Weak Dollar Pushes Oil to Record Above $143

Oil rises above $143 a barrel on falling dollar, tensions in the Middle East.

Oil prices surged above $143 a barrel for the first time ever Monday, as a weaker dollar spurred investors to seek refuge in dollar-denominated oil futures to hedge against inflation.

"The main factors behind the rise today are the U.S. dollar remains fragile and geopolitical tensions, particularly surrounding Iran," said David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney. "That's unsettling for the oil market." The European Central Bank may raise interest rates at its next meeting on Thursday, a move that would help strengthen the euro against the dollar, Moore said.

Light, sweet crude for August delivery rose $3.46 to $143.67 a barrel in electronic trading on the New York Mercantile Exchange, by midday in Europe. On Friday, crude futures spiked to a record $142.99 a barrel in New York before closing at $140.21. In London, Brent crude futures rose $2.87 to $143.18 a barrel on the ICE Futures exchange in London.

Analysts said daily trading volumes for Nymex oil would probably continue last week's trend and stay on the light side, leading to higher volatility during the trading sessions. "We would not expect liquidity to be much better this week, as it will be a short trading week due to the July 4 weekend," Olivier Jakob of Petromatrix in Switzerland said in a research note.

Worries about tight oil supplies and growing global demand are also major factors in the doubling of oil prices since last year, Moore said. Traders were digesting reported comments from the commander of Iran's Revolutionary Guards, who warned that if his country is attacked, Tehran would strike back by barraging Israel with missiles. In a report published Saturday in the conservative Jam-e-Jam newspaper, Gen. Mohammad Ali Jafari said that if Iran were provoked, it would also move to control a key oil passageway in the Gulf.

Iran is the world's fourth-largest oil exporter and about 60 percent of the world's oil passes through the strategic Strait of Hormuz. The report comes after the disclosure of a recent Israeli military exercise over the Mediterranean Sea that was seen as sending a message to Iran to curb its nuclear ambitions.

The dollar has weakened on expectations the Federal Reserve Board won't soon raise interest rates as the U.S. economy struggles with low growth. The Fed left its benchmark rate unchanged last week. The dollar dipped to 105.15 yen on Monday from 106.12 late Friday, while the euro was slightly higher at $1.5813.

"ECB President Jean-Claude Trichet's hawkish stance (on) inflation" could mean the dollar may be headed for further weakness against the euro "and that's not bearish for oil," said The Schork Report edited by U.S. analyst and trader Stephen Schork.

A falling U.S. stock market has also led investors to seek higher-yielding investments such as oil and other commodities. The Dow Jones industrial average has fallen to its lowest level in nearly two years -- and is down nearly 20 percent since its peak in October.

Bank for International Settlements Expects Deeper Economic Downturn

Central banks' banker says world economy could see deeper, longer downturn than most expect.

The global economy could face a deeper downturn than many currently expect amid rising inflation and the turmoil on financial markets, the Bank for International Settlements said at its annual meeting Monday.

"In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation," the BIS said in its annual report. "While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."

The Basel-based bank added that the current "consensus view is still that the global economy will slow only modestly further in 2008" and that growth continued to be strong in the euro zone, Japan, and major emerging market economies.

Often called the central bank of central banks, the BIS said during its last fiscal year central banks worldwide reacted to the financial and monetary policy situation differently, and that given their countries' different economic situations, a "one size fits all" monetary policy can't necessarily be predicted or suggested.

The bank said that with inflation rising, a global bias toward higher interest rates was probably appropriate. Higher interest rates can cool inflation, but run the risk of lower growth. The bank warned against a cookie-cutter approach to interest rates from country to country, and warned than an excessive tightening exacerbated by the credit contraction caused by the crisis over mortgage-backed securities in the United States could worsen any downturn.

"Unfolding developments at the core of the global financial system have, however also created great uncertainty about the future economic prospects," the bank said. "Banks in several advanced industrial economies have been tightening lending standards, and thus a generalized squeeze in the availability of credit remains a distinct possibility."

The European Central Bank has indicated it could raise its key interest rate from the current 4 percent "by a small amount" as soon as this week, in an effort to combat rising inflation in the 15-nation euro zone, which is well above its preferred level of at or near 2 percent.

The BIS said it would have been best to avoid the large buildup of loose credit in the first place and urged new regulatory frameworks to prevent a recurrence. The BIS is a center for economic and monetary research, and coordinates regulations in the fields of financial services to promote international financial stability. All of BIS' capital is held by central banks BIS' customers include international central banks, as well as international organizations..

The BIS board of directors has 20 members and is currently chaired by Jean-Pierre Roth of the Swiss National Bank. Six non official directors are the central bank governors of Belgium, France, Germany, Italy and the United Kingdom as well as the chairman of the Board of Governors of the U.S. Federal Reserve System.

EU Inflation Hits 4% Record

Euro inflation hits new record high of 4 percent as consumers dodge big purchases.

Yearly inflation in euro nations hit a record 4 percent in June, the EU statistics agency Eurostat said Monday. Soaring prices for fuel and food are raising pressure on the European Central Bank to raise interest rates for the first time in a year when it meets this week.

Inflation is Europe's biggest economic headache as consumers pay far more at the gas pump and food, and steer clear of major purchases. ECB officials have signaled they may hike borrowing costs from 4 percent to 4.25 percent to try to cool prices.

This would be the first time they have shifted the rate since June 2007 despite major cuts from the U.S. Federal Reserve and the Bank of England, who moved to encourage reluctant banks to lend in the wake of a credit market crisis.

The inflation figure for June tops the previous record of 3.7 percent in May, far above the ECB's recommended guideline of just under 2 percent. Eurostat says inflation has not been higher since it started keeping records for each euro nation in 1996.

The European economy appears to be slowing sharply after a brief boom -- triggered by exports to a swelling global economy -- cut jobless rates to record lows. Confidence in the 15 nations that share the euro dropped to a near three-year low in June and inflation is now a major worry.

Oil prices have quadrupled in the last seven years, hitting Europeans hard because they also pay heavy taxes on fuel that can cost them some 80 euros ($126) to fill up a tank of a passenger car. Fishermen and truck drivers say that surging fuel prices are threatening their livelihoods, and have protested, sometimes violently, in recent weeks.

Weekend's Featured: Oil Twists Determine Market Jittery This Time

Record crude prices biggest difference from last market downturn in 2002.

Investors who remember the stock market's steep and prolonged decline earlier this decade may be wondering if the recovery from Wall Street's current morass will also take several years to accomplish.

The dot-com bust, terrorist attacks, recession and corporate wrongdoing combined to send stocks plunging in 2002. Today's market has some similar problems, in particular the troubled economy and a devastated industry -- this time, it's the financial sector. But there's one variable that may be impossible to resolve: oil prices that have more than doubled in a year and show no signs of abating.

"The economic gloom is far greater today then it was in 2002 because we have concern about worldwide inflation and what oil is going to do to the economy," said Alfred E. Goldman, chief market strategist at Wachovia Securities. "The problem for investors is when all of this is going to end, and the bottom line is nobody knows. Nostradamus wouldn't have known, neither would Albert Einstein."

Crude oil has risen nearly 44 percent in the past five months, and OPEC's president said this week he believes oil could rise to between $150 and $170 a barrel this summer; it closed at a record high past $142 a barrel on Friday. That's still lower then the $200 peak recently forecast by economists at investment bank Goldman Sachs.

The uncertainty about where energy prices are going makes it harder for economists to make forecasts. Many believe the high price of energy will eventually reverse after oil goes so high that demand shrivels and supplies increase -- but calculating a timeline is difficult. That leaves investors "just along for the ride," Wachovia's Goldman said.

Wall Street saw a return this past week of the volatility that had pummeled stocks since last summer but disappeared for a while during the spring. Investors were rattled not only by the uncertainty about oil's impact, but discouraging outlooks for the financial, high-tech and automotive industries.

This past week, the Dow Jones industrials plunged 4.2 percent, the Standard & Poor's 500 shed 3 percent and the Nasdaq composite index fell 3.8 percent. The market is worried about the direct correlation between the cost of energy, especially gasoline, and consumers' spending habits. Higher pump prices mean Americans might think twice about discretionary items like going out to dinner, buying new clothes, or paying for a new big screen television. Or buying a new car.

Consumer spending accounts for more than two-thirds of U.S. economic growth. Though there are no signs that spending has dried up entirely, many market observers fear it could happen -- especially as gasoline hovers near a national average of $4.08 per gallon.

Wall Street's low point in 2002 was attributed to a host of problems such as the accounting fraud at corporate names like Enron, Adelphia Communications and WorldCom. Global tensions after the Sept. 11, 2001, terror attacks also hung over the market. There was still fallout from the near-collapse of the high-tech industry, and the country's collective problems had also sent the economy into recession.

But, with oil at about $30 a barrel, inflation was under control. The market's troubles were not seen as a systemic risk, as they are today. "I knew we'd get through all the problems in 2002 because it was your plain vanilla, fairly shallow recession," said Stephen Leeb, president of New York-based Leeb Capital Management and author of "The Oil Factor."

"Right now, I think we're in one of the most threatening crisis of our history, and it is going to take a Manhattan Project to figure out what to do and it will take billions of dollars to implement it," he said, referring to the program during World War II to build the atomic bomb. "It can't immediately be cured because we need long-term answers."

The Federal Reserve, which kept interest rates on hold this past week, is well aware of the problem of expensive oil. The Fed statement released after its rate decision said "the rise in energy prices are likely to weigh on economic growth over the next few quarters."

But, Leeb and others believe this isn't something the Fed can solve on its own. The central bank's weapon against inflation is raising interest rates, which runs the risk of slowing down an already fragile economy. The higher oil goes, the more important of an issue it will become during the election cycle: "Washington needs to actively take charge if we want to turn this situation around," he said. "People are recognizing that the Fed is now in a total box."

Fed Helps Big Firms to Prevent Financial 'Contagion'

Fed: Emergency help for Wall Street was necessary to avert "contagion" of financial system.

The Federal Reserve was scrambling to prevent a "contagion" from infecting the nation's financial system when it took unprecedented actions to back a Bear Stearns rescue package and provide emergency loans to big Wall Street firms.

The Federal Reserve released documents Friday providing insights into its private deliberations in March that led to those controversial decisions. The Fed's actions came when credit and financial problems were intensifying, threatening to paralyze the entire financial system and plunge the economy into a recession.

Given the financial markets' fragile condition at that time, the Fed said it felt compelled to intervene because an "immediate failure" of Bear Stearns would bring about an "expected contagion."

Fed Chairman Ben Bernanke and his colleagues initially moved on March 14 to provide temporary emergency financing to investment bank Bear Stearns Cos. through an arrangement with JPMorgan Chase & Co. Two days later, as the nation's then-fifth-largest investment bank teetered on the brink of bankruptcy, the Fed agreed to provide backing for up to $30 billion for a deal in which JPMorgan would take over the troubled company.

That same day -- March 16 -- the Fed said it would let big Wall Street firms go directly to the Fed for emergency loans, a privilege only commercial banks had previously enjoyed. It was the broadest use of the Fed's lending powers since the 1930s.

The Fed's decision to take this action was "based on recent, rapidly changing developments," the documents said. "These developments demonstrated that there had been impairment of a broad range of financial markets" that Wall Street firms rely on for financing.

There was fear that other Wall Street firms could fall into jeopardy, sending problems cascading through the financial system. Democrats in Congress and other critics contend the Fed's actions are akin to a government bailout and are putting billions of taxpayer dollars at risk.

However, Bernanke has defended the actions, and in appearances on Capitol Hill has said he doesn't believe taxpayers will suffer any losses. The Fed's financial lifeline in JPMorgan's takeover of Bear Stearns was subsequently changed to $29 billion and -- most recently -- to $28.82 billion.

The documents said the Fed, in discussions on March 16, believed the takeover -- and the Fed's involvement in helping to bring it about -- were "necessary to avoid serious disruptions to financial markets." The Fed said "many potential investors" had been invited to back Bear Stearns but the investment firm determined that JPMorgan was "the most suitable bidder."

Bear Stearns began to unravel last year when two hedge funds it managed collapsed because of heavy bets on subprime mortgage securities, which soured when the housing market fell into a deep slump. Along with other big investment banks, it was forced to take multibillion-dollar writedowns on the bad investments. Then rumors in mid-March about the company's cash position triggered a run on the investment bank that left it close to bankruptcy. Earlier this month, JPMorgan closed its acquisition of Bear Stearns, bringing to an end an 85-year-old institution.

Everybody May Be the Oil Speculators

Retirement funds plowing cash into oil, riding its remarkable rise -- but there are risks.

All those speculators getting the blame for driving up the price of oil these days -- just who are they? For part of the answer, look in the mirror. The retirement savings of workers across the country, entrusted to pension fund managers, are being plowed into one of the few investments that has delivered phenomenal returns in recent years.

For decades, futures contracts were mostly traded by commodity producers and the people who used the actual products, such as crude oil, corn and soybeans. Agreeing to a price today for a commodity to be delivered in, say, two months is a way to smooth out price fluctuations for those supplies.

But large investors faced with the threat of inflation have increasingly used them as protection against the falling dollar. That includes pension funds, along with investment banks, mutual funds and private hedge funds.

Research firm Ennis Knupp and Associates says $139 billion had been funneled into energy commodites, primarily crude oil, by the end of March -- and it estimates more than half of that is from retirement money.

The investments have paid off. The Standard & Poor's GSCI index, which tracks a basket of commodities, is up 19 percent in the past five years, compared with just 9 percent for the S&P 500 stock index. The risk is that if the remarkable run in oil and other futures markets reverses course, billions of dollars of retirement benefits could be wiped out.

"A pension fund is supposed to be investing money in secure, stable investments for the benefit of the people whose money they are investing," said Dan Lippe, an energy analyst at Houston-based Petral Consulting Inc. "When we hit that wall and things start falling," he said, "they will fall very fast, and the pension funds that invested in commodities will see a tremendous loss of value."

The retirement system for public employees in California, the largest in the nation, has $1.3 billion invested in commodities. Most of it tracks the S&P commodity index. That's still just one-half of 1 percent of the fund's total $240 billion in assets, said Michael Schlachter, who advises the California pension fund. He said a collapse in oil or other commodity prices would have little effect on retirees.

Still, a growing chorus of experts is convinced retirement investments are enough to distort prices. Billionaire George Soros, the airline industry and the International Monetary Fund are all pressuring Congress to curb speculation by large investors. Democrats in Congress say they hope to vote on restrictions by August.

"Your pension fund manager may be using your retirement money to drive up the price of oil," said Rep. Bart Stupak, D-Mich., at a hearing earlier this week on speculation in commodities. "What would happen if pension fund managers decided to increase their commodity investment by another 20-fold?" he asked.

Speculators put money into commodity markets simply to make money on their investments -- unlike commercial investors, who are actually buying or selling orders for physical goods. Energy analysts say it's unclear what effect speculators have had on oil prices, which climbed briefly to a new record above $142 on Friday before falling back.

But Stupak and other lawmakers have already dashed off more than a dozen proposals to rein in commodity trading, including limiting how many contracts speculators can hold and closing loopholes that allow them to skirt regulations.

Sen. Joe Lieberman, I-Conn., proposed banning pension funds and other large investors from commodities altogether. He dropped the idea after vigorous opposition by an association of public and private pension funds.

Schlachter, who is also managing director for investment consulting firm Wilshire Associates, called the idea "horrendously bad." He said pension funds should not be compared to Wall Street speculators, who assume huge risks every day to maximize returns. "The pension plans we work with are using commodities only as a long-term hedge against inflation," he said.

Unlike the stock market, where there are a limited number of shares for each company, futures markets have no limits on contracts available. As long as a buyer can find a seller for each contract, investment opportunities are virtually unlimited.

Critics say retirement funds that accumulate contracts are artificially driving up commodity prices. In the case of oil, that means higher gas prices and more expensive food and other goods. "If they're going to be in the futures market they need to trade rather than take this buy and hold strategy," said Michael Masters, portfolio manager of hedge fund Masters Capital Management. "That is the worst possible thing for the futures market."

Masters and other experts told members of Congress this week that eliminating excessive speculation could drive oil prices down to about $65 a barrel, less than half the current price. Retirement funds have suffered at the hands of the market before. In 2002, when the stock market swooned after the dot-com crash and 9/11, retirement assets dropped $7 billion, losing 8 percent of their value.

Oil Breaks New Record Near $143

Oil prices set new record near $143 a barrel as investors flock to commodities.

Oil futures climbed to a new record near $143 a barrel Friday as the dollar weakened against the euro, confirming expectations that the falling greenback, a major factor in crude's stratospheric rise, will extend its decline and add to oil's appeal.

Retail gas prices inched lower overnight, but are likely to resume their own trek into record territory now that oil futures have broken out of the trading range where they had been for nearly 3 weeks.

Light, sweet crude for August delivery rose as high as $142.99 a barrel on the New York Mercantile Exchange before pulling back sharply in a spate of late-day profit-taking to settle up 57 cents at a record $140.21. On Thursday, the contract shot past $140 and rose more than $5 to a new settlement record.

The latest record came as the dollar fell against the euro in afternoon trading, having traded roughly unchanged for much of the day. "The dollar was slightly stronger, and when it gave up its gains, that gave oil the green light," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.

The market now believes the Federal Reserve is unlikely to raise interest rates in the near future; since higher rates tend to strengthen the dollar, traders are anticipating that it will continue to fall and, consequently, that investors will keep turning to commodities including oil as a hedge against inflation. "Oil's back in favor, especially with people bailing out of the stock market," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

The stock market's recent swoon is also sending investors in search of higher-yielding investments. On Thursday, the Dow Jones industrial average fell nearly 360 points, and in afternoon trading Friday was down more than 100 points.

"When money has nowhere to go, it is parked in commodities as it is one of the few investment instruments that actually rises the more money you pour into it," said Oliver Jakob, an analyst at Petromatrix Gmbh, in Switzerland in a note. With oil over $140 a barrel, traders are now expecting to see $145 and even $150, analysts say.

At the pump, meanwhile, gas prices slipped 0.1 cent overnight to a national average of $4.066 a gallon, according to a survey of stations by AAA, the Oil Price Information Service and Wright Express. Gas prices have fallen slightly from their June 16 record of $4.08 a gallon, but will likely resume their record breaking rise if oil futures keep trending higher.

That seems likely. Oil has more than doubled in the past year due to the dollar's decline, but also because of rising global demand, particularly in fast-growing economies such as China and India. Supply outages in the Middle East and Nigeria have also contributed, as has falling production in Mexico.

The sharp increase in oil prices has driven a similar rise in fuel prices. Gas prices are $1.09 higher than a year ago, and diesel prices were up $1.85 over the past year at a national average of $4.763 a gallon on Friday. Diesel is used to fuel most industrial vehicles, trucks, trains and ships, and its increase is a large part of the reason food and consumer goods prices are rising, putting additional pressure on consumers already paying $4 and more for gas. Diesel prices peaked at $4.797, also on June 16, but are likely to push past that record if oil futures keep rising.

NASA Scientist Gives 'Last Chance' Warning on Global Warming

NASA global warming scientist: Dump coal power and clean up emissions or 'we're toast'

Exactly 20 years after warning America about global warming, a top NASA scientist said the situation has gotten so bad that the world's only hope is drastic action.

James Hansen told Congress on Monday that the world has long passed the "dangerous level" for greenhouse gases in the atmosphere and needs to get back to 1988 levels. He said Earth's atmosphere can only stay this loaded with man-made carbon dioxide for a couple more decades without changes such as mass extinction, ecosystem collapse and dramatic sea level rises.

"We're toast if we don't get on a very different path," Hansen, director of the Goddard Institute of Space Sciences who is sometimes called the godfather of global warming science, said. "This is the last chance."

Hansen brought global warming home to the public in June 1988 during a Washington heat wave, telling a Senate hearing that global warming was already here. To mark the anniversary, he testified before the House Select Committee on Energy Independence and Global Warming where he was called a prophet, and addressed a luncheon at the National Press Club where he was called a hero by former Sen. Tim Wirth, D-Colo., who headed the 1988 hearing.

To cut emissions, Hansen said coal-fired power plants that don't capture carbon dioxide emissions shouldn't be used in the United States after 2025, and should be eliminated in the rest of the world by 2030. That carbon capture technology is still being developed and not yet cost efficient for power plants.

Burning fossil fuels like coal is the chief cause of man-made greenhouse gases. Hansen said the Earth's atmosphere has got to get back to a level of 350 parts of carbon dioxide per million. Last month, it was 10 percent higher: 386.7 parts per million.

Hansen said he'll testify on behalf of British protesters against new coal-fired power plants. Protesters have chained themselves to gates and equipment at sites of several proposed coal plants in England. "The thing that I think is most important is to block coal-fired power plants," Hansen told the luncheon. "I'm not yet at the point of chaining myself but we somehow have to draw attention to this."

Frank Maisano, a spokesman for many U.S. utilities, including those trying to build new coal plants, said while Hansen has shown foresight as a scientist, his "stop them all approach is very simplistic" and shows that he is beyond his level of expertise.

The year of Hansen's original testimony was the world's hottest year on record. Since then, 14 years have been hotter, according to the National Oceanic and Atmospheric Administration. Two decades later, Hansen spent his time on the question of whether it's too late to do anything about it. His answer: There's still time to stop the worst, but not much time.

"We see a tipping point occurring right before our eyes," Hansen told the AP before the luncheon. "The Arctic is the first tipping point and it's occurring exactly the way we said it would." Hansen, echoing work by other scientists, said that in five to 10 years, the Arctic will be free of sea ice in the summer.

Longtime global warming skeptic Sen. James Inhofe, R-Okla., citing a recent poll, said in a statement, "Hansen, (former Vice President) Gore and the media have been trumpeting man-made climate doom since the 1980s. But Americans are not buying it." But Rep. Ed Markey, D-Mass., committee chairman, said, "Dr. Hansen was right. Twenty years later, we recognize him as a climate prophet."

Weekend's Featured: Fed Unlikely to Raise Interest Rates Despite Hawkish Stance

The tough talk on inflation from Federal Reserve chairman Ben Bernanke and his colleagues is unlikely to lead to a boost in interest rates for now.

Even as central bank officials step up hawkish rhetoric, base rates will likely be held steady at 2.0 percent at a two-day meeting opening Tuesday of the Federal Open Market Committee, most analysts predict.

The Fed appears to be in a box with inflation pressures heating up even as the economy teeters on the brink of recession. The central bank has slashed rates since last September by 3.25 percentage points in an effort to fire up growth, but officials appear to be signaling that cycle of cuts is over, and that inflation is now the biggest threat.

"The Fed is approaching a danger point, in our opinion," said Ethan Harris, senior economist at Lehman Brothers. "It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level. Moreover, the rise in inflation expectations is clearly due to surging commodity prices, not an economic overheating."

David Kotok, chairman of Cumberland Advisors, said the Fed "will not raise interest rates this year, at least not until after the (November presidential) election." Kotok said the US economy is facing a commodity-driven inflation surge rather than a wage-driven push, and that monetary policy would do little to check these prices.

"The energy price shock is not something that the Fed can control," he said. Moreover, he said that because more consumer income is going to pay fuel bills, the effect of high oil prices is "deflationary, not inflationary." Similarly, Kotok said higher food prices would see little impact from rate hikes.

The analyst also said the Fed does not want to risk being seen as injecting itself in politics during a presidential campaign and will most likely refrain from any major actions until the election is over.

"The Fed normally does not raise interest rates preceding a national election," he said. "This time they are a beleaguered body and threatened by politics unlike in any recent period of history. Politics has injected a wild card into the Fed decision making. We expect that the Fed will stay on hold until after the election and keep its profile low in September and October."

From a purely economic perspective, many analysts argue that conditions are too fragile for higher interest rates. The housing crisis remains in full swing and credit markets are still vulnerable to a shock, some argue.

"If the Fed now regrets having lowered the federal funds rate while providing so much liquidity, might raising the federal funds rate now exacerbate the credit crisis and the recession? I think so," said Ed Yardeni at Yardeni Research.

Still, Bernanke and other Fed officials have been signaling they will take steps to keep inflation expectations from getting out of control. Bernanke said earlier this month that any shift in public expectations in inflation could be self-fulfilling by prompting workers to demand higher wages and businesses to pass on price increases.

"It's 'high noon' and Sheriff Bernanke is waiting with gun holstered, waiting for rapid inflation," said Scott Anderson, senior economist at Wells Fargo. "The problem is he may actually have to do battle if oil prices do not recede or stabilize soon. I call this a problem, because I'm not sure if the town is ready for this event, so soon after Sheriff Bernanke had to chase off the financial market crisis gang from taking over the town."

Some say the Fed is trying to "jawbone" public expectations in what amounts to a bluff on hiking rates. "The Fed is now battling inflation expectations, not inflation itself," said Joel Naroff at Naroff Economic Advisors.

"The first step in that war is jawboning, which is going on like crazy. We will not likely see the next action, rate hikes, until late in this year at the earliest." Naroff said the latest economic data "do not tell us the economy has stabilized to the point where the Fed would have any cover to raise rates."

Weekend's Featured: Oil Summit Looks for Oil Prices Solution

Oil Powers and Consumer Nations Meet on Sunday to Tackle Rising Oil Prices.

Leaders of global oil powers and consumer nations gathered in Jeddah on Sunday seeking ways to control spiralling oil prices seen as a mounting threat to the world economy. Saudi Arabia vowed on the eve of the meeting to release more crude as the price of a barrel hurtles toward 140 dollars, compounding inflation fears of countries reeling from record prices for staple foods.

Oil markets have lurched by up to 10 dollars a day in recent weeks, falling last week after China increased fuel prices, but many analysts expect new attacks in Nigeria to add to tensions this week.

While governments have highlighted refining shortages and increased demand, producer nations say action has also got to be taken to rein in "speculators" who they say have played a key role in the doubling of a price of a barrel over the past year.

"What is bringing us together is a sincere wish to be responsible," Saudi Arabia's Deputy Petroleum Minister Prince Abdulaziz bin Salman told a press conference late Saturday. Saudi Arabia has already announced it will increase output by 200,000 barrels a day to 9.65 million a day. "We will meet demand," the prince vowed. "If demand requires more crude, we shall sell it."

But Saudi Arabia is one of the nations that wants action against "speculators" and its gesture in increasing production has not been matched by other members of the Organization of Petroleum Exporting Countries (OPEC) which accounts for about 40 percent of world output.

OPEC president Chakib Khelil said even that increased production was "irrational and illogical". A Saudi source said there is scope for other countries to follow however. "Some people believe there is one million barrels of spare capacity within OPEC outside Saudi Arabia," the source told reporters. "Saudi Arabia has two million so all together that is three million." World production is currently just over 80 million barrels a day.

But more pressure for increased supplies is expected at the summit. German Economy Minister Michael Glos has called for a speedy increase in supplies. "We need more oil in the world market quickly in order to stop the spiralling prices at the gas pumps" which have passed a "limit" acceptable to consumers, the minister wrote in an article in the Sunday newspaper Bild am Sonntag.

British Prime Minister Gordon Brown, the senior western leader at the summit, has called for a "new deal" between consumers and producers. He wants producer nations to "invest in countries like ours, and oil consumers like us with good companies, with good technology and skills can invest in the oil-producing countries."

Brown said in an interview with The Guardian newspaper that the world was going through "the biggest of all three oil shocks" and called it "the downside of globalisation." He predicted that "the world is going to have to build 1,000 nuclear power stations."

US Energy Secretary Samuel Bodman insisted meanwhile that there is nothing to back accusations that "speculators" had pushed oil prices to their record levels. "There is no evidence that we can find that speculators are driving futures prices," Bodman told a press briefing in Jeddah.

"It is clear that financial markets have seen unprecedented movement of capital into commodities in recent years. Our view is that this capital is following the market upward, it is not leading that movement."

OPEC has argued that speculation and the weak dollar are behind the record prices. Bodman said: "Fundamentally tight market conditions in our view are the major driver of the dramatic price increases that we have seen over the last five years, and particularly in recent months."

Weekend's Featured: Wall Street Awaits Hawkish Fed Message

Struggling Wall Street Is Bracing for Hawkish Fed Message.

Whipsawed by fresh worries on the financial sector, Wall Street enters the summer season with investors in a sour mood ahead of a meeting of increasingly hawkish Federal Reserve policymakers.

Market jitters have risen amid high oil prices, troubles in the banking sector and the prospect of higher interest rates despite soft economic conditions. Auto sector troubles also have intensified. In the week to Friday, the blue-chip Dow Jones Industrial Average skidded 3.77 percent to end at 11,842.69, closing below 12,000 for the first time since March. The Standard & Poor's 500 broad-market slumped 3.10 percent to 1,317.93 and the tech-heavy Nasdaq composite fell 1.97 percent on the week to 2,406.09.

Sentiment faces yet another test in the coming week, when the Federal Open Market Committee headed by Fed chief Ben Bernanke is expected to signal a tougher position on inflation that could eventually mean higher interest rates.

"All eyes will be on the FOMC which is slated to announce its latest policy decision on Wednesday," said Meny Grauman, economist at CIBC World Markets. "The markets seem convinced that the Fed will hold rates at 2.00 percent, but there is considerably more uncertainty about whether the Fed will signal a tightening bias."

The Fed's shift in tone has been closely watched by analysts. After slashing rates by 3.25 points over the past few months in an effort reignite growth, the Fed has signaled that it is unlikely to cut rates further and may boost rates if inflation gets out of hand.

"The Fed is approaching a danger point, in our opinion," said Ethan Harris, senior economist at Lehman Brothers. "It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level."

Market troubles over the past week were fueled by growing worries about the banking sector. Citigroup's warning of more writedowns from real-estate losses and a need for fresh capital from regional bank Fifth Third fueled fears about the sector.

"Each day the Street is seeing similar news -- such as higher energy costs, financial losses, worries of inflation, and continuing housing slumps. The bleak news is keeping investors from stepping into the market," said Colleen King at Schaeffer's Investment Research.

Gerard Cassidy at RBC Capital Markets said bank stocks are headed for a "dead cat bounce" or a brief rebound from their troubles as they recognize losses from real-estate investments. "Though we expect the bank stocks to rally as much as 20 percent into second-quarter earnings announcements, we believe the fundamental trend is still bearish for banks stocks," he said. "Credit problems are expected to deteriorate over the next 12 months, which should drive stock prices lower in the second half of 2008, in our opinion."

Fred Dickson at DA Davidson & Co. said the troubles for banks are being watched because credit needs to flow to help any economic rebound. "Wall Street is growing more concerned over deteriorating profits and weakening balance sheets at not only the regional banks but also at global banks as more institutions 'fess up and state their need for additional capital or their view that the current credit market crisis hasn't materially begun to wind down," he said. Bank stocks, he added "need to bottom out before the broader stock market can begin a meaningful sustainable rally."

To make matters worse, the auto sector is facing its own troubles as Ford and General Motors slash output of profitable but fuel-hungry trucks to adapt to changes in demand in light of record fuel costs. Standard and Poor's cut its credit rating on the two along with privately held Chrysler. "We have renewed concerns about all three automakers' future cash outflows in light of the prospects for US sales for the rest of 2008 and into 2009," said S&P analyst Robert Schulz.

Bonds rallied as investors set aside inflation concerns and looked for safety. The yield on the 10-year Treasury bond fell to 4.137 percent against 4.261 percent a week earlier and that on the 30-year bond eased to 4.702 percent against 4.802 percent. Yields and prices move in opposite directions.

In the coming week, the Fed meeting is the main attraction but markets will also see data on new and existing home sales, durable goods orders and the final estimate of US economic growth in the first quarter.

Banks Raise Capitals at the Expense of Investors

Banks cutting dividends, diluting shares to raise badly needed capital.

America's banks and brokerages are scrambling to raise badly needed cash, but it may be at the expense of shareholders. Since the subprime mortgage market imploded, financial companies caught in the fallout have been raising capital in two major ways -- cutting dividends and issuing more shares. Both methods erode shareholder value; analysts believe the industry is poised for more.

"The market is now seeing a substantial increase in financial companies issuing common and convertible instruments in an effort to shore up liquidity," said Standard & Poor's senior index analyst Howard Silverblatt. "The additional financing gives them immediate breathing room, with the payback being longer term dilution."

Put plainly, their gain is your pain. Just this past week, Fifth Third Bancorp Chief Executive Kevin Kabat needed a cash infusion of $2 billion to bail out his struggling regional bank, while KeyCorp CEO Henry Meyer needed $1.5 billion. Both will issue stock to boost their balance sheets.

Banks have raised more than $60 billion this year by selling common and preferred shares. The issuance of new stock acts to dilute the value of current shareholders because profit gets split among more shares. It's like having the family over for a turkey dinner and at the last minute grandpa invites the neighbors, too. There'll be less for everybody.

Meanwhile, the regular stock dividends investors have counted on from banks are shrinking. Citigroup Inc., Wachovia Corp. and KeyCorp are among 16 U.S. banks that slashed dividends during the first six months of 2008 -- that's more dividend trimming in the sector than the past five years combined.

The entire S&P 500 doled out $61.72 billion worth of dividends during the first quarter -- down from $67.09 billion during the fourth quarter of 2007. Financial companies accounted for 12.35 percent of the first quarter dividends, a sharp decline from 22.3 percent during the fourth quarter and 28.68 percent during the third quarter.

And, with major banks set to report second-quarter earnings next month, investors will likely suffer through more write-downs. Already Citigroup Inc. Chief Financial Officer Gary Crittenden warned investors that the bank will take substantial charges in the second quarter, though they won't exceed the $6 billion that Citi recorded in the first quarter.

Since last summer, global banks and brokerages have written down nearly $300 billion from wrong-way bets in mortgage-backed securities and other risky investments. Some analysts say that amount could climb much higher.

Fitch Ratings estimates that the mortgage crisis has cost banks $400 billion in losses so far, and the International Monetary Fund said in a report that the amount may rise to nearly $1 trillion before the credit crisis is over.

Analysts at JPMorgan Chase & Co., Merrill Lynch & Co. and UBS AG all said this week that banks may have to cut dividends further and raise more capital to cover losses. Not all of the banks are feeling the same pain. Huntington Bancshares Inc. said this week that its credit quality is not on the verge of buckling, while SunTrust Banks Inc. announced Friday it does not foresee having to cut its dividend or issue new stock to raise capital.

But the rest of the sector might need to raise $65 billion more as losses and write-downs extend into 2009's first quarter, according to Goldman Sachs analyst Richard Ramsden. He lowered the price targets on 14 banking companies, and slashed earnings per share forecasts for 11 of them.

All of this comes amid one of the most brutal years for financial stocks since they plunged in 1998 after Russia defaulted on its government bonds and caused investors to unwind positions in emerging market debt. The KBW Bank Index, which includes 24 financial companies, has slid about 19 percent in June. And major institutions from Lehman Brothers Holdings Inc. to regional banks like Wachovia Corp. are all hovering near record lows. "Banks will not turn until a peak in credit costs is in sight," Ramsden said.

China Pledges Economic Openness, Wants US to Avoid Protectionism

China vice premier pledges economic openness, urges US to avoid protectionism.

China's vice premier said Thursday his country will continue to open its economy, but he urged the United States to avoid protectionism and share technology on energy and climate change.

"A trend of protectionism has emerged in the United States, a country based on free trade," Wang Qishan said at a reception in New York. "The United States should not close its doors or practice protectionism. The U.S. should continue to be an open country."

Wang's comments followed high-level economic talks this week in which China and the United States pledged greater cooperation to boost bilateral investment and deal with energy shortages and climate change.

The two countries agreed to launch talks on a treaty that could allow more U.S. investment in China's booming economy -- a major initiative of the Bush administration. The agreements on energy, the environment and investment followed two days of talks aimed at diffusing simmering economic tensions.

Critics contend the soaring U.S. trade deficit with China, which last year reached an all-time high of $256 billion, is the result of unfair trade practices, including currency manipulation, and has contributed to the loss of 3 million manufacturing jobs since 2001.

Wang said his country would continue down the path of economic reform, noting recent efforts to strengthen intellectual property rights, boost food and product safety, and protect foreign investors. But he urged patience as the developing Asian country of 1.3 billion people seeks to modernize its economy, poised to surpass Germany to become the world's third largest after the U.S. and Japan.

"We are making efforts to build institutions and a sound legal framework," said Wang, a former mayor of the Chinese capital, Beijing. "There is still much room for improvement," he added. "We need to improve transparency, but (the U.S.) should recognize how much progress China has made. We have done in 30 years what it took America 100 years to do.

Wang spoke at a dinner reception at a posh New York hotel. Guests included former U.S. Secretary of State Henry Kissinger, former U.S. ambassador to the United Nations, Richard Holbrooke, and Morgan Stanley Chief Executive John Mack.

Calling U.S.-Chinese relations of "paramount importance," Wang urged the United States to share more technology to prevent climate change and boost energy efficiency. He noted China could use U.S. expertise to capture carbon emissions from coal-fired power plants -- a chief source of global pollution. "This area of capturing carbon emissions enjoys broad prospects and wonderful business opportunities," Wang said.

He noted that U.S. firms have been reluctant to share technology with China because of lax intellectual property laws, but he said he pledged to work on the problem in talks with Treasury Secretary Henry Paulson. The talks were the fourth round of a series of negotiations known as the Strategic Economic Dialogue.

Wang also hit out at U.S. critics who have blamed China for steep increases in world food prices, saying the complaints contradict U.S. trade policy to boost American food sales to China. "Some people say China and India are beginning to eat too much beef and are straining supplies. But India doesn't eat as much beef so it must be all China," Wang said jokingly. "Does that mean the Chinese and Indians are destined to eat rice and vegetables? Some of these problems contradict one another."

The decision to pursue an investment treaty with China offers the prospect of wiping away a multitude of barriers that U.S. companies now face in their efforts to do business with China. But critics of the U.S. trade policy say the process could become bogged down and fail to produce the market-opening that U.S. companies are seeking. Some also complain the measures fail to push the Chinese to stop manipulating its currency.

China Petrol Hike Not to Reduce Oil Demand

China's fuel price hike may not dent booming economy's hunger for oil, analysts say.

The jump in China's state-controlled fuel prices will inevitably squeeze consumers at both filling stations and grocery stores. But analysts say the hike is unlikely to make an immediate or huge dent in the country's hunger for oil.

China's economy is booming, and people are buying cars and air conditioners as their incomes grow. There is huge pent up consumer demand in a country of 1.3 bilion where per capita energy consumption is still far below wealthier countries.

Also, the price hike of up to 18 percent is likely to prompt refiners to boost production of crude oil, gasoline and other refined products. Previously, they had held back because they were losing money on the wide gap between global crude oil prices and state-set retail prices, which had created widespread fuel shortages.

"Do not expect an immediate fall in China's oil imports -- the price effect on demand will work in China as well, but it will take some time to work through," Wang Tao, an economist for UBS Securities, said in a report issued Friday.

Crude oil prices edged higher Friday in Asian trading -- approaching $133 a barrel on the New York Mercantile Exchange -- after tumbling the day before on news the National Development and Reform Commission would raise prices for gasoline and diesel fuel by 16 percent and 18 percent respectively.

Some analysts said the oil market may have overreacted to the news from China, with some traders buying oil futures on the belief that their climb will continue. "Whether domestic demand cools, or the price increase simply serves to bring more refining capacity on-line to satisfy China's voracious appetite, remains to be seen," said Jing Ulrich, chairwoman of China equities for JP Morgan Chase & Co.

Chinese drivers shrugged off the price hike as inevitable. "Maybe I might drive a bit less. But if it's for business, then if I have to drive, I will," said He Ping, a trading company employee who was refilling is VW Jetta at a Beijing gas station. "It's not that big a deal," he said.

In an explanatory note accompanying its announcement, the commission said that soaring oil prices had created "contradictions in the purchasing price of oil being higher than the selling price of refined products that were becoming more glaring by the day."

The government has been paying billions of dollars in subsidies to the country's two big state-owned refiners to make up for the losses. Many smaller loss-making refiners had shut down or cut back their operations.

The government hiked fuel prices by about 11 percent in November but had kept them frozen at that level, seeking to avoid adding to inflation, which has touched 12-year highs since the beginning of the year.

News of the price hikes lifted Chinese stocks Friday. The benchmark Shanghai index rose 3 percent, driven by a 4.6 percent gain in PetroChina and a 2.1 percent advance in Sinopec -- the country's two big refiners.

The hike raised the price of gasoline by 1,000 yuan ($145) per ton to 6,980 yuan ($1,015) -- more than 16 percent -- and diesel by the same amount per ton to 6,520 yuan ($949) per ton -- an 18 percent hike. Aviation kerosene rose by 1,500 yuan ($218) per ton to 7,450 yuan ($1,084), the commission, known as the NDRC, said on its Web site.

To protect individual consumers, the government said it would not allow any increases in bus and subway fares or taxi fares. Natural gas and liquefied petroleum gas prices will remain unchanged, and subsidies to the poor and to grain farmers would increase, it said.

Residential housing and farming and fertilizer industries will be exempt from a 0.025 yuan (0.0036 U.S. cents) per kilowatt increase in electricity rates for most businesses, the planning agency said.

The state-run newspaper China Daily said Friday that areas in Sichuan province, hit by a massive earthquake last month, were exempt from the increases. Still, the move is widely expected to boost inflation -- a major concern for Beijing. The hikes "will be quickly passed on to consumers through other channels, especially food prices in urban areas," said Vivian Chiu, an analyst at Merrill Lynch, said in a report.

China's inflation rate fell in May to 7.7 percent from 8.5 percent the month before, mainly reflecting lower food prices. But economists warn that higher costs for crude oil and other commodities pose a long-term threat.

Chinese officials bristle at suggestions that their country is a main factor behind the recent surge in global oil prices. Despite surging oil costs, the country's imports of both crude oil and oil products have surged to unprecedented levels as it builds up national stockpiles, while exports have plunged. Crude oil imports rose to 59.8 million barrels in January-April, up 10 percent from a year earlier.

Gasoline imports skyrocketed by nearly 20 times to 554,000 tons in January-May while imports of diesel jumped by more than nine times, to 2.9 million tons. "The government has to build up reserves for the sake of the domestic energy supply," said Han Xiaoping, chief executive officer of the China energy Web site http://www.china5e.com, an independent research organization. "After all, China is not the only country with such reserves," Han said.

Despite the surge in overall demand, China still consumes far less energy per each of its 1.3 billion people than the U.S. or other wealthy countries. Streets are dimly lit, apartment buildings often are illuminated by lights triggered only by movement or sound and ownership of private cars, though growing quickly, remains relatively low.

Pinched by surging costs for labor, land and materials -- as well as energy -- Chinese industries are finally beginning to cut back on the waste that has made them far more extravagant energy consumers than private citizens.

China Ocean Shipping (Group) Co., a huge state-owned shipping company, announced earlier this week that it was cutting the speed of its ships by 10 percent to help reduce fuel consumption and conserve energy.

US-India Nuclear Talks Going Haywire

India puts off talks, unable to clinch nuclear deal with the United States.

The future of a landmark nuclear energy accord between India and the United States looked deeply uncertain Wednesday after India's government put off talks with powerful communist opponents of the pact.

The meeting is now scheduled to take place next week. But even if it goes ahead, it's unclear what difference it will make with the communist parties steadfast in their opposition, reinforcing doubts over whether the deal can be clinched before President Bush leaves office. "We have several times made our position clear -- we are opposed to it," said Nilotpal Basu, a top official of the Communist Party of India (Marxist)

The deal would "undermine the independent foreign policy of India," he said, citing U.S. pressure on New Delhi to aid Washington's efforts to halt Iran's nuclear program. "We do not think this deal gives us any advantages."

U.S. policymakers see India as a counterweight to an ever-more powerful China, and the deal reverses three decades of American policy by allowing the shipment of nuclear fuel and technology to India, which has never signed international nonproliferation accords and yet has tested atomic weapons. India, in exchange, would allow international inspections of its civilian nuclear reactors.

For Bush, the deal -- the result of two years of painstaking negotiations -- would be a major foreign policy success amid the wars in Iraq and Afghanistan and other crises. For India, the benefits are arguably greater. Its booming but energy-starved economy would gain access to much-needed nuclear fuel and technologies that it has long been denied because of its refusal to sign nonproliferation accords.

And even though the deal only covers civilian nuclear power, it tacitly acknowledges India as a nuclear-weapons state, giving its weapons program a degree of international legitimacy -- and adding to India's growing clout. But a wave of opposition from India's communist parties, which provide the governing coalition with its parliamentary majority, appears to have scuttled the pact for now.

U.S. officials said earlier this year that with American elections coming up -- and no guarantee the next U.S. administration will keep the deal on the table -- India needed to complete its end of the pact by May to give the U.S. Congress enough time to pass it. Congress breaks for the summer in early July, and many lawmakers will be busy campaigning in the fall.

It's now mid-June, and New Delhi has made no progress in reaching a separate deal with the U.N.'s International Atomic Energy Agency that's needed before Congress can approve the pact. Wednesday's meeting was intended to persuade the communists to allow the government to secure a deal with the IAEA. It was canceled because of scheduling conflicts, Basu said.

Following the postponement, an Indian Foreign Ministry official said the deal was in "meltdown," although he held out hope for a last minute communist reversal. The official insisted on anonymity because of the sensitivity of the situation.

A day earlier in Washington, U.S. State Department spokesman Tom Casey stressed that the Bush administration would "make every effort to move it through Congress" before leaving office in January. But he, too, suggested that is unlikely to happen. "We would certainly hope that the next administration, whoever comes to office in January, would also see this agreement as something fundamentally in America's interest," he told reporters on Tuesday.

Both Barack Obama and John McCain have endorsed the deal. But it is not clear if either would make it a priority. The nuclear deal faces opposition in the U.S., too. Critics there, including some in Congress, say providing U.S. fuel to India would free up India's limited domestic supplies of nuclear material for use in atomic weapons, which they argue could spark a nuclear arms race in Asia.

Chinese Yuan Hits New Record Against Dollar

Chinese currency hits fresh high against US dollar as strategic economic talks resume.

The Chinese yuan gained against the U.S. dollar on Wednesday, hitting a fresh high as American and Chinese officials resumed talks centering on trade and other strategic issues.

Washington wants Beijing to loosen controls on currency trading and allow the yuan's rate to set by market forces. U.S. manufacturers contend that the restrictions keep the yuan's value artificially low, giving Chinese exporters an unfair advantage and boosting China's trade surplus.

The yuan has gained about 20 percent against the U.S. dollar since Beijing revamped its foreign exchange trading system in July 2005, revaluing the currency by 2.1 percent to 8.11 yuan to one dollar.

On Wednesday, the yuan began trading at a 6.8823 to the dollar, continuing a steady advance against the dollar that has taken it to record highs in recent weeks. It was trading at 6.8827 by Wednesday afternoon on the over-the-counter market, stronger than Tuesday's close of 6.8914.

China has pledged to loosen currency controls, but has not given any timetable, saying that sudden change would expose the country's shaky financial system to excessive risks from outside speculators.

During the talks in Annapolis, Md., China's central bank governor, Zhou Xiaochuan, alluded to such risks by asking about the regulatory mistakes that may have helped precipitate recent U.S. financial troubles.

"China always hopes to draw lessons from the U.S. experience in macroeconomic management and market development," the official Xinhua News Agency quoted Zhou as saying. "However, during this time of discussion, we are also interested in drawing lessons from the U.S. financial turbulence." Among the questions Zhou said raised was the role exchange rates can play "in maintaining the world's financial stability." The yuan has gained about 6 percent so far this year, compared with a 6.9 percent gain in 2007.

Top finance officials from the United States and China pledged greater cooperation Tuesday on a range of economic issues. But it was clear that the fourth round of high-level economic talks would leave both nations far apart on a number of contentious subjects from U.S. unhappiness over the slow pace of China's economic reforms to Chinese concerns about increasing protectionist sentiments in the United States.

Treasury Secretary Henry Paulson hoped that the two days of talks in Annapolis will produce enough results to persuade the next administration to continue the meetings. It was Paulson's brainchild to start the twice-a-year discussions in 2006.

The U.S. trade deficit with China grew to a record $256.3 billion last year, although the gap has begun to moderate as U.S. demand for Chinese-made exports has slackened. "We now believe that the (Chinese) trade surplus should plateau in 2008," Stephen Green, China economist at Standard Chartered Bank in Shanghai, wrote in a report issued this week.

The People's Bank of China, the central bank, announces the yuan's parity rate -- a weighted average of prices given by market makers, excluding the highest and lowest offers, early each trading morning.

US Needs to Stop Nuclear Black Market

US needs to be nuclear black market's biggest customer in order to stop it.

The U.S. government is not doing enough to buy uranium and plutonium on the black market and keep it out of the hands of terrorists, criminals and rogue states, the Energy Department's top intelligence official said Monday.

"We must take urgent action to scoop up any nuclear material outside state control before terrorists do," Rolf Mowatt-Larssen, Energy's intelligence director, said at a speech at the Washington Institute.

Since 1993 there have been 1,300 nuclear-smuggling related incidents, according to the International Atomic Energy Agency. About 19 have involved the transfer of weapons grade uranium or plutonium, which could be used to fuel either a traditional nuclear warhead or turn a conventional explosive into a bomb that disperses radiation.

"The continuing instances of trafficking in nuclear materials means we collectively have not done enough to keep material out of the hands of terrorists," he said. "We must urgently intensify efforts to acquire any materials that may be for sale on the illicit nuclear market."

There are nuclear weapons materials in more than 40 countries, with significant amounts in some former Soviet states. Only a few kilograms of plutonium would be needed to make a primitive nuclear weapon, and such material is hard to detect in transit because it emits low levels of radiation, according to the Nuclear Threat Initiative in Washington.

The amount of nuclear material U.S. agents buy on the black market is classified. The new revelation that the A.Q. Khan nuclear network sold a digital blueprint for a small nuclear warhead highlighted the danger.

That information was contained in a report by David Albright, the president of the Institute for Science and International Security and a former U.N. arms inspector. The report was issued Monday. The Washington Post first reported on it June 15.

Khan, who headed Pakistan's nuclear program for about 25 years, headed a network that secretly sold nuclear technology to Iran and Libya on the black market. The network was discovered and largely dismantled in 2004.

In that investigation, Swiss officials seized computers and files from three brothers accused of smuggling for the network. By 2006 the files had been deciphered and among them was a detailed design for an advanced but small nuclear warhead.

Albright told The Associated Press on Monday that the design goes far beyond the schematics and information about nuclear weapons available on the Internet. "It's a very different category of information, and it's very dangerous," he said. "There are no other designs out there. There is very little information of this quality out there outside of the nuclear weapons states."

Mowatt-Larssen said the U.S. government assumes terrorists or developing countries can obtain or develop a warhead on their own. Preventing them from acquiring the nuclear materials needed to make a bomb is vital.

The possibility that a terrorist group or country that does not now have a nuclear weapon may build or buy one seems to be frightening enough to do what years of legislation and presidential directives haven't quite achieved: knitting together disparate American intelligence agencies into one well-meshed, functional brain.

Different agencies and offices within those agencies have traditionally worked on separate pieces of the nuclear question -- what the status of a given nation's nuclear energy program is, whether it has or is developing a warhead, if it is sharing or selling weapons information or parts, or the intent of a terrorist group to acquire a nuclear weapon.

Mowatt-Larssen said those analysts are now being tied together into a separate unit that can look at all those questions together and update their assessment of the nuclear threat based on changes in any piece of it. His office declined to provide further details, saying the effort is classified.

UK CPI Hits 3.3%, an 11-Year High

UK consumer price inflation climbs to 3.3 percent, as food and fuel send rate to 11-yr high.

Inflation in Britain hit 3.3 percent in May, the highest annual rate in 11 years, the government said Tuesday, putting more pressure on the Bank of England to keep prices under control. The price of meat, vegetables and fuel were key factors in pushing the index up from 3 percent in April, a full point above the government's inflation target.

The governor of the Bank of England, Mervyn King, is now obliged to write a letter to Treasury chief Alistair Darling explaining why the rate has shot above 3 percent. Concern about rising inflation has led the Bank of England to hold base interest rates at 5 percent, and many analysts now expect the bank to raise the interest rate further in coming months despite the general slowing of the British economy. Cutting rates can boost growth but also risk worsening inflation.

"The initial market reaction to the announcement was relatively stolid, with the majority of the inflationary increase having been priced in," said Richard Hunter, analyst at Hargreaves Lansdown Stockbrokers. "(Darling's) response to the letter and the next set of economic numbers will now take on more significance."

The consumer index is now at the highest level since the statistics agency began tracking it in 1997. A different measure, the Retail Prices Index rose to 4.4 percent in May from 4 percent in April, the Office for National Statistics (ONS) said.

The headline rate of RPI inflation, which includes mortgage interest payments, rose to 4.3 percent in May from 4.2 percent in April, the ONS said. "The one thing that can be said with a fair degree of confidence at the moment is that interest rates will not be coming down further any time soon and that if the Bank of England does act in the near term, it will be to raise interest rates," said Howard Archer, chief European economist at Global Insight.

"Inflation concerns are likely to intensify in the coming months," said Malcolm Barr, economist at JP Morgan. "In the absence of a marked fall in global commodity prices, the period of high inflation and letter-writing from the (Bank of England) is likely to extend into the second quarter of 2009," Barr said.

Weekend's Featured: UN and Saudi to Tackle Oil and Food Prices

UN Chief and Saudi King reach agreement to tackle rising oil and food prices.

UN chief Ban Ki-moon and Saudi King Abdullah reached common ground here Saturday on the need to tackle rising prices of oil and food, and the problem of climate change, a UN spokesman said. The UN secretary general flew into this Red Sea city earlier Saturday for a 24-hour visit and met with the king for one hour after being welcomed by Saudi Foreign Minister Saud al-Faisal.

Farhan Haq, a member of Ban's delegation, described the discussions as "very positive." One one of the main issues raised was "the related crisis involving rising food costs, rising fuel costs and climate change," he said. The two leaders agreed that the three issues "should be dealt with comprehensively," he added.

He restated Ban's view that "rising fuels costs can contribute also further to rising food costs." He added: "What you want to avoid is a cascade of these sort of challenges that affect a wide range of social and economic sectors and then start also creating political problems."

There was no word from the Saudi side on what was discussed. Haq could not confirm press reports that Riyadh was planning to hike its crude production next month by about a half a million barrels per day (bpd) to calm market jitters.

But Ban, on his second visit to Saudi Arabia since March 2007, expressed hope that a Saudi-hosted meeting of oil producers and consumers here on June 22 would yield a productive outcome. The king invited Ban in an apparent bid by the kingdom to burnish its international image as a responsible oil power at a time when it is facing criticism, particularly in the United States, over skyrocketing crude prices.

Saudi Arabia, by far OPEC's biggest oil producer and exporter, decided to convene the June 22 meeting talks after crude struck a record high of nearly 140 dollars last week, stoking fears of surging global inflation and weaker economic growth.

Reports on Friday suggested that the oil giant -- which currently produces 9.45 million bpd -- could decide to raise its crude production to 10 million bpd when it hosts the meeting next week. The New York Times linked the expected plan to what it said were fears by Saudi Arabia that soaring oil prices might trigger a worldwide economic slump and lead to lower oil demand.

Last month, Saudi Arabia announced an increase of 300,000 bpd after a visit by US President George W. Bush, but the kingdom has been under pressure to step up its output further. After Riyadh announced the June 22 meeting, US Senator Charles Schumer, the lead sponsor of a resolution in Congress to block four pending arms deals with the Saudis, said: "We don't need a meeting. We need to pump more oil."

Ban's visit to Saudi Arabia also comes as Group of Eight finance ministers warned in Japan that high oil and food prices posed "a serious challenge to stable growth worldwide" and may worsen poverty and stoke global inflation.

Haq also noted that the UN boss expressed gratitude for Saudi Arabia's contribution of 500 million dollars to the UN World Food Programme appeal to battle the global food price crisis. Other topics that came up during the meeting include regional issues such as the Middle East peace process, Lebanon and the recent peace deal initiated by Somalis's transitional government and its rebel foes, Haq said..

The recent Saudi initiative to foster dialogue among Christians, Jews and Muslims was also raised. In March, Abdullah proposed inter-faith talks among the three religions in a first for the ultra-conservative kingdom, which is home to two of the three holiest shrines in Islam.

A dinner with the Saudi foreign minister was cancelled and instead Ban met with Organization of the Islamic Conference Secretary General Ekmeleddin Ihsanoglu. The UN chief was to wrap up his visit on Sunday with meetings with the Saudi foreign minister and Crown Prince Sultan Abdul Aziz al-Saud.

Weekend's Featured: Google Looks Stronger Than Ever Amid Collapsed Microsoft-Yahoo Talks

Google emerges from rubble of collapsed Microsoft-Yahoo talks looking stronger than ever.

Microsoft Corp.'s abandoned takeover bid for Yahoo Inc. appears to have culminated with a disheartening thud for those two companies but amounted to yet another coup for online search leader Google Inc.

What began in January as Microsoft's most audacious attack yet on Google instead paved the way for the Internet's most powerful company to gain even more clout through a deal that gives Google access to a large chunk of Yahoo's advertising space.

By submitting to a partnership that endorses Google's search advertising technology as a better choice than its own, Yahoo is giving online marketers even more incentive to spend most of their money with its biggest rival, according to industry analysts.

It looks like such a sweet deal for Google that the U.S. Justice Department and lawmakers are expected to take a hard look at the arrangement to make sure it doesn't give Google too much control over the Internet's search advertising market.

Google currently has about 75 percent of the U.S. search advertising market followed by Yahoo at 9 percent, according to the research firm eMarketer Inc. Although they contend their alliance won't lessen competition, Google and Yahoo have agreed to wait until late September to begin working together so the U.S. government has more time to assess the potential impact.

Even more importantly to Google, the Yahoo partnership keeps a potentially valuable weapon out of Microsoft's control. Without Yahoo's renowned franchise, Microsoft once again is scrambling to find a way to fix its unprofitable online operations and narrow Google's commanding lead in the Internet's rapidly growing ad market.

Google shares gained $18.56 to close Friday at $571.51 while Microsoft shares added 83 cents to close at $29.07 -- an indication that some investors were relieved the world's largest software maker concluded it would be too expensive and troublesome to buy Yahoo.

On the other side of the fence, Yahoo shareholders had been clinging to the possibility that Microsoft would revive its last offer of $47.5 billion, or $33 per share, to buy the Internet pioneer. But those hopes evaporated late Thursday after Yahoo disclosed Microsoft had "unequivocally" rebuffed an attempt to renew the negotiations.

In a sign of investors' frustration, Yahoo shares dropped as much as $1.77, or 7.5 percent, Friday before rallying late in the session to finish at $23.47, down five cents. The downturn marked Yahoo's lowest stock price since it closed at $19.18 at the end of January, just before Microsoft launched its takeover attempt.

That leaves Yahoo's market value 29 percent below Microsoft's last offer, which was withdrawn May 3 after Yahoo asked for $37 per share. Yahoo's stock hasn't reached that price since January 2006. At least Microsoft still has a strong, highly profitable backbone -- a suite of software products that run most computers around the world.

Yahoo, though, may have made a Faustian bargain by hiring Google to show ad links next to a significant portion of the ad links appearing alongside search results on its Web site in the United States and Canada. The Sunnyvale-based company also will pluck Google ads to show on other Web sites in its marketing network.

Yahoo expects its annual revenue to get an $800 million lift from the arrangement with Google while still showing show the majority of its own ads alongside its own search results. But most analysts viewed it as an act of desperation, asserting it's only a matter of time before advertisers shift all their business to Google because they know their messages will show up on Yahoo either way. Deutsche Bank analyst Jeetil Patel described Yahoo's decision to farm out advertising to Google as "one of the worst strategic maneuvers seen in the Internet industry."

Google will get such great access to Yahoo's highly trafficked Web site that it should be able to gather more insights about the correlation between search requests and advertising, ThinkPanmure analyst William Morrison wrote in a Friday research note titled "Giving Away The Store (To Google)."

And that additional data could help Google further improve its advertising formula to become an even more compelling marketing magnet. The partnership also cast doubt on a turnaround plan Yahoo co-founder Jerry Yang began drawing up year ago after he replaced Terry Semel as the Sunnyvale-based company's chief executive.

A big part of that strategy hinged on Yahoo becoming a "must-buy" for advertisers -- a strategy that the Google deal appears to contradict. "This raises very important questions about the long-term vision for (Yahoo) and its place in the industry," said Cantor Fitzgerald analyst Derek Brown.

Yahoo shareholders will get a chance to vent their frustration at the company's annual meeting Aug. 1 when activist investor Carl Icahn will seek to replace the board with nine alternate candidates. Icahn was primarily interested in selling Yahoo to Microsoft, so his campaign to replace the board may be hurt if he can't persuade shareholders he has other viable ideas on how to boost Yahoo's stock price. He didn't return a call seeking comment Friday.

Yang and his top lieutenant, Susan Decker, defended the Google deal as a profitable move that will better position the company to capitalize on the Internet advertising market's growth from roughly $40 billion worldwide this year to a projected $75 billion to $80 billion market in 2011.

Microsoft contends it offered Yahoo a better alternative even after losing interest in buying the entire company. When the latest talks broke off June 8, Microsoft was prepared to buy Yahoo's search operations for $1 billion and pay $35 per share to accumulate $8 billion worth of Yahoo's stock, according to an internal note sent Friday by Kevin Johnson, who oversees Microsoft's online operations.

Microsoft also would have offered guarantees that could have boosted Yahoo's operating cash flow by an estimated $1 billion annually, Johnson wrote. Yahoo estimates the Google partnership will increase its operating cash flow by $250 million to $450 million annually. "Regardless of Yahoo's decision, we will continue to move forward on our strategy in online services and advertising," Johnson assured Microsoft employees.

Microsoft left the door open to renewing talks about buying Yahoo's search operations. Yahoo also gave itself some wiggle room by including a clause in the Google partnership that would end the alliance for a termination fee of up to $250 million.

Some analysts and investors still think Microsoft eventually might try to buy Yahoo in its entirety, although at a price well below $47.5 billion. "Yahoo seems to have backed itself into a corner pretty effectively here so it would appear Microsoft has a lot of leverage," said Dan Davidowitz, a portfolio manager for Polen Capital Management, which owns about 750,000 shares of Microsoft and 37,000 shares of Google. Davidowitz said he isn't interested in owning Yahoo's stock.