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The dollar sank against most foreign currencies Tuesday, as the still-frozen credit markets led a majority of investors to believe the Federal Reserve will step in with rate cuts, in addition to buying loans crucial to business.

In a speech before the National Association of Business Economics in Washington on Tuesday, Fed Chairman Ben Bernanke signaled that the U.S. central bank may be getting ready to cut interest rates. He said the Fed will consider the appropriateness of its monetary policy given the state of the economy.

The Fed announced earlier Tuesday it would take action to backstop the commercial paper market, by purchasing companies’ short-term debt. That sparked more speculation that the bank needs to cut rates in its meeting Oct. 29 - or even before that in emergency action.

On the Chicago Board of Trade, futures indicated a 48% chance that the Fed will lower its rate to 1.5% from 2%, and the futures showed a 58% chance that the rate will be cut to 1.25%.

The U.S. central bank could choose to lower its key funds rate, which is a rate banks charge other banks to borrow money, in an attempt to further encourage lending and thereby return the normal flow of credit to businesses.

But rate cuts are also inflationary, worrying dollar investors that their investments will devalue over time as the Treasury prints more money.

Euro: Due partly to these concerns, the euro traded at $1.3615 as of 4 p.m. ET. That’s up from $1.3498 on Monday. At one point on Monday, the euro hit $1.3443, the lowest level the currency has seen since Aug. 20, 2007.

But while investors seem to expect the United States to cut rates, they aren’t quite holding their collective breath yet for Europe to do the same.

"The European Central Bank hasn’t sent a clear signal that it will decrease rates anytime soon," said Rivera, currency strategist with Forex Capital Markets. "The much higher expectations that the Fed will cut rates are weighing on the dollar."

British rate cut: Speculation is brewing, however, about a possible rate cut in the U (paydayloans).K. when the Bank of England meets on Thursday, which held the British pound back a bit from achieving the same gains that the euro saw.

At 4 p.m. ET, the British pound bought $1.7483, up from Monday’s $1.7438 level. At one point Monday, the U.K. currency sank as low as $1.7335, the lowest point the pound has seen since March 13, 2006.

Yen: The dollar fell 0.6% against the yen to ¥101.31 after a historic collapse the day before. The dollar fell as low as 4.8%, or ¥100.23 during Monday trading - the biggest one-day drop ever. The dollar recovered a bit from hitting a 6-month low, ending the day at ¥101.82.

The yen was actually down as much as 1% earlier in the day when Australia’s central bank slashed rates early Tuesday and ECB President Jean-Claude Trichet said the bank would continue to provide liquidity to financial institutions for as long as needed.

The yen typically increases when investors show aversion to risk.

But the Fed’s plans may be a long-term positive for the dollar. With global economies struggling, the United States may in fact have the best chance to recover first.

"It’s a coin flip," said Rivera. "If they have to take measures like this, it may heighten concerns, but the whole concerted effort can be seen as a bottom, and we may start seeing buyers come into the market with confidence that the credit crisis is almost over."

In fact, the euro and pound had been much higher against the dollar before Bernanke’s speech. One analyst says some investors were encouraged that the rate cuts will eventually help the economy.

"There is some reassurance coming back into the marketplace," said Garreth Sylvester, senior currency strategist with HFIX. "Bernanke said he was confident in the measures taken to stifle current climate, and suggested the Treasury’s [financial rescue] plan may be enough." 

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Japan and Australia's central banks pumped more than $11 billion into money markets, seeking to ease near-record borrowing costs that threaten to tip regional economies into recession.

The Bank of Japan injected 1 trillion yen ($9.8 billion) and the Reserve Bank of Australia added A$1.815 billion ($1.3 billion). The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans stayed near a nine-month high and the Tokyo interbank rate was unchanged at the steepest this year. The Japan Libor-OIS spread, a gauge of cash scarcity among foreign banks seeking yen, rose to a record.

Interbank rates have jumped as lenders hoard cash, sheltering from bank failures and plunges in stock and commodities markets. The Nikkei 225 Stock Average dipped below 10,000 for the first time since December 2003 as Asian shares slumped for a fourth day, extending an equities rout that erased more than $2 trillion from global equities yesterday.

“There's a massive asset bubble deflating and it just encompasses everything,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. “We've been living in a dreamland and that dream has ended.''

Banks increased deposits held at the Reserve Bank of Australia by A$92 million to A$9.493 billion yesterday, after those holdings reached a record A$11.04 billion on Sept. 30, the RBA said today on its Web site. Those deposits averaged A$1.7 billion last year.

Money held at the BOJ by banks and other financial institutions rose 1.23 trillion yen to 7.22 trillion yen yesterday.

`Hoarding Cash'

The BOJ has pumped about 23 trillion yen into the system over the past three weeks, the most in at least six years, and Australia's central bank is adding twice the daily average injected last year as banks store cash after governments in Europe and the U.S. acted to prevent the collapse of six financial institutions in the past two weeks.

“Despite central banks pumping liquidity into the system, banks are either hoarding cash or putting it into treasury bills,'' said Ong Hock Ann, a money-market dealer at ING Asia Private Bank Ltd. in Singapore. “It's a question of confidence and trust. There is money, but money is not flowing to the right channels.''

The world economy is sliding into its first recession since 2001 as the credit crisis hammers consumers and companies, economists at JPMorgan Chase & Co. and UBS AG said yesterday.

Rate Cuts

Economists predict central banks will cut interest rates as growth concerns outweigh inflation worries. Those at UBS predict the Fed will halve its benchmark rate to 1 percent by April and the European Central Bank will cut its main rate to 3 percent from 4.25 percent by the end of next year.

Australia's central bank today slashed its cash target rate to 6 percent from 7 percent, the biggest reduction since 1992 and double the half-point cut forecast by economists in a Bloomberg News survey (500 fast cash).

Australian banks' borrowing costs were little changed after today's cash injection, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 86 basis points, or 0.86 percentage point, from 88.3 before the RBA operation. The gap has averaged 45 points this year.

Banks hold cash in RBA exchange settlement accounts, on- call deposits at the central bank that receive interest at 0.25 percentage point below the central bank's benchmark rate.

Default Risk

The cost of protecting investors from Australian corporate bond defaults increased to a record.

The Markit iTraxx Australia index rose 34 basis points to 245, according to prices from Citigroup Inc. The price of the contracts, tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd., is the highest since the iTraxx benchmarks started in 2004. Sydney trading desks were closed yesterday for a holiday.

The Markit iTraxx Japan index rose 9 basis points to 207, Morgan Stanley prices show.

“Credit markets remain extremely weak and fragile,'' Gus Medeiros, a credit analyst at Deutsche Bank AG in Sydney, wrote in a research note today. “We expect the market to remain very volatile and thin in the next few days.''

Damage from the credit crunch accelerated over the past month as Lehman Brothers Holdings Inc. and Washington Mutual Inc. collapsed, the U.S. government took control of Fannie Mae, Freddie Mac and American International Group Inc., and Merrill Lynch & Co. and Wachovia Corp. were purchased by rivals.

Cash Auctions

The U.S. dollar Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, stood at 287 basis points today, after touching 298 points yesterday. It was at 129 basis points two weeks ago and 81 basis points a month ago. The Japanese Libor-OIS spread widened to a record 61.05 basis points.

Japan's central bank today said it offered $20 billion in three-month loans to 40 financial institutions as part of a currency swap agreement with the Federal Reserve. The operation was held for firms including Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Goldman Sachs Japan Co.

The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps, the central bank said today in a statement. The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each. The central bank will also begin paying interest on bank reserves.

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Sarah Palin gets a lot of credit for standing up to Big Oil in Alaska, but if she and John McCain win the White House, don’t expect some of her more populist policies to survive the move to Washington.

In her two years as Alaska’s governor, Palin is credited with being tough on big oil, to the benefits of her constituents and bucking her own party.

In late 2007 Palin succeeded in raising the tax on oil companies from 22.5 to 25% of net profits. Alaska also added a clause increasing the tax for each dollar oil goes above $52 a barrel - essentially, a windfall profits tax.

Palin also killed a deal struck between Exxon Mobil, BP, and ConocoPhillips and Alaska’s previous governor to build a natural gas pipeline across the state and into Canada.

Analysts said corruption tainted that deal.

Palin renegotiated a new deal with a Canadian company, TransCanada, to build the $26 billion pipeline, which analysts say - if completed - is better financially for the state.

But analysts - and the McCain campaign itself - are quick to note that Palin will toe the line on the energy policies of her potential boss, who unlike Barack Obama does not favor a windfall profits tax.

Christopher Ruppel, an energy analyst at Execution LLC, a broker and research firm for institutional investors like hedge and mutual funds is more concerned with McCain’s energy policy than Palin’s past spats with the oil industry. "We don’t think she will represent a big change from that."

The McCain campaign, which speaks for Palin, confirmed that stance.

"’The governor supports the campaign’s positions," said Doug Holtz-Eakin, a McCain senior advisor.

Palin certainly has experience in dealing with energy issues in Alaska. But despite her drill baby comments, it’s hard to tell if the oil industry will see her as an ally - a la Dick Cheney who ran Haliburton, an oil services company - or whether her previous tax and pipeline decisions will label her a threat (instant payday loans).

‘It’s mixed, I haven’t picked up a consensus view," said Amy Myers Jaffe, a fellow in energy studies at the James A. Baker III Institute for Public Policy.

Exxon Mobil, which currently has an $800 million lawsuit filed against the state over the revoking of a gas field permit, declined to comment on Palin. Calls to Conoco and BP were not returned. The American Petroleum Institute also declined comment.

Jaffe said Palin shouldn’t get too much credit for raising the oil tax, noting that everyone from Hugo Chavez to the Canadian government hiked taxes as oil prices skyrocketed.

"Even the Bush administration raised royalty fees," she said. "She didn’t do anything everyone else didn’t do."

Other analysts echoed that sentiment.

"When people say ‘I stuck it to the oil companies,’ that is misleading," said Fadel Gheit, a senior energy analyst at Oppenheimer. "She is basically doing what is popular."

The tax may have been popular with Alaska’s voters, but it was not popular within Palin’s own party - many Republican state senators voted against the tax.

Holtz-Eakin, the McCain campaign spokesman, also said Palin’s decision to scrap the pipeline deal highlighted her ability to clean up Washington.

"She threw out the whole thing and redid it, which made sense," he said.

As to whether Palin can bring more experience in energy issues to the White House than her rival Joe Biden can, most analysts didn’t see it that way.

"Biden has extensive experience in dealing with energy and geopolitical issues due to his long record in the Senate," said Execution’s Ruppel. 

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OTTAWA–Canada is safe from recession, even if the U.S. Congress rejects a bailout package and global credit dries up further, but the economy may take enough of a beating to force the Bank of Canada to cut interest rates.

Credit is harder to come by for Canadian businesses, curtailing their investments. U.S. consumer purchases of made-in-Canada goods is wilting and commodity prices are slamming into reverse from record highs.

That toxic mix has sent economists back to their models to churn out lower growth forecasts for both 2008 and 2009, raising the likelihood that the central bank will have to consider easing borrowing conditions.

"If the U.S. government can’t put something through, that clearly increases the risk to Canada through the end of the year and into next year," said Ryan Brecht, economist at Action Economics.

The export sector, heavy reliant on the U.S. market, is getting clobbered and 70,000 factory jobs have been lost in the past year. But commodity prices are still higher than a year ago, padding household and corporate income.

"At this point we don’t really see negative growth for Canada, even in the worst-case scenario. We still look at them as being able to eke out a little bit of growth because they’ve been so resilient thus far," he said.

Last month after holding rates steady at 3 per cent, the Bank of Canada flagged a worsening U.S. outlook as one key risk that could prompt it to change its mind on rates. In a Sept. 25 speech Governor Mark Carney said this risk had become "more probable."

Markets on Thursday had priced in a 96 per cent probability of a rate cut on Oct. 21 due to the financial market meltdown, up from 51 per cent on Sept. 23.

Some economists are gradually coming around to that view as well.

"Even if the rescue package is passed, I’m still assuming that there is about a 60 percent chance the bank will cut in October," said Dale Orr, chief economist on Canada at Global Insight.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty have used words like "resilience" and "island of stability" to describe Canada’s economy and banking system since the financial crisis escalated, triggered by the collapse of U.S online payday advance. investment banks and other financial pillars.

Both men are vying for votes in an Oct. 14 election on a platform of prudent economic stewardship. So Canadians could be forgiven for wondering if their word is too good to be true.

"We are not upbeat on the real economy. … We’ve had to pull our forecast down with each successive round (of the crisis). I think growth of under 1 percent this year is now the most likely outcome," said Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada.

Flaherty this week predicted economic growth of 1 per cent this year, almost double what some economists now expect. Dale Orr, for example, revised down his growth outlook to about 0.6 per cent this year and 1.4 per cent next year.

Still, politicians and economists alike agree that the Canadian banking system is sturdier than in the United States or Europe because of conservative regulations. "We are probably as insulated as anybody in the world, given what’s happening next door," Hodgson said.

As the U.S. House of Representatives prepares to vote on Friday on a proposed $700 billion rescue package for financial institutions and European leaders scramble to cobble together a plan of their own, such a move is still unfathomable in Canada.

"I would be astonished if we needed the kind of credit backup that the Treasury and Fed are putting together in the United States," said Hodgson.

But the liquidity problems in Canada have been serious enough to prod the central bank to offer to inject $10 billion into money markets by the end of October.

If all else fails to calm global markets, Carney is seen as fully committed to joining in any coordinated action by the world’s major central banks.

"You hate to think about it but to be realistic, if those politicians don’t get their act together and they disappoint everybody, something has got to move in very quickly to instill confidence and I would guess this is certainly one way of doing it," said Orr.

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European officials squabbled over how to respond to the global credit crunch, with Germany opposing a coordinated approach and the Netherlands calling on states to set aside funds to help troubled banks.

French President Nicolas Sarkozy distanced himself from comments by his finance minister Christine Lagarde over the need to set up a “rescue fund.'' Luxembourg Prime Minister Jean- Claude Juncker told DeutschlandRadio today he didn't “see the need'' for an effort to emulate the $700 billion rescue package that U.S. senators passed yesterday.

The conflict undermined efforts to build a consensus European strategy to counter the financial crisis as a recession looms. Other fissures emerged, as Ireland's decision to guarantee bank deposits and debts prompted criticism by British bankers yesterday that it “distorted competition.''

“I cannot see a common response,'' Jean Peyrelevade, former chief executive officer of French bank Credit Lyonnais SA, now owned by Credit Agricole SA, said in an interview. “For this crisis it's too late to build a common response.''

Fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy hit Europe this week, with Germany, France, Belgium, Luxembourg, Iceland and the U.K. rescuing five lenders and Italian Prime Minister Silvio Berlusconi pledging to prevent losses for depositors.

Euro Weakens

The euro tumbled against the dollar amid the infighting among European leaders. The Senate's vote in favor of the rescue plan for financial companies today also gave the dollar a boost. The euro fell to $1.3884 per euro at 13:05 p.m. in Frankfurt, near a one-year low, from $1.4009 yesterday in New York.

Dutch Prime Minister Jan Peter Balkenende will discuss his plan for European Union nations to create accounts to support their finance industry when he meets Sarkozy in Paris today, Dutch Finance Ministry spokeswoman Hendrieneke Bolhaar said.

“If all European countries reserve funds, it will add up to hundreds of billions of euros and that provides trust to Europeans,'' Dutch Finance Minister Wouter Bos told parliament today. “The funds will be strictly national, although we need to reach consensus over when to use them.''

In the U.S., Treasury Secretary Henry Paulson proposed a $700 billion bailout on Sept. 20 that lawmakers are struggling to pass. The House of Representatives rejected a version of the plan three days ago. Senators who approved the package urged opponents in the House to drop their objections.

`Non-Starter'

A European version of the Paulson plan is a “non-starter'' because of competing agendas and coordination difficulties, Klaus Baader, chief European economist at Merrill Lynch and Co. in London, said in a Sept. 29 report. Still, he expects increased cooperation among governments confronting the crisis.

The disagreements will be aired at an Oct. 4 meeting called by Sarkozy in Paris with Juncker, leaders of Great Britain, Italy and Germany, as well as European Central Bank President Jean-Claude Trichet.

Lagarde told the German newspaper Handelsblatt in an interview today that a “rescue package'' was needed to help “smaller'' European states “threatened with a banking failure.'' Germany opposes the proposal “based on its current assessment of risk,'' said Finance Ministry spokesman Stefan Olbermann (no fax cash advance) http://paydayloans-on.com.

“We see no need for a fund,'' Olbermann said today.

Reuters reported that the fund would total 300 billion euros ($420 billion), citing an unnamed European government official.

Sarkozy Denial

Speaking to reporters today in Paris, Sarkozy said he “denied the amount and the principle'' of such a fund.

“Everyone is working very well together,'' Lagarde told reporters in Paris today.

The specifics of a coordinated plan notwithstanding, Germany rejects a Europe-wide approach to bank rescues, said Torsten Albig, another finance ministry spokesman.

“The idea of applying one solution, one big bang'' should the banking crisis spread “is not practicable and would create new, enormous problems,'' he told reporters yesterday in Berlin. “The tailor-made solution is the right way.''

That contrasts with pleas from European Union officials for less unilateral action. Charlie McCreevy, EU financial-services commissioner, yesterday proposed more coordinated oversight and rules that banks hold additional capital for asset-backed bonds.

“Capital and strong financial institutions are the lifeblood of an economy,'' McCreevy said in a Bloomberg Television interview in Brussels.

Money Markets

As banks hoarded cash, the Libor-OIS spread, a gauge of cash scarcity, widened for an eighth day. The difference between the three-month London interbank offered rate for dollars and the overnight indexed swap rate widened 7 basis points to 254 basis points as of 8:44 a.m. in London. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze spurred by the U.S. subprime- mortgage crisis began.

The credit-market turmoil may require a more comprehensive approach in Europe, the Organization for Economic Cooperation and Development said yesterday.

“Considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don't improve on the other side of the Atlantic,'' OECD Secretary General Angel Gurria said in Paris. “The piecemeal approach may not work in Europe either.''

A group of economists including Alberto Alesina of Harvard University and Klaus Zimmerman of Berlin's DIW economic institute appealed for an EU initiative to recapitalize banks.

`Once-in-a-Lifetime'

“This is a once-in-a-lifetime crisis,'' the 10 academics said in an emailed statement. European leaders need to tackle the bank industry's crisis “head on before it spirals out of control.''

One proposal is for European countries to follow Ireland, either as a bloc or individually, in guaranteeing banks' deposits and debts. Spain's Finance Ministry today said it supports strengthening EU protections of deposits. Berlusconi and Sarkozy have already pledged to prevent losses for depositors.

The advantage of such a program would be that it would boost confidence among banks and give them time to resolve their problems, although it would also put taxpayer funds at greater risk, economists at Royal Bank of Scotland Group Plc. said in a report today.

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Japan's wages dropped for the first time this year in August, indicating that households will keep cutting spending.

Monthly wages, including overtime and bonuses, fell 0.3 percent to 283,473 yen ($2,699) from a year earlier, after a 0.3 percent gain in July, the Labor Ministry said in Tokyo today.

Sentiment among large manufacturers fell to a five-year low last month, a central bank survey showed today, worsening prospects for wages and hiring. Factory output fell, export growth slowed and household spending dropped in August, signs the world's second-largest economy may already be in a recession.

“Given that the economy is in a recession, the priority for companies is to save costs, not to hire workers or increase wages,'' said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “I don't see any drivers of growth for Japan's economy at least until next year.''

The slump in production prompted manufacturers to reduce overtime working hours by 6.9 percent from a year earlier, the steepest decline since March 2002, today's report showed paydayloans.com. Households are the most pessimistic they've ever been and are cutting spending as falling wages and a rising jobless rate dims their prospects.

Wages fell in the month because summer bonuses declined 9.8 percent and overtime hours were reduced, said Akira Motokawa, head of the Labor Ministry's statistics division.

Consumer wealth is being also being eroded by the declining stock market. Japan's shares plunged to the lowest in almost four years yesterday, cutting into the value of assets of households who are already trying to cope with the fastest inflation in a decade. The Nikkei 225 Stock Average has lost 26 percent this year.

“Households are under siege,'' said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo. “It's only natural that consumer spending will stall.''

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