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While you were sleeping: BusinessWire overnight wrap

Wednesday 17th December 2008

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The Federal Open Market Committee lowered its target range for the federal funds rate to between 0 to 0.25%, more than most economists had expected, driving up stocks and weakening the dollar against the euro and yen.

The decision also helped drive yields on Treasury bonds to record lows.

The Fed cited deteriorating labour market conditions, and lower consumer spending, business investment, and industrial production. "Overall, the outlook for economic activity has weakened further," it said in the text of its decision.

The committee said it will use "all available tools" to revive growth and anticipates the economic slump will "warrant exceptionally low levels of the federal funds rate for some time."

The Dow Jones Industrial Average jumped 2.6% to 8788.58 after the announcement, led by an 8.2% gain in JPMorgan Chase to US$31.02 while Citigroup rose 7% to US$7.91. Tech stocks also advanced, with Intel rising 4.7% to US$15.27 and Microsoft advancing 2.7% to US$19.56.

The Standard & Poor's 500 Index rose 3.5% to 898.77 and the Nasdaq Composite gained 3.6% to 1561.99.

The US dollar fell to a two-month low against the euro after the announcement of the rate cut, which made the currency the lowest-yielding for any developed economy.

The currency's slide comes after European Central Bank President Jean-Claude Trichet this week signaled the ECB may pause in cutting rates, saying there's a limit in low they can go. The US dollar tumbled to $1.3971 per euro from $1.3688 yesterday. It declined to 89.50 yen from 90.65.

US Treasuries advanced, in their fourth day of gains, as some investors bet the Fed will buy government debt to drive down credit costs.

The yield on 30-year Treasuries fell 7 basis points to 2.88% while the 10-year bond yield fell 12 basis points to 2.39%.

US consumer prices slumped by a record amount last month, raising the prospect of deflation as the economic slump deepens in the world's biggest economy. The Consumer Price Index declined 1.7% in November, more than economists had expected, according to the Labor Department. So-called core prices, which exclude food and energy, were unchanged from the previous month.

Housing starts tumbled 18.9% for an annual rate of 625,000, according to a separate report from the Commerce Department said. That's the lowest since records began in 1959.

Meantime, Goldman Sachs Group posted a fourth-quarter loss of US$2.12 billion, reflecting plunging values for stocks and debt. The results were better than economists had expected and the stock jumped 14.5% to US$76.09.

In the UK, central bank Governor Mervyn King said the inflation rate may fall below 1%, providing room to cut interest rates further to revive the British economy after it shrank in the third quarter. Inflation in the UK eased to 4.1% in November from 4.5% in October.

"The immediate outlook for activity has deteriorated further," King said in a letter to Chancellor of the Exchequer Alistair Darling to explain why inflation exceeded the UK government's 3% upper limit.

European stocks snapped a three-day slide as investors speculated the fed would cut its target rate to a record low.

The Dow Jones Stoxx 600 Index rose 0.8% to 199.01. Germany's DAX 30 rose 1.6% to 4729.91, with BASF rising 4.3% and Deutsche Bank climbing 3.5%.

In France, the CAC 40 rose 2.1% to 3251.66 and the FTSE100 Index rose 0.7% to 4309.08 in London, led by an 8.5% gain in Tullow Oil and a 6% advance in Aviva.

Copper futures fell on concern demand for the metal will evaporate as the global economy contracts. Copper futures for March delivery fell 1.2% to US$1.3885 a pound on the New York Mercantile Exchange.

Gold advanced as the declining dollar stoked demand for the precious metal as an alternative investment. Gold futures for February delivery rose 0.7% to US$842.70 an ounce in New York.

Crude oil fell on speculation OPEC won't cut production targets enough to stop prices declining as world growth stalls.

Saudi Arabian Oil Minister Ali al-Naimi said OPEC should trim output by 2 million barrels a day. Crude oil for January delivery fell 1.7% to US$43.74 a barrel on the New York Mercantile Exchange and has fallen some 70% since reaching a record US$147.27 in July.

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