The yen touched a nine-week high versus the dollar yesterday after Japan’s Finance Minister Kaoru Yosano said the government won’t intervene in the currency market and the Bank of Japan raised its economic assessment. The dollar posted its biggest weekly drop versus the euro since March after Pacific Investment Management Co.’s Bill Gross said this week the U.S. will “eventually” lose its AAA credit rating.

“We’ve been seeing an increased speculative push,” said Michael Woolfolk, New York-based senior currency strategist at Bank of New York Mellon Corp., in an interview on Bloomberg Television. “There is some concern about perhaps the credit rating, the creditworthiness of the U.S., particularly from other corners of the world such as China.”

The dollar slid 3.7 percent to $1.4013 per euro, from $1.3494 on May 15, tumbling yesterday to $1.4051, the weakest level since Jan. 2. It was the biggest weekly drop since March 20, when it plunged 4.8 percent. The dollar lost 0.4 percent to 94.79 yen from 95.21. The euro gained 3.4 percent to 132.80 yen from 128.43 at the end of last week.

A rout in Treasuries pushed the yield on the benchmark 10- year note up 32 basis points, or 0.32 percentage point, to 3.45 percent. It was the biggest increase since June 2008.

Credit-Default Swaps

The cost to hedge against losses on U.S. government bonds for five years climbed to a three-week high yesterday, indicating perceptions the nation’s credit quality is deteriorating. Credit-default swaps on U.S. debt rose 3.5 basis points to 41, the highest since April 29, according to prices from CMA Datavision in New York.

“The markets are beginning to anticipate the possibility” of a U.S. credit rating cut, said Gross, co-chief investment officer of Newport Beach, California-based Pimco, in an interview on May 21 on Bloomberg Television. “It’s certainly nothing that’s going to happen overnight.”

The administration of President Barack Obama will probably sell a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc.

Treasury Secretary Timothy Geithner said in a May 21 interview on Bloomberg Television that he’s committed to reducing the federal budget deficit to 3 percent of gross domestic product or less, compared with a projected 12.9 percent this year.

U.S. debt is far below a level that would trigger a downgrade, Woolfolk said.

Canadian Dollar

The dollar dropped this week against all of the 16 most actively traded currencies tracked by Bloomberg. The Canadian dollar advanced to C$1.1198, the strongest level since Oct. 9, while New Zealand’s currency climbed to 62.38 U.S. cents, the highest level since Oct. 21. The Australian dollar reached 78.67 U.S. cents, the highest level since Oct. 2.

The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined 3.6 percent to 80.025 after touching 79.805, the lowest level since Dec. 29. The gauge of the greenback dropped 11 percent from a three-year high reached on March 4.

“The urgency for money managers with large U.S. dollar holdings to diversify could well intensify,” analysts led by Callum Henderson, global head of currency strategy in Singapore at Standard Chartered Bank, wrote in a research note yesterday.

Fed’s Debt Buying

The dollar dropped a record 3.4 percent versus the euro on March 18, when the Fed announced plans to buy up to $300 billion in U.S. government debt to keep interest rates low and stimulate the economy. The central bank’s target range for overnight loans between banks is zero to 0.25 percent.

Some Fed policy makers indicated at the April 28-29 policy meeting that the central bank might have to increase its purchase of assets should the economy or financial markets deteriorate further, minutes released this week showed.

Japan’s currency posted a thirdly weekly gain versus the greenback after Finance Minister Yosano said the “government isn’t considering currency intervention at this point.”

Waning global sales and a 10 percent gain in the yen versus the dollar in the past year hurt exporters including Toyota Motor Corp. Central banks intervene by buying or selling currencies to influence exchange rates.

Bank of Japan

The Bank of Japan kept its target lending rate at 0.1 percent at the end of its policy meeting yesterday and raised its economic assessment for the first time since July 2006. The central bank also said it will accept foreign debt owned by banks as collateral for loans.

The euro pared gains against the dollar yesterday after Luxembourg Finance Minister Jean-Claude Juncker told Reuters extended advances in the 16-nation currency would hamper a recovery in the region’s economy.

The dollar may rise against the euro after the greenback’s plunge created a “lose-lose situation” for the U.S., Europe and other countries, according to Barclays Capital Inc.

“While sentiment has become very negative toward U.S. bonds and the U.S. dollar, this sell-off does not seem to have benefited anyone,” wrote Steven Englander, chief U.S. currency strategist at Barclays, and Aroop Chatterjee, a colleague, in a research note yesterday.

The industrial output data dimmed the allure of safe-haven investments such as U.S. Treasuries, as did separate reports showing improved national consumer sentiment and a slower rate of contraction in New York state manufacturing this month.

"Economic releases weighed on prices a bit," said John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey, adding however that Treasuries "still had a pretty strong week overall."

Benchmark 10-year Treasury notes traded 11/32 lower in price for a yield of 3.14 percent, up from 3.10 percent late on Thursday. Friday’s losses ended a recovery from last week’s sell-off that lifted yields to a 5-1/2-month high of 3.38 percent. Benchmark yields overall gained about 15 basis points on the week.

Bond market sentiment had been improving since the end of last week’s quarterly refunding sales, which swamped the market with $71 billion in coupon securities, after a record $101 billion in auctions the week before.

Bonds have another week to consolidate before being hit by the next wave of supply to fund the U.S. administration’s fiscal deficit. There are no new Treasury auctions of coupon securities scheduled until the May 26 sale of 2-year notes.

The 30-year long bond <US30YT=RR> traded 14/32 lower in price with yields rising to 4.09 percent from 4.06 percent late on Thursday. Despite the day’s losses, the long bond posted its best weekly performance so far this year.

The New York Federal Reserve Bank’s "Empire State" general business conditions index, a gauge of manufacturing in the state, rose to minus 4.55 in May — its highest reading since August 2008 — from minus 14.65 in April. [ID:nN15177430]

It was hardly a stellar reading, but in current market conditions, investors have decided "less bad" means "good."

It was a similar story with the industrial output, which fell 0.5 percent in April, a more modest pace than in recent months and less than the 0.6 percent economists had expected.

Even though the fall in March was revised up to a 1.7 percent drop from the previously reported 1.5 percent dip, the 0.5 percent decline in April was not as bad by comparison.

"It looks like a bottom in the manufacturing sector is at hand and that could be extrapolated into an eventual swing into positive territory as the inventory sell-off eases," said Pierre Ellis, senior economist at Decision Economics in New York. "The Fed will be cautiously optimistic about this report."

 Separately, the Reuters/University of Michigan Surveys of Consumers said consumer sentiment rose in early May to its strongest since the September failure of Lehman Brothers, with rising expectations the economy may be in the last stages of the recession. The survey reading exceeded economists’ forecasts.

Two-year notes <US2YT=RR> traded unchanged in price for a yield of 0.86 percent. The two-year note also posted its best weekly performance so far this year, although yields held well within a range that has dominated since the Federal Reserve cut recommended overnight lending rates between banks to zero to 0.25 percent in December.

"The Fed has been on hold for such a long time and until there is any indications they are going to move, the front end is going to remain range bound," Canavan said.

Five-year notes <US5YT=RR> lost 6/32, lifting yields to 2.00 percent from 1.97 percent late on Thursday.

A Chapter 11 filing would help GM shed franchise accords that would otherwise be binding. Using the courts to hasten dealer consolidation would help meet the goal of a “speedy” bankruptcy as outlined by Chief Executive Officer Fritz Henderson in a May 14 Bloomberg Television interview.

“If GM files bankruptcy, the landscape will change to reflect what Chrysler is doing with its dealer body,” said Billy Donley, a franchise and distribution attorney for Baker & Hostetler LLP in Houston.

The shutdowns are GM’s first step to pare domestic dealers to a range of 3,600 to 4,000 from 5,969 by the end of 2010. Having fewer retailers may allow the survivors to sell more cars at higher prices, boosting profit.

“It’s a cruel day, but it’s one of the casualties of the situation,” said Mike Robinet, a CSM Worldwide Inc. analyst in Northville, Michigan. “Dealer consolidation is a fairly substantial reason that Chrysler had to go into bankruptcy and a very good reason why GM will need to go in as well.”

GM’s Letter

GM told dealers in a letter the locations targeted for closing were measured by benchmarks including sales volume, customer feedback, capitalization, profitability and pairings with competing brands.

The notices went to “1,100 underperforming and very small sales-volume U.S. dealers,” GM said in a statement.

“It’s not something we do without a lot of consideration,” Mark LaNeve, GM’s North American sales chief, said on a conference call. “The dealers receiving these letters, unless they haven’t been paying attention at all, it should be no surprise at all to them.”

LaNeve said GM would follow the same reduction plan whether the automaker restructures in or out of court. An “orderly” wind-down would help preserve the value of dealers’ inventory, he said.

Chrysler, racing to complete an alliance with Fiat SpA and form a new company that would exit bankruptcy in as little as two months, gave its dealers less than four weeks to wrap up operations and sell off their cars and spare parts.

Susan Garontakos, a GM spokeswoman, said in an interview that she couldn’t speculate on how a bankruptcy proceeding might alter the company’s timetable.

‘On the Table’

“What’s currently on the table would change if they go into bankruptcy,” said Donley, the Baker & Hostetler attorney. “They may not let dealer agreements expire, they may just leave them in court.”

The dealers losing their franchise accords included R.L. Reising Sales Inc. in the Chicago suburb of Beecher, Illinois, which learned by letter that it will have to stop selling Chevrolets.

“It’s like someone rips your guts out,” said Joseph Reising, 49, the dealership’s vice president. Founded by his grandfather, the retailer has sold GM vehicles since 1929 and employs 15 full-time workers. “It leaves a big hole.”

GM Brands

Yesterday’s moves are in addition to about 470 dealers being shed as GM disposes of its Hummer, Saturn and Saab brands and drops Pontiac. GM has said it expects some dealers to leave voluntarily. GM plans to focus on its remaining Chevrolet, Cadillac, Buick and GMC brand dealerships in the future.

GM fell 6 cents, or 5.2 percent, to $1.09 yesterday in New York Stock Exchange composite trading. The shares have tumbled 95 percent in the past year.

In contrast to Chrysler, which waited until it filed bankruptcy to cancel dealerships, GM is moving to reduce its retail network now, saying it still hopes to avoid restructuring in court.

Still, Henderson in the May 14 interview said that bankruptcy is “probable” as GM works to shave operating costs and shrink debt and union-retiree obligations by $44 billion.

LaNeve said GM’s dealer consolidation won’t affect whether the automaker files for court protection, adding that the company needs to reduce its retail outlets in or out of bankruptcy.

GM didn’t make a list of dealers public, so the names surfaced more slowly than those on Chrysler’s roster, which were disclosed in a U.S. Bankruptcy Court filing.

‘No Big Deal’

Kenneth Keeton, owner of Keeton Motor Co. in Fordyce, Arkansas, said he received a letter from GM yesterday informing him GM would let his Buick-Pontiac-GM franchise agreement lapse in 2010.

“It ain’t no big deal to me,” said Keeton, whose 42-year- old store is among four dealerships, including another GM outlet, in a town of about 5,000 people. “The last 10 years, it’s cost me more to do business with them than it’s worth.”

Keeton, who said his dealership employs about 10 people, said he plans to stay in business selling used cars and offering service and towing.

Hitachi Ltd., Japan’s third largest chipmaker, tumbled 17 percent after forecasting a loss. Rio Tinto Group, the world’s third-largest mining company, slumped 14 percent after London’s Telegraph newspaper reported the company may sell shares. China Construction Bank Ltd., the world’s No. 2 lender by market value, dropped 8.8 percent as Bank of America Corp. sold a stake.

“All positive news has already been priced,” said Masaru Hamasaki, a senior strategist at Toyota Asset Management Co., which oversees the equivalent of $3.3 billion. “We need solid evidence the economy is indeed recovering to go up any further.”

The MSCI Asia Pacific Index fell 0.7 percent to 97.28 in the past five days, ending a two-week, 9.5 percent advance. Speculation the global economy is recovering sent the gauge to the highest since Oct. 7 on May 11. The average valuation of its companies is 33 times trailing earnings, the highest level since 2004, according to data compiled by Bloomberg.

Japan’s Nikkei 225 Stock Average dropped 1.8 percent, snapping its two-week, 8.3 percent advance. Australia’s S&P/ASX 200 Index slumped 4.3 percent.

Stimulus Measures

The MSCI Asia Pacific Index’s relative strength index, which measures how rapidly prices have risen or fallen, traded above the threshold of 70 that some investors use as a signal to sell in the six trading days through May 13.

“Of course it’s time for a correction, that’s the way markets work,” investor Jim Rogers said in an interview with Bloomberg Television May 12. “I don’t see the stock market as a great place to be for the next two to three years.”

MSCI’s Asian index has climbed 38 percent from a five-year low on March 9 on speculation stimulus measures by governments around the world are working to pull the global economy out its worst recession since World War II.

Mitsubishi UFJ Financial Group Ltd., Japan’s biggest bank, declined 6.3 percent after soaring 23 percent in the past week. Toyota Motor Corp., the world’s biggest automaker, retreated 9.8 percent after saying it will cut production. Santos Ltd., Australia’s third-biggest oil and gas producer, dropped 10 percent following a share sale.

Hopes for an economic recovery faltered this week as government reports showed U.S. retail sales fell 0.4 percent in April and Germany’s economy contracted 3.8 percent in the fourth quarter. Japan’s wholesale prices fell at the fastest pace in 22 years in April, according to central bank figures issued yesterday.

‘Rapid Recovery Unlikely’

“It looks to me now as if the markets are now pricing in a rapid recovery, that they’re pricing in a V-shaped recession, which I consider extremely unlikely,” Nobel Prize-winning economist Paul Krugman said at a forum in Shanghai on May 12. “The market seems to be looking as if this is going to be an average recession, but it’s not.”

Hitachi tumbled 17 percent to 325 yen in Tokyo. The company said on May 12 it will post a net loss of 270 billion yen ($2.78 billion) in the 12 months ending March 31, 2010.

Rio Tinto slumped 14 percent to A$61.88 in Sydney. London’s Telegraph newspaper reported on May 13 that Rio may sell shares to current shareholders if an investment by Aluminum Corp. of China Ltd. is not allowed to proceed. Rio yesterday reaffirmed its commitment to the $19.5 billion transaction.

MSCI Changes

China Construction Bank dropped 8.8 percent to HK$4.79. Bank of America sold 13.509 billion shares, or a 5.78 percent stake, for HK$4.20 apiece, Beijing-based Construction Bank said on May 13.

Mitsubishi UFJ declined 6.4 percent to 613 yen in Tokyo. The stock’s surge the previous week took it to its highest close since Nov. 5.

Toyota Motor retreated 9.8 percent to 3,590 yen. The company said on May 13 it will slash global vehicle production by 28 percent in 2009 to its lowest in seven years as worldwide vehicle demand plummets.

Santos Ltd., Australia’s third-biggest oil and gas producer, dropped 10 percent to A$14.13 in Sydney. The company said on May 13 it raised A$1.75 billion ($1.3 billion) by selling shares to institutional investors. It will sell a further A$1.25 billion to retail investors.

With first-quarter earnings reports winding down and recent optimism about economic stabilization already factored into stock prices, analysts said there appears to be very little on the horizon to help extend the recent run-up.

Quarterly earnings from rival home improvement chains Home Depot Inc and Lowe’s Cos Inc may shed some light on the consumer’s ability and inclination to spend. The numbers may also give a hint of any further fallout from the housing slump.

Technology bellwether Hewlett-Packard Co also is scheduled to report results next week.

But after the benchmark S&P 500 rose 37 percent from the 12-year closing low of early March, analysts and money managers said there is a risk that U.S. stocks may be on the cusp of a long-predicted pullback.
Economic fundamentals probably won’t justify more gains in the near term.

"There’s been a little bit of exhaustion here," said Jeff Morris, vice president at Boston-based Standard Life Investments, which manages more than $5 billion of U.S. equity investments.

"It feels like we’re going to be in a phase of having to deal with some negative data points like what we saw with April retail sales. Establishing the bottom is probably more a process of a back and forth rather than just deciding things have turned, and everything will be fine."

And if the choppiness of the recent sessions is any sign, the U.S. stock market could be in for some volatile days ahead as the bulls scramble to keep the reins a little longer.

On Friday, U.S. stocks succumbed to selling of some of the market’s recent high-fliers, including banks and technology, driving the S&P 500 down to close out its worst week in two months.

For the week, the Dow Jones industrial average declined 3.6 percent and the S&P 500 slid 5 percent, while the Nasdaq fell 3.4 percent.
Friday’s sell-off resulted in the Nasdaq breaking a 9-week winning streak.

But the Nasdaq is still up 6.54 percent for the year, while both the Dow and the S&P 500 are in the red. The Dow is down 5.79 percent for 2009, while the S&P is off 2.26 percent.

SLIGHT WARMING TREND IN HOUSING

The sparse economic calendar also is likely to make next week a troublesome one for U.S. stock investors. A major highlight will be April housing starts, set for release on Tuesday before Wall Street’s opening bell. This report on housing starts and building permits will come out a day before the release of the minutes of the Federal Reserve’s most recent policy meeting on April 28-29.

Economists polled by Reuters expect that U.S. housing starts rose to a seasonally adjusted annual rate of 520,000 units in April, compared with the March pace of 510,000, which was the second lowest on records dating back to 1959.

On Thursday, the focus will be on weekly jobless claims and the Federal Reserve Bank of Philadelphia’s May snapshot of business conditions in the U.S. Mid-Atlantic region. The economic data will get added scrutiny as investors look for direction and more confirmation that the recession that started in December 2007 is easing.

"We’re at a crossroads right now. You’ve got a market that’s ramped up, an economy that hasn’t necessarily ramped up whatsoever and so now we’re into this pause," said John Schloegel, vice president of investment strategies for Capital Cities Asset Management in Austin, Texas.

"It’s a tug of war between the buoyant positivity that we’ve had for two months with the reality of the economics maybe not quite running parallel to the positive vibes on the stock market."

FROM HAMMERS TO COMPUTER HARDWARE

On the earnings front, there are several major retailers set to post quarterly scorecards, including Dow component Home Depot and its major rival Lowe’s Cos.

Earlier this week, Citigroup upgraded its rating on Home Depot’s stock to "buy" from "hold," saying it believes the earnings-per-share estimates for the top home improvement retailer may be conservative for 2009. Lowe’s has reiterated its first-quarter outlook for profits and sales.

In addition to earnings from Dow component and tech bellwether Hewlett-Packard, quarterly scorecards are also expected from farm equipment maker Deere & Co, luxury home builder Toll Brothers and discount chain Target Corp.

Analysts expect Hewlett-Packard’s results to show fairly steady profits and sales for the quarter, but they believe investors will look at the computer and printer maker’s cash flow to see how well it cushions the bottom line. For more details.

Through Friday, 91 percent or 455 of S&P 500 companies had reported first-quarter results, with 65 percent beating analysts’ estimates, 8 percent matching them and 26 percent missing, according to Thomson Reuters data.

To be sure, some analysts said the stock market could still mount an advance ahead of the long weekend for observance of the Memorial Day holiday on Monday, May 25. But the gains will likely be fairly tepid, compared with the heady upsurge seen since March 9.

This past week yielded some ominous signs as volume began to slacken and investors rotated money from some of the recent winners — technology, financials and industrials — into more defensive areas such as healthcare and consumer staples.

On the upside, above 1.3580, next resistance level lies at 1.3615/20 area, and above here, intra-day high at 1.3650.
On the downside, support levels are 1.3525/30 (May 14 low) and below there, 1.3510 (Intraday low and upward trending support from Apr 28 low). below there, 1.3470 (May 7 high).

Immediate resistance lies at the mentioned 95.60 (April 28 low) and above here, 95.80 and intra-day high at 96.20. On the downside, support levels lie at 95.15, and 94.80, intra-day low. Below here, next support level is 94.15 (Mar 20 low).

EUR/JPY has bounced from two-weeks low at 128.35 to reach 129.40 level at the time of writing. First resistance lies at 129.85 and 130.75. Support levels remain at 129.25 and 128.35.

The euro’s losses on the fastest ever contraction in the euro zone economy were greatest against the yen, which helped spur the Japanese currency to a two-month high against the dollar.

The 16-nation euro zone economy shrank 2.5 percent in the first quarter from the previous quarter and 4.6 percent from the same period a year ago, driven by a plunge in German output. [ID:nLF21360]

This hurt the euro and fed into broader stock market selling, with European stocks down 0.5 percent .FTEU3, UK stocks down 1 percent .FTSE and U.S. stock futures pointing to opening losses of up to 0.8 percent.

Investors sought currencies perceived to be safer assets like the yen, which speculators still regard as the funding currency of choice when risk appetite is high.

"The story isn’t as much that the (euro zone) data was weak, but how weak. It was a massive surprise just how weak the data was … and that was the main trigger for the euro to go lower," said Paul Mackel, senior currency strategist at HSBC in London.

"And the yen is trading well, and seems to have some momentum but that’s largely a function of euro/yen."

At 1200 GMT euro was down 1.6 percent against the yen at 128.60 yen <EURJPY=R>, having hit a two-week low around 128.41 yen earlier.

 The euro also shed 0.8 percent against the dollar to trade at $1.3530 <EUR=>, near the lows for the week.

The dollar was down 0.9 percent against the yen at 95.05 yen <JPY=>, having hit a two-month low of 94.78 yen on trading platform EBS. A close below the 100-day moving average of 95.14 yen will be the first for three months, Reuters charts show.

The euro was well on track for its biggest weekly loss against the yen since late January and the dollar/yen on track for its steepest weekly decline since its collapse in late October.

The Australian dollar fell 1.8 percent against the yen to 71.51 yen <AUDJPY=R> and sterling was down 1.2 percent against the Japanese currency at 144.20 yen <GBPJPY=R>.

YEN AGAIN

Later in the day investors will look to U.S. inflation data, U.S. portfolio flow figures and the New York Federal Reserve’s manufacturing index ECON.

More surprises showing the economy isn’t poised to recover quite as much or as quickly as previously thought could reinforce investors’ desire to cut their exposure to risk, especially ahead of the weekend, supporting the yen.

"We are seeing a broad correction to the recent risk rally, and the yen is still seen by speculators as the favoured funding currency," BNP Paribas currency strategist Ian Stannard said.

Analysts said the yen’s outperformance suggests the recent evidence of Japanese investors looking towards their domestic markets is now translating into yen strength.

"The rate of reward (in foreign bonds) is on the wane and with rates set to be low across the world for the foreseeable future, Japanese investors are becoming increasingly risk intolerant and turning to their domestic market," Bank of New York Mellon currency strategist Neil Mellor said.

In interviews with Reuters late last month, many of the top nine Japanese life insurers said they would increase their holdings of yen bonds as uncertainty over a global economy deep in recession leaves them in defensive mode. [ID:nT231946]

Recent data also showed Japanese investors turned net sellers of foreign bonds in the week from April 26 to May 2 after three straight weeks of being sizeable net buyers [ID:nT75391].

(c)Reuters

Resistance levels lie at 1.5245 intra-day high, and above there, 1.5300 and May 13 high at 1.5335. On the downside, support levels are 1.5215, intra-day low at 1.5130 and below there, 1.5060(May 14/ April low).

GBP/JPY bounce from 143.55 has soared to levels around 145.50 moments after U.S. data release. The Pound advances on a strong pace with next resistance levels at 146.45 intra-day high and 146.95. Support levels lie at 145.00 and 144.65.

"The last (January-March) quarter was the nadir, and things will gradually start to improve in the first two quarters (of this year)," Takeo Fukui told Reuters in an interview.

"I’m definitely expecting the second half to turn up, and on an annual basis I think this year will be the floor."

Battered by a sales slump in the United States, its biggest market, Japan’s No.2 automaker lost a net 186 billion yen ($1.95 billion) in the fourth quarter of 2008/09, a reversal from a profit of 25.4 billion yen a year earlier. For the year to March 2010, Honda has forecast a 71 percent drop in net profit to 40 billion yen.

A key element in the earnings deterioration across the industry in the past year has been a double-digit sales slide in the United States, which lost its claim to being the world’s biggest auto market to China this year. But Fukui said he believed the U.S. market had also reached a bottom, projecting a recovery in the latter half of 2009.

"A 10 million-unit (a year) market is abnormal for the United States," he said. "I think there’s latent demand for 13 to 14 million units annually, and we’ll get back to that level at some point."

One worry was the possible disruption if Chrysler, which filed for bankruptcy protection last month, dumped its cars on to the market from its inventory, Fukui said.

While Fukui said he hoped that Chrysler’s bigger rival, General Motors Corp, would avoid Chapter 11, he said Honda — and probably the rest of the industry — was making necessary preparations for the possibility.

"You can’t just assume that it won’t happen and hope for the best," he said.

QUALITY-RELATED COSTS DOWN

Honda was the only top Japanese carmaker to stay in the black last year as Toyota Motor Corp and Nissan Motor Co lost money, and executives have cited its profitable and world-leading motorcycle business as a major boost.

But Fukui said another factor that gets little mention was the vast drop in warranty and other costs last year after a lengthy process of fixing quality issues finally began to bear fruit.

"The initiative started during my predecessor’s tenure and it’s been a long and painstaking process. We finally saw the results of that last year," said Fukui, who will step down as CEO next month after six years at the helm.

"The improvement will grow from here onwards."

WORKING ON NEXT HYBRID

Honda’s more visible strength lies in its line-up heavy in smaller and fuel-efficient cars — the most recent addition being the Insight hybrid.

Fukui said response to the Insight has been good so far in the United States, while Honda was focusing on trying to meet better-than-expected demand in Japan.

Honda is scheduled to roll out a family of low-cost hybrid cars over the next few years including a gasoline-electric version of the Fit subcompact, and expects about one-tenth of its global sales to be hybrids by around 2015.

Honda’s hybrid system has the benefit of being simple and cheap, with a single electric motor that assists the engine, but has the disadvantage of being underpowered when mounted on bigger cars, unlike Toyota’s hybrid technology.

To overcome that shortcoming, Fukui said Honda was developing various types of hybrid technologies including a twin-motor system that "would be better than Toyota’s" that could eventually power bigger models such as the Odyssey minivan or Pilot SUV.

"We’ll have more variations," Fukui said, adding that Honda was also working on a dual-clutch transmission to possibly be matched up with a future hybrid system.

Pre-opening trades on Wall Street put paid to any FTSE gains, with the leading share index down ending the session down 14.47 points at 4348.11.

The Dow was down 1.59 points to 8329.73, retreating from porevious gains on relief that the cost of living in the US had remained unchanged in April, and Industrial production in the U.S. had fallen at the slowest pace in six months.

Barclays ended as the highest riser on the index, up 14.75p at 267.75, helping sector rivals gain some extra ground after a correction earlier in the week.

The bank was reported to be in talks over a sale of its BGI fund management arm with bidders including US money manager BlackRock.

Royal Bank of Scotland ended where it began at 39.5p and Lloyds Banking Group cheered 1.4p to 89.2p.

The big miners were also higher after recovering from a bout of recent profit taking. Vedanta Resources rose 64p to 1316p.

Land Securities continued its decline, down 16.5p to 473.5p after reporting a £4.8 billion loss earlier this week. Hammerson also fell, down 7.25p at 278.75p and British Land followed, off 5.25p at 391.75p.

In the FTSE 250, Ladbrokes fell 20p to 204.75p after the gaming group said profits were down by a third after punters enjoyed a successful Cheltenham Festival.

The industrial equipment and electronics firm said net losses to the end of March 2009 would exceed the projected loss of ¥700bn, partly as a result of smaller projected tax refunds.

But the firm, like other Japanese manufacturers, has also been hit hard by the global slump in demand for consumer electronics and cars, with its export earnings eroded by a soaring yen.

Hitachi added, however, that it expects an operating profit of ¥127bn for the year, an increase on its earlier estimate of ¥40bn, but still down 63% from a year earlier.

The company, which makes a wide range of products from flat-screen TVs to computer chips and medical devices, said it would close unprofitable sectors and spin off its auto parts and consumer business interests in an attempt to save ¥500bn.

The firm, which is also considering applying for state funds, has already announced the loss of 7,000 jobs, or 2% of its global workforce.

A ¥788bn annual loss would be the largest ever by a Japanese manufacturer, according to the Shinko Research Institute, and the second biggest in Japanese corporate history after the ¥834.6bn loss suffered by Nippon Telegraph and Telephone in 2002.

"If we look at the current global conditions, it is hard to be optimistic," Hitachi’s executive vice president, Takashi Miyoshi, told reporters, adding that he expected the firm to stay in the red for a fourth year in a row.

Last year the Hitachi group recorded a net loss of ¥58bn.

The company will announce its results on Tuesday.

"The world economy remains in deep recession. Output has continued to contract and international trade has fallen precipitously. The global banking and financial system remains fragile despite further significant intervention by the authorities," it said in a statement on Thursday as it announced the plans.

The unexpected move prompted a jump in the price of government bonds, or gilts, as investors were cheered by the certainty that the Bank would remain a big buyer of the assets over the coming months.

“The gilt market was taken by surprise by the additional facility of £50bn of quantitative easing taking the total to £125bn," said Stuart Cheek, head of Government bonds at BGC Partners.

Before the decision was announced at noon, the price of gilts had fallen as nervous investors feared the Bank would opt to say nothing about any additional help. However, gilts prices rallied after the announcement.

The Bank has been authorised by the Treasury to spend a total of £150bn on quantitative easing, so by announcing an extra £50bn today, it still has £25bn left to spend on gilts should it deem the move necessary.

It may have decided to delay a commitment to spending the full amount until it is clearer whether recent signs of improving conditions in some parts of the economy develop into the early stages of recovery.

Data from the services, manufacturing and construction sectors over the past week have indicated that circumstances for British businesses modestly improved in April, stoking hopes that the worst of the UK recession is now over.

"The Bank of England was always going to keep interest rates down at 0.5pc, but by expanding its quantitative easing programme by £50bn to £125bn indicates that the MPC believes that the economy still needs support despite recent mounting signs that the rate of economic decline is moderating," said Howard Archer, economist at IHS Global Insight.

The MPC said in its statement that the drastic attempts by the Government and the Bank to stimulate the economy should contribute to recovery, but added it was impossible to predict when.

"There is considerable economic stimulus stemming from the easing in monetary and fiscal policy, at home and abroad, the substantial depreciation in sterling, past falls in commodity prices, and actions by authorities internationally to improve the availability of credit.

"That stimulus should in due course lead to a recovery in economic growth…But the timing and strength of that recovery is highly uncertain," it said.

Mervyn King, governor of the Bank, is likely to say more about prospects for the economy when he presents the Bank’s latest Inflation Report next week.

The May meeting of the MPC was the last one to be attended by David Blanchflower, the member of the committee who has consistently voted for interest rate cuts since October 2007, the month after Northern Rock’s difficulties were made public. His term of appointment ends on May 31.

Fritz Henderson, GM’s chief executive, said: “Our first quarter results underscore the importance of executing GM’s revised viability plan, which goes further and faster to lower our break-even point.”

GM’s $6 billion loss for the quarter compares with a loss of £3.3 billion for the same period last year. Its sales for the first three months of the year were $22.4 billion compared, a drop of 47 per cent compared with the first quarter in 2008.

The carmaker also said it had not yet reached a new deal aimed at reducing costs with the UA union.

GM warned that it would make further reductions among salaried and executive employees to try to break even. It said it needed to reduce drastically its breakeven point to enable it to be profitable at the current below-trend sales levels.

Mr Henderson said: “This is a defining moment in the history of General Motors, and we are committed to our plan, which we believe will lead to a stable and sustainable operating structure with a strong balance sheet.”