 2008 low, and General Motors’ shares dived 15% to a new 54-year low of $9.98 after a Merrill Lynch analyst warned that bankruptcy was "not impossible" for GM.
All of this is leading up to another potentially big day for markets on Thursday, when the government reports on June employment trends (a net loss of 60,000 jobs is expected) and the European Central Bank is expected to raise its benchmark short-term interest rate for the first time in a year, citing inflation. The ECB’s move could slam the dollar once again -- if currency traders didn’t get most of that out of their systems today.
Oh, and U.S. investors and traders will have to cram their responses to the jobs report and the ECB into a half day, because markets will close at 10 a.m. PDT in advance of the Fourth of July holiday. That could just stoke the volatility meter tomorrow.
Who’s ready for a long weekend?
Photo: Oh sure, they look cuddly enough when they're young. Don't be fooled. Polar bear cub Flocke at the Nuremberg zoo. TImm Schamberger/AFP-Getty Images
A few notes from around the markets today:
-- As Federal Reserve meeting days go, this one was fairly uneventful for markets. Blue-chip stocks finished modestly higher and Treasury bond yields were mixed after the Fed, as expected, kept its key short-term rate at 2%. It was the first Fed meeting without a change in rates since August.
The central bank suggested in its post-meeting statement that the economy wasn't in such bad shape after all. "Although downside risks to growth remain, they appear to have diminished somewhat," the Fed said -- obviously discounting the abysmal consumer confidence survey results reported Tuesday.
-- "Inflation has been slightly higher than expected and there are prospects that inflation will move up further," the central banker said. "We give weight to preventing the higher rate of inflation from becoming entrenched."
 The Fed's Ben S. Bernanke? No, that was the Norwegian central bank's deputy governor, Jan F. Qvigstad, in a statement today after the Norges Bank raised its benchmark interest rate to 5.75% from 5.5%.
Bernanke & Co. continue to talk a good game about inflation concerns, but other central banks are taking action by tightening credit, the usual step to show you're serious about damping price pressures. Norway's rate hike followed similar moves recently by China, Mexico, Turkey, Brazil, India and South Africa.
Who cares what other central banks do? The dollar does. It slid today against many other currencies after the Fed's statement. (There go your hopes for that Oslo pub-crawl tour.)
It was just a few weeks ago that Bernanke strongly signaled the need for a rebound in the dollar to combat rising prices of imports, including oil. Yet there was no mention of the greenback in today's Fed statement, notes Joe Battipaglia, chief investment officer at brokerage Stifel, Nicolaus & Co. in Florham Park, N.J.
Never mind, Dr. Bernanke?
-- The Fed's relatively upbeat take on the economy must not have been persuasive to investors in financial-company shares, which have been battered by expectations of mounting loan losses. The BKX index of 24 major bank stocks jumped as high as 65.44 early in the session, a 4.9% leap from Tuesday's finish. But the index gave almost all of that back by the closing bell, ending at 62.62, up just 0.4% for the day.
That's still above the 10-year closing low of 60.87 reached Monday. But as Jay Shartsis, head of options trading at RF Lafferty & Co. in New York, reminds: "Every time the financial stocks look like they can't possibly go any lower, they go lower."
The BKX is down 29% year to date, compared with a 10% drop in the Standard & Poor's 500 index.
The Federal Reserve talks a lot about inflation.
The Bank of Mexico does something about it.
The Mexican central bank today surprised markets by raising its benchmark short-term interest rate to 7.75% from 7.5%, the first increase since October.
The bank said it tightened credit because "the recent inflation dynamic is worrying."
 Like most of the world, Mexico is battling rising cost pressures, particularly in food products.The country’s consumer price index rose 4.95% in the 12 months through May, well above the central bank’s target range of 2% to 4%, notes Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.
Still, the bank’s move was unexpected because the government on Wednesday announced a deal with major food companies to freeze prices on more than 150 pantry items through the end of the year, in an attempt to ease the squeeze on consumers.
That was supposed to forestall an interest-rate hike. Instead, it looks like the Mexicans are taking the inflation battle seriously enough to risk slowing their economy with higher interest rates.
In the currency markets, at least, the Bank of Mexico’s decision is a hit. The peso has edged up to a five-year high against the dollar. The buck is worth 10.27 pesos this morning, down from 10.32 on Thursday and 10.36 a week ago. That’s not a big move, but it’s the trend that counts.
Interestingly, the Mexican stock market is suffering less today than the U.S. market. The Mexican IPC index was down about 0.6% at 10:45 a.m. PDT, compared with a 1.6% drop in the Dow industrials.
The U.S. inflation rate -- 4.2% for the year through May -- isn’t much lower than Mexico’s. But when Fed policymakers meet next Wednesday, they’re almost certain to leave their key rate at 2%, despite the recent barrage of rhetoric about being inflation-vigilant.
Given this week’s renewed carnage in bank and brokerage stocks on Wall Street, it’s clear the Fed is boxed in: Tighter credit could be a certain death sentence for many financial companies that are teetering on the edge.
Photo: Guillermo Perea/EPA
Maybe you can start dusting off those overseas vacation plans, after all: The beleaguered dollar suddenly is on a hot streak.
The greenback is rallying today against the euro, the yen, the Canadian dollar and other major currencies, lifting a closely watched index of the dollar’s value to its highest level since February.
The DXY dollar index, which measures the buck’s moves against six key currencies, was at 74.13 at about noon PDT, the highest since Feb. 27. The index has jumped 2.4% this week, a big move compared with its usual shifts.
 The euro has slumped to $1.535 today from $1.542 on Thursday. The European currency peaked at $1.599 in mid-April.
Just a week ago the dollar was hammered by the government’s report of a jump in the unemployment rate in May to 5.5% from 5%. Anything that dims faith in a country’s economy usually is bad news for its currency.
But this week, sentiment toward the buck has rebounded sharply -- although not necessarily for reasons that will make average Americans feel good.
One factor is the growing belief that the Federal Reserve will begin raising short-term interest rates this fall to combat inflation. The Fed has encouraged that idea with tough talk on inflation, including a throw-down-the-gauntlet speech on Monday by Chairman Ben S. Bernanke.
"There has been a pretty significant shift in expectations on rates," said Kathy Lien, currency strategist at DailyFX.com. Higher interest rates could attract more global investors to U.S. bonds, underpinning the dollar.
Today, although the "core" rate of inflation in the government’s May consumer prices report remained relatively tame, Treasury bond yields are mostly higher after dipping early in the session. That’s a sign investors continue to bet on a credit-tightening move by the Fed later this summer or early in fall.
The dollar also is getting a boost today from a blow to the euro’s image, after Irish voters rejected the European Union’s new governing treaty -- raising new doubts about prospects for greater political unity to tackle Europe’s problems. Bloomberg has a good story here.
The Irish vote "weakens the appetite foreign investors have for euro-denominated assets," said Michael Woolfolk, currency strategist at Bank of New York Mellon.
For the Bush administration and the Fed, almost anything that strengthens the dollar is welcome at this point, because a healthier buck could put downward pressure on prices of oil and other commodities, as I explain here. Crude oil today is trading lower, off $1.86 to $134.88 a barrel around noon PDT.
Photo: Michael Probst/Associated Press
Globalization is a dirty word anymore in much of America, what with the inevitable and ongoing wealth transfer from the haves (the developed world) to the have-nots (the developing world).
But it isn’t a one-way street, as Caterpillar Inc. showed on Thursday.
 The Peoria, Ill.-based company said it would invest more than $1 billion in five Illinois plants by 2010 to boost manufacturing capacity for heavy machinery used in mining and infrastructure projects.
Cat’s sales have doubled since 2003, to $45 billion last year, amid booming foreign demand for its earthmovers, excavators and other machinery. In the first quarter nearly 60% of the company’s sales were to customers outside North America, including China and India. The dollar’s slide has been an obvious help by making Cat’s products relatively less expensive for many foreign buyers.
Cat’s CEO, Jim Owens, said the Illinois expansion "demonstrates our optimism about the global markets we serve."
Despite the stock market’s swings, buy-and-hold investors have been happy campers in Cat: Its shares have risen every year since 2003 and are up 11% this year. Cat on Wednesday raised its cash dividend 17%, to an annual rate of $1.68 a share. The stock rose $1.57 to $80.50 on Thursday.
Hate globalization? No question, it hasn’t been good for many U.S. workers. But it must be playing well in Peoria.
Photo: Caterpillar machinery for sale in Richmond, Vt. Toby Talbot/Associated Press
Wall Street woke up this morning determined to have a nice day. But by the closing bell, the drugs had worn off.
You can thank the usual buzz killers: oil and the Federal Reserve.
The next test for rickety markets comes on Friday with the government’s report on May consumer price inflation.
Today, the Dow industrials were up as much as 186 points early on, nearly recouping Wednesday’s drop, after the government said retail sales rose 1% last month, the biggest jump since November. That was a clear sign that many consumers were spending their tax rebate checks, just as the Bush administration had hoped.
What’s more, a $46-billion takeover bid for Anheuser-Busch Cos. by Belgium’s InBev left the impression that foreigners, at least, may believe that U.S. stocks are cheap.
 And even oil cooperated, for a while, with near-term futures falling as much as $4.83 a barrel, to $131.55.
But there seems to be no way to keep the oil bulls down for long these days. The price rebounded by the end of trading, closing up 36 cents at $136.74 a barrel -- even in the face of a stronger dollar, which usually pulls commodity prices lower. As oil recovered stocks sank. The Dow closed at 12,141.58, up 57.81 points, or 0.5%; broader indexes were weaker.
Wall Street also was spooked by the latest Fed missile launched in the war of words on inflation. Charles Plosser, president of the Fed’s Philadelphia bank, said on CNBC that the central bank must "act preemptively" to damp inflation pressures. That added to the growing belief that the Fed will begin boosting short-term interest rates by fall. (And if the consumer keeps spending, that gives the Fed more cover to make a move.)
"It looks like they do want to start raising rates," said Ray Remy, head of fixed income at Daiwa Securities in New York.
Plosser’s comments helped spark another big sell-off in Treasury bonds that pushed the yield on the two-year T-note to 3.04%, the highest since Dec. 31. (How much have investors’ rate expectations changed in the last week? Just last Friday they were willing to buy two-year T-notes at a yield of 2.38%. D’oh!)
The Fed’s new inflation paranoia places more than the usual importance on the May consumer prices report due Friday. Most analysts figure prices were up 0.5%.
But Ian Shepherdson of High Frequency Economics warned in a report today that "the unpredictability of food, home heating oil and utility prices means a slightly bigger increase is also possible."
Get the drugs ready.
Photo: Charles Plosser. Federal Reserve Bank of Philadelphia
The Federal Reserve hasn’t raised its benchmark short-term interest rate. But it might as well have, given how yields are rising on Treasury bonds.
And that is a distressing turn of events for mortgage rates and for the struggling housing market.
Yields on Treasuries have been in an upward trend since mid-March, but the trend gave way to a spike the last few days: The yield on the two-year T-note ended at 2.92% on Tuesday, up from 2.71% on Monday and 2.38% on Friday.
A move of a half-percentage-point in two trading sessions is nearly unheard-of.
 Bond yields rise, of course, when investors are bailing out, pushing bond prices lower. And there has definitely been a rush for the exits. "This is the get-me-out trade," said Tom Di Galoma, a veteran bond trader at brokerage Jefferies & Co. in New York.
Why the sudden urge to sell? The Fed seems to have gotten religion about inflation pressures in the economy, with oil’s surge above $130 a barrel. Chairman Ben S. Bernanke warned about the risks of higher inflation in two speeches over the last week.
The implicit message: Don’t expect the central bank to make another cut in its benchmark rate, now 2%. In fact, be prepared for a rate hike, particularly if oil doesn’t come down.
That is driving two camps of investors away from Treasury bonds. Camp One comprises "people who had been betting on a weakening economy," Di Galoma said. Bernanke, in his speech Monday, indicated the Fed was less worried about the economy than inflation.
Camp Two: Investors who figured the Fed was done cutting rates, but who believed a rate increase wouldn’t happen before 2009. Now, the concern is that Bernanke might want to start tightening credit in the fall.
David Ader, chief government bond strategist at RBS Greenwich Capital in Greenwich, Conn., said he still expects the Fed to wait until next year to raise its key rate. But with its new hard-line on inflation, Ader said, "The Fed is trying to tighten credit without actually tightening."
Many on Wall Street believe the Fed’s immediate goal is to bolster the dollar. As I explain here, that could help bring down commodity prices and thereby damp inflation.
Di Galoma is warning clients that Treasury yields may continue to rise as shell-shocked investors reassess the Fed’s stance. The two-year T-note yield, he said, could jump to 3.2% in the near term.
And although longer-term Treasury yields haven’t risen as quickly as shorter-term yields, the 10-year T-note, at 4.11% on Tuesday, was the highest since Dec. 27.
The housing market can’t like the sound of this. The mortgage market takes its cue from longer-term Treasuries, which could mean more upward pressure on mortgage rates. The average 30-year home loan rate was 6.09% as of last week, up from 5.98% two weeks earlier and the highest since mid-March, according to mortgage finance giant Freddie Mac.
The latest jump in bond yields "is not a welcome circumstance," said Keith Gumbinger, vice president at mortgage research firm HSH Associates. He was trying to be gentle.
If a potential home buyer is having trouble making the math work because of higher mortgage rates, guess what the home seller will probably have to do to his asking price?
Rising inflation pressures are a serious threat, as Fed chief Bernanke has been telling us over and over again lately.
Yet the premier inflation hedge -- gold -- has been struggling since crossing the $1,000-an-ounce mark for the first time in mid-March.
And today, after Bernanke repeated in a speech late Monday that the Fed wouldn’t allow inflation to take off like some helium balloon (OK, I’m using literary license here), gold took a big hit: Near-term futures in New York sank $26.80, or 3%, to $867.90 an ounce.
 The price now is off 13.5% since the metal peaked at $1,003 on March 18.
Gold’s woes today stemmed from a jump in the dollar, a move that Bernanke and the White House helped engineer, as I explain here.
Gold is, in effect, a rival currency. When the dollar is being devalued -- which has been the major trend since 2001 -- gold shines as an alternative. The flip side is that a rising dollar often dims the appeal of gold to investors and speculators.
As for the metal’s role as an inflation hedge, a turn in the dollar hurts on that count, too, because a stronger greenback is potentially anti-inflationary (it makes imports cheaper, for example).
Even before the dollar’s revival this week, though, gold has been having trouble sustaining a rally since it crested the $1,000 mark.
Those record prices have caused some potential buyers to balk: The World Gold Council said global gold consumption slumped 16% in the first quarter from a year earlier, to 701 tons. And jewelry demand, which accounts for the lion’s share of gold consumption, tumbled 21% in the quarter to 445 tons, the lowest since 1993.
Still, some gold bulls are undaunted -- particularly those who believe the public is inexorably losing faith in paper currencies.
For sheer hyperbole, you can't beat this quote from a Bloomberg interview Tuesday with Peter Hambro, co-founder of London-based Peter Hambro Mining, which mines gold in Russia: The metal, he said, would attract more buyers because of "fundamental mistrust of the financial system of all inhabitants of the world."
That would be a lot of gold buyers, if he's right.
Photo: American Gold Eagle coin. Genaro Molina/Los Angeles Times
The Bush administration and the Federal Reserve are getting what they wanted: a big rally in the dollar and a drop in oil prices.
But the cost is higher interest rates -- great for savers, lousy for home buyers.
The dollar has jumped today to a three-month high of 107.37 yen from 106.10 on Monday, while the euro has fallen to $1.545, down from $1.565 on Monday and from $1.577 on Friday.
 Crude oil was off $3.12 to $131.23 a barrel at about noon PDT, after rising as high as $137.98 early in the session.
Let’s recap the last few days: Oil soared to a record high of $138.54 a barrel on Friday, in part because the dollar slid and the stock market dived after a disturbingly weak U.S. employment report for May.
Here's the widespread view on Wall Street: The administration and the Fed looked around for a way to help pull oil back down, and they decided to focus on the dollar. If they can boost the greenback’s value they might reduce global investors’ and speculators' appetite for commodities, which have been rallying in part because a weak dollar makes commodities look more appealing than other dollar-denominated assets.
 So early on Monday Treasury Secretary Henry M. Paulson Jr. tells CNBC that the administration won’t rule out jumping into the currency market to boost the dollar.
Fed Chairman Ben S. Bernanke follows that with a speech Monday evening in which he basically says the economy will be OK, and the Fed is more worried about inflation. The hint therein: The Fed’s next step with interest rates is more likely to be an increase than a cut.
Today, yields on Treasury bonds are surging on Bernanke’s warning. The two-year T-note yield was at 2.90% at about noon PDT, up from 2.71% on Monday and 2.38% on Friday. That’s a massive move in two days.
And as U.S. bond yields rise, that underpins the dollar’s value by making bonds more attractive to global investors.
"What Bernanke has done to U.S. yields has given the dollar a lot more support than anything else he could have said," said Daniel Katzive, a foreign exchange strategist at Credit Suisse in New York.
But rising bond yields will put upward pressure on mortgage rates, too -- which is about the last thing the crippled housing market needs.
Wall Street ought to know better than most: There is no free lunch.
Photos: Treasury Secretary Henry M. Paulson Jr. (Karen Bleier/AFP/Getty Images) and Fed Chairman Ben S. Bernanke (Susan Walsh/Associated Press)
Treasury Secretary Henry M. Paulson Jr. is trying to make currency speculators think twice before betting on a weaker dollar. And he’s having the desired effect, which also may be helping to pull oil prices lower today after Friday’s manic surge.
The greenback is rallying briskly against the euro and the yen after Paulson, on CNBC, said he wouldn’t rule out the idea of Treasury intervention to boost the U.S. currency’s value.
 "I would never take intervention off the table or any policy tool off the table," he said. "And I just can’t speculate about what we will or won’t do."
The euro has slumped to $1.563 in New York trading from $1.584 in Asia overnight, a big move for one day.
Paulson’s boss, President Bush, also tried to jawbone the buck higher today. Speaking to reporters before leaving for a European trip, Bush reiterated that "a strong dollar is in our nation’s interests."
"They’re putting markets on notice," said Jay Bryson, global economist at Wachovia Corp. in Charlotte, N.C.
Maybe that's because they’re running out of other ideas to deal with the debilitating effects of soaring oil prices, which on Friday rocketed $10.75 a barrel to a record $138.54.
Because commodities are priced in dollars worldwide, commodity producers earn less as the U.S. currency loses value. That boosts their incentive (and the incentive of speculators) to keep prices moving up as the dollar slides.
If, instead, the dollar were to strengthen, that could put downward pressure on commodity prices. A more robust dollar also could encourage global investors to favor U.S. stocks and other assets over commodities, and dim the need for raw materials as an inflation hedge. (Yes, that might be wishful thinking, but stranger things have happened.)
Federal Reserve Chairman Ben S. Bernanke also turned up the heat on dollar bears last week, as I noted in this post.
The oil market could just be tired from its record run on Friday, but prices have come off today as the dollar has rebounded. Near-term crude futures in New York were down $3.87 to $134.67 a barrel late in the trading session.
Talk is always cheap when it comes to government policy on the dollar, but with Bush, Paulson and Bernanke all chattering on the issue, currency speculators at least have to be prepared that the White House could actually be serious.
Photo: Treasury Secretary Henry M. Paulson Jr. Karim Jaafar/AFP Photo
How badly does Wall Street want to believe the worst is almost over for the economy?
Let’s see: On Thursday the stock market rallied briskly in the face of 1) ugly first-quarter data on mortgage delinquencies and foreclosures 2) a stunning rebound in the price of oil, which jumped $5.49 to $127.79 a barrel and 3) a pullback in the dollar, after the head of the European Central Bank warned that the bank may raise interest rates soon to combat inflation.
The Dow Jones industrials rose 213.97 points, or 1.7%, to 12,604.45, the biggest one-day gain since April 18.
 The rally was broad-based. Small-company stocks were stronger than blue-chips, continuing the trend since mid-March. That shows investors are climbing further out on the risk curve -- something you wouldn’t expect them to do if they feared a deep recession was upon us.
More remarkable is that the bulls would be this bold ahead of Friday’s government report on May employment trends.
As Steve Todd of the Todd Market Forecast in Crestline, Calif., notes, the monthly employment report tends to be "the most market-moving of all economic releases."
The consensus forecast of Wall Street economists is that the economy lost a net 60,000 jobs last month, after a loss of 20,000 in April.
"The jobs number is going to be huge" for the market, said Todd Clark, head of trading at Nollenberger Capital Partners in San Francisco. "If it’s still in decent shape you can take away the bear case for the economy."
Or, at least, a relatively small decline in jobs could reinforce the idea that the economy isn’t in danger of unraveling, despite the serious pain the housing market’s woes are causing in many parts of the country, and despite record gasoline prices.
Andy Engel, senior research analyst at investment firm Leuthold Group in Minneapolis, says he figures the economy is in recession, but the stock market is doing what it usually does: It’s already looking ahead to a recovery.
Leuthold turned more positive on the market in mid-May, boosting the weighting of stocks in the firm’s model account from 50% to 60%, Engel said.
The commodity bull market seemed to be under attack from all sides Tuesday, triggering a broad retreat in prices.
But considering the big guns aimed at the market, the losses were fairly modest. The Reuters/CRB index of 19 commodities fell 1.4%. Oil was one of the more serious casualties, off 2.7% to $124.31 a barrel in futures trading.
Under political pressure to corral investors and speculators who have been accused of helping to drive prices of grain (among other commodities) to record highs, the Commodity Futures Trading Commission announced that it would require certain investors to disclose more information about their holdings in ag markets.
"We want to encourage access to markets, but we want to be sure too much money isn’t distorting markets artificially," acting CFTC Chairman Walter Lukken told reporters in a conference call. More on the CFTC’s announcement here.
 Still ongoing: the agency’s six-month-old probe of oil-futures trading, which was just publicly disclosed last week.
Meanwhile, the Senate Committee on Commerce, Science and Transportation held a hearing Tuesday on possible energy-market manipulation. Investment legend George Soros, head of Soros Fund Management, was called as a witness because of his "life-long study of bubbles" (his words).
His conclusion about the oil market: Fundamental demand is driving prices, but institutional investors in commodities (such as pension funds) "reinforce the upward pressure on prices."
Said Soros: "I find commodity index buying eerily reminiscent of a similar craze for ‘portfolio insurance’ which led to the stock market crash of 1987. In both cases institutions are piling in on one side of the market and they have sufficent weight to unbalance it."
Nonetheless, he said he wasn’t predicting an "imminent" crash in oil prices.
Finally, Federal Reserve Chairman Ben S. Bernanke helped undermine commodity markets by appearing to draw a line in the sand on the dollar’s long slide. I explain here, but in a nutshell, a weaker dollar would help boost commodity prices, while a stronger buck would be a drag on prices.
Photo: George Soros before the Senate. Stefan Zaklin/EPA
The U.S. dollar has a new BFF: Federal Reserve Chairman Ben S. Bernanke.
And that revelation may be helping to drive oil down to a three-week low today.
In a speech, the Fed chief took the unusual step of declaring the central bank’s interest in "ensuring that the dollar remains a strong and stable currency."
His comments are helping to push the dollar up, albeit modestly, against the euro, the yen and other key currencies.  And as the dollar appreciates, that’s negative for commodity prices, because it removes one incentive for higher prices of oil and other raw materials. They've risen in recent years partly because of the greenback's long slide: Most commodities are priced in dollars worldwide, so a weak buck means commodity producers -- and speculators -- have had more motivation to seek higher prices to offset the U.S. currency's devaluation.
Crude oil prices were down $3.06 to $124.70 a barrel at about 11:30 a.m. PDT, while the euro fell to $1.546, down from $1.555 on Monday and the lowest since May 15. (Not that any of this is helping the stock market today, which is broadly lower for a second day.)
Bernanke’s defense of the buck is unusual because currency issues normally are the U.S. Treasury’s concern, not the Fed’s. But the dollar’s decline is helping to stoke inflation in the U.S. by boosting prices of imported goods, and inflation is what the Fed is paid to worry about. (Never mind, for now, that a weak dollar is a boon to U.S. exporters.)
"The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation," Bernanke said in a speech via satellite to a financial conference in Spain.
"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations," he said.
Bernanke is "putting the market on notice that [the dollar] has begun to reach a level that may be uncomfortable" for the Fed, Goldman Sachs & Co. economists said in a note.
"Not since the days of the Louvre Accord more than 20 years ago has the Fed drawn an explicit line in the stand against the weakness of the dollar," said Michael Darda, economist at MKM Partners in Greenwich, Conn.
And what that also means, of course, is that the Fed is highly unlikely to cut interest rates further. Bernanke strongly hinted as much today: "For now, policy seems well-positioned to promote moderate growth and price stability over time," he said.
Photo: Fed Chairman Bernanke at a conference in May. Scott Olson/Getty Images
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