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Is U.S. closer to 'nightmare scenario' of deflation?

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U.S. closer to deflation, economist says It's far from certain that a fresh round of intervention by the Federal Reserve will halt the slide in inflation, Capital Economics warns in a new report.

The U.S. central bank, concerned about deflation amid a faltering recovery, is widely expected to launch a new round of quantitative easing, dubbed QE2, and anticipation of such a measure has rippled through stock and currency markets.

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But "we are not convinced that QE2 will prevent inflation from eventually falling to zero," said Paul Dales, U.S. economist at Capital Economics in Toronto, noting that at the last reading, core consumer prices were flat for the second consecutive month and the annual increase fell to a 49-year low of 0.8 per cent.

"The U.S. economy has moved closer to the nightmare scenario of a sustained bout of deflation," he said. "... Continued weak GDP growth and a persistently high unemployment rate will only conspire to push inflation even lower."

Price pressures, he noted, are "very weak" in most sectors.

Currencies volatile after G20 meeting The U.S. dollar sank this morning and the Canadian dollar climbed sharply in the wake of a G20 finance meeting that ended with just vague pledges amid heightened currency tensions.

While the meeting of finance ministers and central bankers in South Korea focused heavily on foreign exchange volatility, "there was nothing really firm in there to halt the decline of the U.S. dollar, so the risk is out of the way," said Scotia Capital currency strategist Camilla Sutton.

The G20 finance officials pledged in their communiqué to refrain from "competititve devalution" of currencies, the flashpoint in trade tensions, and to pursue policies that would bring down high trade imbalances. That was nowhere near what U.S. Treasury Secretary Timothy Geithner was pushing for, but, economists said, it does lay the groundwork for the broader G20 meeting in November.

"We think the communiqué will take some temporary pressure of the 'currency war' refrain; however the significant and persistent economic problems will likely make it easy for a backward slide," Ms. Sutton said.

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The greenback hit a 15-year low and the loonie shot above 98 cents U.S. as markets took the G20 pledge as basically leaving the status quo in place. There are somewhat differing views going forward, though:

"Markets took the G20 outcome as a green light to get back to the business of selling [the U.S. dollar]across the board ... We retain our base case view that the [U.S. dollar]selloff is running out of steam. In the longer-run, more [foreign exchange]co-operation should actually ease the pressure on [the U.S. dollar]" said Elsa Lignos, currency strategist at Royal Bank of Canada Europe.

But CMC Markets analyst Michael Hewson sees the U.S. dollar continuing to struggle: "As suspected this weekend's G20 communiqué turned out to be another bland statement pledging to work together to avoid 'competitive devaluation' of currencies. It also pledged that countries would work together to 'move towards more market-determined exchange rate systems' and that the International Monetary Fund would have more of a role in the supervision of exchange rates.

"The meeting also agreed to look at ways of looking at measures at reducing what was termed as excessive trade imbalances, though no specific targets or time-frames for doing this were set. It also served to kick the can down the road, so to speak, to the G20 leaders' summit next month, also in South Korea but is unlikely to reverse the overall pressure on the U.S. dollar as it continues to remain under pressure."

Singapore exchange bids for ASX The consolidation trend among global stock exchanges has spread to Asia. So far, marriages of stock exchanges have largely involved European and American bourses, but today Singapore Exchange Ltd. struck an $8.3-billion (U.S.) deal for the parent of the Australian Securities Exchange.

The deal for ASX Ltd. would create the fifth-biggest bourse operator in the world and a market of almost $2-trillion.

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"The combination of ASX and SGX, offering innovative new products and services to the market, will allow customers to maximize future opportunities, where Asia Pacific takes center stage globally as the source for capital, wealth creation and trading opportunities," the chief of Singapore Exchange said in a statement.

U.S. foreclosure process slows The U.S. foreclosure fiasco is taking its toll, slowing the pace of evictions and allowing people to stay in their homes for much longer, The Financial Times reports today.

Freddie Mac, the giant U.S. mortgage finance company, said foreclosure proceedings are now taking up to eight months, or two months longer than previously. While a record number of evictions is feeding the slowdown, so are the legal issues haunting U.S. lenders since the latest crisis in the embattled housing industry began, the newspaper said.

There have been allegations in the United States of improper foreclosures, largely related to reports of improper documentation.

Separately, The Wall Street Journal reported today that Bank of America Corp. has found some mistakes in its files. The giant U.S. lender has found mistakes in up to 25 of the first several hundred cases it has studied, involving documentation, missing files and missing signatures, the newspaper said

Some of the problems seem trivial, the Journal said, and there is no evidence of wrongful foreclosures.

Federal Reserve Chairman Ben Bernanke, meanwhile, said federal regulators are studying the issue, and preliminary results are expected next month.

"We are looking intensively at the firms' policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures," he said in the text of a speech to a housing conference.

OMERS teams up for 'Cheesegrater' OMERS is joining what may be the stirrings of a real estate revival in London. The giant Canadian pension fund manager is joining forces with British Land C. to build a 47-storey tower that is known as the "Cheesegrater" because of its tapering design.

Worth an estimated £340-million, It's the second tower plan to be pulled out of mothballs in a week.

Globe and Mail Streetwise columnist Boyd Erman notes today that OMERS took its first jump into London with a building known as Watermark Place, but that was just as the financial crisis was beginning.

Gildan pushing through price hikes Gildan Activewear Inc. has pushed through a "significant" price hike averaging 7 per cent in its wholesale business, and is believed to be in talks with retailers as well as cotton prices rise, UBS Securities Canada said today.

Gildan's wholesale business, its biggest, involves shirts that are screen-printed by the buyer, the type you'd buy at a concert.

UBS analyst Vishal Shreedhar said in a research note that the latest increase follows recent hikes of 3 per cent in each of July and September. Gildan's stock has "materially underperformed" its peers, Mr. Shreedhar said, but Gildan has a strong balance sheet and higher prices will be an "industry theme."

"We believe wholesale supply/demand conditions remain very tight," he added. "As a result, we believe the industry environment remains supportive of continued price increases, if further commodity price appreciation necessitates."

Marchionne stokes controversy Union and government officials are up in arms today over Fiat chief Sergio Marchionne's comments that the auto maker would be better off without Italy.

Fiat is locked in heated talks with unions over the fate of a plant in Sicily that it plans to shutter next year. It also has proposed moving some work to Italy from Poland, but it wants concessions from the union.

Marchionne said in a weekend TV interview that none of Fiat's 2010 profits will come from Italy, and that it can't sustain Italian losses forever.

"Fiat would be better off if it eliminated Italy," he said, according to news reports. "... For a long time now, the Italian system has been losing its competitiveness year-by-year, and over the last 10 years it has not kept pace with other countries, but this is not the fault of the workers."

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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