Spreading the atom

Stopping the wrong sort of chain reaction

The spread of civilian nuclear technologies brings the risk of nuclear proliferation—and attempts to stop it may backfire

REDISCOVERING the charm of nuclear power throws up some odd results. America and Saudi Arabia have just signed a deal that may mean that the world's biggest oil-producer imports American-made uranium fuel for (as yet unbuilt) reactors. Japan's prickly relations with Russia did not stop Toshiba agreeing on joint reactor-construction and fuel-production efforts with state-owned Atomenergoprom. Diplomats, engineers and businessmen from Argentina, India, Pakistan, South Korea and elsewhere tout nuclear know-how around the globe. Yet behind the potential profits is a danger: that the spread of the peaceful atom will, as in the past, fuel military rivalry.

Cost, safety concerns and scarce skills mean that many of 200-plus new power reactors now proposed or planned (in addition to more than 400 operating worldwide and almost 30 under construction) may never actually be built. Yet curbing the most proliferation-prone nuclear technologies is already proving tricky. Efforts to persuade countries to forgo uranium enrichment and plutonium reprocessing (usable but not vital in civilian power programmes, but abusable for bomb-making) have sometimes backfired.

Canada, for example, is staunchly against proliferation, yet its government is lobbying hard for a loosening of proposed tighter rules for the 45-nation Nuclear Suppliers Group (NSG), an informal cartel that oversees nuclear trade. Four years ago, President George Bush urged the NSG to bar the sale of uranium and plutonium technologies to any country that at the time did not already possess “full-scale, functioning” plants. Canada doesn't, but has large uranium reserves and wants to keep the option open. So do Argentina, Brazil (which has a pilot enrichment facility) and South Africa, all NSG members. Australia used to, but its new government has gone cooler on the idea. Uranium-rich Namibia, a non-member, hankers after its own enrichment business too.

The spur is fear of getting stuck in Mr Bush's “no enrichment, no reprocessing” camp. Perversely, America's Global Nuclear Energy Partnership, combining co-operation in high-tech (though costly and as yet unproven) technologies among countries that already have “advanced” skills, with assurances of fuel supply for others who agree not to seek them, has stoked fears in some quarters of a new nuclear apartheid. Other ideas being touted—including an international fuel bank under the control of the International Atomic Energy Agency (IAEA), the UN's nuclear guardian, or more commercial ventures that let countries share in profits and fuel products but not enrichment skills—will appeal only to countries not fussed at proving their own nuclear prowess.

Unlike Canada, India never signed the Nuclear Non-Proliferation Treaty; it built the bomb and refuses to accept full safeguards on all its nuclear industry. Under existing NSG guidelines, nuclear trade with it is banned. America, in the name of friendship, has been trying to write a subcontinental-sized exemption into these rules. That encourages China, for example, which wants to favour its pal Pakistan.

Laxity also makes it harder to persuade Iran, a flagrant repeat violator of its safeguards agreement with the IAEA, to obey UN resolutions and suspend its uranium and plutonium work until there is confidence in its supposedly peaceful intentions. A report this week by the IISS, a London-based think-tank, says fear of Iran's nuclear intentions is fuelling the most dangerous regional nuclear spurt: in the Middle East and the Gulf.

In the 11 months to January 2007, it says, at least 13 states in the region announced plans to pursue or explore nuclear power, citing electricity needs, energy diversification, a desire to export more home-produced hydrocarbons and climate change. Yet a still bigger cause was probably Iran's defiance and suspicions that it has dabbled in the dark arts of bomb-making. Though Arab states have lived tetchily with Israel's nukes for decades, no would-be heavyweight wants to be outstripped by Iran, even if the reigning mullahs never actually build a weapon.

The report highlights transgressions and suspicions in Algeria, Iraq, Libya, Saudi Arabia and Syria, but it also points to a more promising model. Saudi Arabia and the other countries of the Gulf Co-operation Council, while all pursuing nuclear-energy ambitions, have also agreed on a joint and transparent feasibility study. The Saudis have even proposed a joint enrichment facility in a neutral country (perhaps Switzerland). Several have firmly ruled out starting dangerous fuel-making themselves.

It will take tighter safeguards, tougher inspections, new rules to deal with violators and more countries ready to forgo the most sensitive technologies (Iran still says it won't) to prevent new nuclear rivalries growing in such a fissile region. And such safety-enhancing diplomacy won't come—if at all—a moment too soon.

Scandal and the race for president

Read all about it!

If there were a scandal in the American presidential race, what would it be? We pass on the latest odds

AMERICA'S presidential nomination process has been one of the most interesting for many years. But much can happen between now and the election, not least a juicy scandal. If you think that one is coming and hope to profit, Paddy Power, an online bookmaker, is offering odds on the next scandal to emerge involving a candidate. The current favourite is adultery, although same-sex affairs and bigamy attract much better odds.

Space exploration

Mars, air, fire and water

Phoenix has arrived on Mars. It now has 90 days to deliver the goods

NOT bad for a lash-up. On Sunday May 25th Phoenix, America’s latest mission to Mars, landed successfully where many others have failed. And it did so in classic sci-fi fashion, using a parachute and retro-rockets to make a controlled touchdown on three spindly legs rather than swaddling itself in balloons and bouncing around for a bit first.

More pleasingly still, the first pictures it sent back could have come from a chapter of a school geography textbook on arctic terrain. They show a surface broken into polygonal slabs by repeated freezing and thawing of the sort that happens above permafrost. For, unlike any previous successful mission to Mars, Phoenix has landed not in the planet’s tropics but near one of its poles. And the reason for going there is the same as the reason for the polygonal slabs. It is that the martian poles are repositories of ice, and the hunt for water on Mars has now become almost obsessive.

Phoenix got its name from its precarious beginnings. In 1999 NASA, America’s space agency, suffered two failed Mars missions on the trot. One, Mars Climate Orbiter, was particularly humiliating because the fault lay with a group of engineers who, in defiance of common sense, had continued to use imperial units of measurement in their calculations when all around had adopted the metric system. The other, Mars Polar Lander (intended to touch down near the south martian pole), was not lost through that sort of carelessness; landing things on Mars is hard and mission failures are inevitable. Nevertheless, rather than risk a third consecutive crash, NASA put things on hold. One result was that an unlaunched craft similar to Mars Polar Lander was tucked away in a clean room while the agency had a rethink.

The outcome of that rethink was a bid by the University of Arizona to take the mothballed lander, refit it, and have another go at visiting a martian pole (this time the northern one). The idea of naming the craft after a mythological bird that self-immolates and then rises anew from its own ashes was thus irresistible. It was also poignant, because Phoenix’s active life is expected to be a mere three months. It will be killed beyond reasonable hope of resurrection not by heat but by the encroaching cold of winter.

Watching that winter arrive will be spectacular. Vastitas Borealis, the area that Phoenix has landed in, gets covered in a metre-deep layer of frozen carbon dioxide. Phoenix’s main camera will have a close-up view of this happening. The instrument that everyone is really concentrating on, however, is not the camera but the digging arm. Measurements from orbit suggest that the martian permafrost is within half a metre of the surface. If that is correct, the arm, which is fitted with a scoop and a second camera, should be able to dig into it, photograph its details, and bring samples back into the main body of the probe for analysis.

The hope—the one that propels all missions to Mars—is to find a set of conditions that would allow living creatures to survive. Since cold-tolerant microbes do just that in terrestrial permafrost, it is quite possible that appropriate conditions will, indeed, be found. That does not, of course, mean that anything will be living in them. Nor is Phoenix equipped to detect micro-organisms, though it will be able to sniff out organic molecules if these are around, and that will be a tantalising clue. It will also examine the general chemistry of the sub-surface layers, to see if it is within the limits tolerable by living things on Earth.

An affirmative answer will bring comfort to exobiologists—a group of people whose subject is, at the moment, based on hope rather than reality. But you can be sure that a negative one will not be taken as reason for despair. For the phoenix is also a good metaphor for the attitude of those who seek extraterrestrial life: a fire of optimism unquenchable by negative results.

McCain Trumpets Independence From Bush, Except for Fundraising

May 27 (Bloomberg) -- John McCain's challenge in winning the presidency isn't unique. George H.W. Bush in 1988 and Al Gore in 2000 also struggled to chisel an identity separate from a two- term incumbent president of their party.

There's one big difference: in 1988, Ronald Reagan had a 51 percent approval rating, according to Gallup surveys, and in 2000 Bill Clinton's was 57 percent. Today, President George W. Bush's rating is 28 percent and the leading House Republican political analyst, Virginia Representative Tom Davis, said the president is ``absolutely radioactive'' for party candidates, including McCain, the presumptive presidential nominee.

So why is the Arizona senator going to appear with Bush in Phoenix tonight for a closed-door fundraiser? McCain, whose fundraising totals are dwarfed by those of Democratic candidate Barack Obama, needs Bush to bring in money and signal to conservative Republicans that he can be trusted.

``Any sitting president, even one whose approval rating is in the low 30s, can raise money,'' said Jim Pinkerton, a Republican strategist. ``McCain has to distance himself from Bush, but he also has to reassure the Republican base -- and that means snuggling up.''

`Pay Penance'

McCain, who has long been viewed with suspicion by his party's conservative base, ``needs to pay penance'' for setting himself apart from Bush, said Pinkerton, who worked on the first President Bush's strategy to distinguish his record from Reagan's.

The fundraiser marks the first time Bush, 61, has campaigned for McCain, 71, with whom he has a thorny relationship. The two last appeared together March 5, when Bush endorsed McCain at the White House.

Since then, McCain has accelerated his push to underscore differences with Bush on policies ranging from foreign affairs to climate change. In a speech in New Orleans on April 24, McCain assailed the administration's ``terrible and disgraceful'' response to Hurricane Katrina.

McCain used a climate-change speech this month to highlight another breach with Bush, saying that he would negotiate with China and India, and that the U.S. had ``an obligation to act.'' On foreign affairs, McCain has carved out a more confrontational position than Bush on Russia, China and North Korea.

Bush Legacy

On most other issues, though, McCain says he will carry on Bush's legacy, vowing to extend the president's tax cuts, keep troops in Iraq and offer private accounts as a component of Social Security overhaul.

Those policy similarities are fodder for the Democrats, who will make them a centerpiece of the November campaign. Obama, 46, an Illinois senator, already tells voters that America ``cannot afford a third Bush term.''

Many Republicans understand the danger of that charge and are helping McCain pull away from Bush. Former Massachusetts Governor Mitt Romney, who lost the party nomination to McCain, now attests to his former rival's anti-Bush credentials.

``John McCain has been a frequent and vocal critic of George Bush,'' Romney said on Bloomberg Television's ``Political Capital with Al Hunt'' on May 23.

Bush loyalists said such efforts are natural after an eight- year administration.

``McCain will continue to distance himself from the president on issues he disagrees with him on,'' said Sara Taylor, who was Bush's political director from 2005 to 2007. ``That shouldn't surprise anybody.''

`Final Pivot'

McCain has until the Republican nominating convention in September to establish an identity separate from Bush. Then, he must execute ``his final pivot from the Bush presidency,'' said Scott Reed, who managed the 1996 campaign of Republican presidential candidate Bob Dole.

At the White House Correspondents Dinner in April, Bush indicated he understands the strategy, lightheartedly observing that McCain wants ``to distance himself from me a little bit.''

McCain's and Bush's differences weren't always a laughing matter. Their 2000 contest for the Republican nomination ended in acrimony and mistrust. However, both men know are trying to submerge.

``The mutual dislike between McCain and President Bush has been tabled, for Bush's legacy desperately needs the GOP to win the White House,'' Reed said.

Strategists said the administration should follow a basic rule if it wants to bequeath the Oval Office to its party's nominee: Don't blindside the campaign.

`No Surprises'

``The most important thing is no surprises,'' said Ron Kaufman, a political director in President George H.W. Bush's administration.

Clean lines of communication will help the White House and the McCain campaign smooth over any public breaches. Two of McCain's top five advisers -- Charlie Black, and Steve Schmidt -- worked on Bush's 2004 re-election. Nicolle Wallace, the communications director in that campaign, signed up with McCain last month.

``We coordinate with the McCain campaign all the time,'' said White House Press Secretary Dana Perino.

For any candidate trying to extend his party's grip on the White House, there's a ``fine line'' to walk, said Leon Panetta, one of Clinton's chiefs of staff.

Gore ``tried to separate himself from the White House and didn't really make that much use of Clinton,'' Panetta said. Had Gore used Clinton in a ``more strategic way, that could have made the difference.''

Of course, Clinton had twice as high approval ratings as Bush has today.

Wall Street Dismissals, Not as Bad as '01, Signal Worst to Come

May 27 (Bloomberg) -- It's as if the entire workforce at Goldman Sachs Group Inc. and Morgan Stanley vanished in less than a year.

From Tokyo to London to New York, financial companies announced plans to shed more than 83,000 jobs since last July as revenue and compensation pools evaporated, according to figures compiled by Bloomberg. The dismissals range from 90 jobs, or 0.1 percent of the total, at London-based HBOS Plc to about 9,160 jobs, or 66 percent of the workforce, at New York-based Bear Stearns Cos., which is being acquired by JPMorgan Chase & Co.

The cuts add up to 3.3 percent of employees at the 28 firms eliminating positions. That's significantly less than the market slump from 2000 to 2003, when 17 percent of banking and securities jobs in New York were wiped out, data from the Bureau of Labor Statistics show. Given the record-breaking losses of the past year -- banks and brokers have taken $383 billion of writedowns and credit losses -- some economic forecasters and industry veterans expect the number of dismissals to increase.

``My guess is there's probably more to come,'' said Sanford ``Sandy'' Weill, chairman emeritus of Citigroup Inc., who worked on Wall Street for 53 years, in a May 21 interview. ``I think this is tougher'' than the last market decline, Weill, 75, said.

New York-based Citigroup, the biggest U.S. bank by assets, has announced 15,900 job cuts worldwide, about 4 percent of its employees.

New York's Outlook

The retrenchment has affected positions as varied as biotech bankers, compliance officers and Latin America debt traders -- not just mortgage salesman and credit traders -- as revenue declines spread beyond fixed-income. New York and London, the world's biggest financial centers, are bearing the brunt of the firings, while employment grows in emerging markets such as Dubai and China.

New York has lost 10,000 financial services jobs since last August, a 3.5 percent decline, according to the Bureau of Labor Statistics in Washington. Those figures don't tell the whole story because employees receiving severance remain on payrolls.

The Independent Budget Office in Manhattan said in a report issued last week that it expects 33,300 finance jobs in the city, or 7.1 percent of the total, to be cut from the peak in 2007. The industry lost 52,500 jobs in New York during the 2000- to-2003 market drop, or 17 percent, Bureau of Labor Statistics data show.

London will suffer 19,225 finance job reductions in 2008 and 2009, or 5.4 percent of the total, according to estimates from the Centre for Economics and Business Research in London. That compares with 15,340 jobs, or 4.7 percent, from 2000 to 2002, the CEBR's data show.

Won't Match 2001

Job cuts in New York probably won't match those of 2001 and 2002, when losses accelerated after the Sept. 11 terrorist attacks, said Marisa Di Natale, senior economist at research firm Moody's Economy.com in West Chester, Pennsylvania. She's forecasting that the New York metro area will lose 45,000 financial jobs this time, or 7.7 percent, compared with 60,000 jobs, or 10 percent, in the previous decline.

``In the run-up to the dot-com bust, there was a very frenzied pace of hiring on Wall Street, and we didn't have that this time around,'' Di Natale said. ``And in the last recession, there were a lot of back-office jobs cut or moved overseas that never came back.''

Still, financial companies are suffering deeper losses than earlier this decade. Morgan Stanley and Bear Stearns, which remained profitable throughout the previous decline, reported their biggest losses last year. Merrill Lynch & Co., which had one quarter of losses in 2001, has reported three straight unprofitable quarters.

Falling Profits

``We've never seen writedowns like we're seeing now and such big losses,'' said John Challenger, chief executive officer of Chicago-based outplacement firm Challenger, Gray & Christmas Inc. ``More job cuts will come. Even with the market's optimism recently, I don't think we can safely say that we're out of the woods yet.''

Merrill reported a $2 billion loss in the first quarter, while profits tumbled 42 percent at Morgan Stanley, 53 percent at Goldman and 57 percent at Lehman Brothers Holdings Inc. The four New York-based companies are the biggest U.S. securities firms.

Analysts estimate that revenue and profit will drop again in the second quarter. Three analysts are predicting that Lehman, whose shares are down 45 percent this year, will report its first loss since the credit crisis began.

``Salaries and bonuses are the largest expense that Wall Street firms have, and when they don't make money, they have to look to cut,'' said Len Blum, 50, who has worked on Wall Street for more than 21 years and is now managing director at Westwood Capital, a 13-year-old investment bank in New York. ``People have a lot of fear of losing their jobs.''

`Waves of Firings'

The scale of job reductions doesn't yet mirror the scale of the financial losses, said Jeanne Branthover, managing director of Boyden Global Executive Search in New York.

``I don't think the waves of firings have ended,'' Branthover said. Losses started in the credit markets, and they're now ``going into all these other areas,'' she said.

As the outlook darkens, the pace of layoffs has increased. Zurich-based UBS AG and Lehman have unveiled more job cuts this year than during 2001 to 2003. Morgan Stanley, after cutting 900 jobs in 2007, is shedding about 3,540 this year. Goldman, which didn't announce any dismissals last year, has eliminated more than 1,500 positions so far in 2008.

``There are still more writedowns that may have to be taken,'' said Samuel Hayes, finance professor emeritus at Harvard Business School in Boston. Banks and securities firms ``will throw over people the way that they throw over any other cost,'' he said.

U-Shaped Market

Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who is a former chief financial officer at Lehman, said the recent job cuts in areas such as equities show that management doesn't expect business to improve anytime soon.

``They seem to be positioning themselves for a U-shaped recovery, not a V-shaped recovery,'' Hintz said.

At Columbia Business School in New York, none of the graduates taking Wall Street jobs, except those who accepted positions at Bear Stearns, have had their offers rescinded or renegotiated as they were in 2001, said Regina Resnick, managing director of the school's career-management center.

``My anticipation is that we may see something more like what we had in 2002 or 2003, but we're not there yet,'' Resnick said. Job offers for the school's 700 new graduates were ``down from the summer of 2007, but it still was what we consider to be a strong year,'' she said.

That's no consolation for Tom Curialle, 50, a 20-year veteran of Wall Street who lost his job at Bank of America Corp.'s asset-backed and mortgage-backed bond-sales division in October and hasn't found work since.

``I would have to describe this as the most difficult period I've ever seen,'' Curialle said. ``Nobody feels safe.''

Trichet's Inflation Aim Proves `Fiction' After Decade (Update2)

May 27 (Bloomberg) -- Jean-Claude Trichet's European Central Bank hasn't had much success hitting its inflation target. The fault may lie with the goal itself.

``The ECB's keeping up a fiction,'' says Joachim Fels, co- chief economist at Morgan Stanley in London. ``The trade-off between growth and inflation has really changed. They should be as open as possible by adjusting the target.''

The Frankfurt-based central bank, marking its 10th anniversary June 1, has failed in each of the last eight years to achieve its aim of bringing inflation below 2 percent. The goal may become even more elusive as fast-growing eastern European countries adopt the euro and push up costs within the region at the same time it faces price jolts from emerging markets in Asia.

That forces an unpleasant choice on President Trichet and his colleagues: They can keep striving to force inflation lower by holding interest rates higher, at the cost of crippling faltering economies such as Italy's. Or they can yield to demands to set an easier target -- something Trichet says he won't consider ``for one second'' -- and risk letting inflation erode stronger economies such as Germany's.

Sticking with the current number may result in ``a pyrrhic victory by pushing inflation within target but having destroyed the real economy,'' says Thomas Mayer, chief European economist at Deutsche Bank AG in London.

Trichet's Defense

Trichet, 65, recently stepped up defense of his goal, arguing May 8 that a revision would ``unanchor'' inflation expectations. He maintains that investors ``have not lost faith'' in the ECB's ability to deliver price stability and that only temporary ``shocks'' have caused its ceiling to be breached. Support for his view came this month as an ECB survey of private forecasters showed they expect long-term inflation to slow to 1.9 percent.

The short term is a different story. Prices rose at an annual rate of 3.6 percent in March, the fastest pace in almost 16 years, and Barclay's Capital and Societe Generale SA say inflation has yet to peak.

Even the ECB's own economists, who have underestimated inflation every year since 2001, are predicting prices will rise at a 2.9 percent rate this year, the biggest increase since 1993. The outlook is forcing the ECB to hold its key interest rate at a six-year high of 4 percent, even as growth slows.

Investors' inflation expectations, as measured by French inflation-indexed 10-year bonds, rose as high as 2.38 percent last week from 2.07 percent in February.

Bernanke's Goal

Containing those expectations is one of the reasons for establishing a numerical inflation target, a strategy the Reserve Bank of New Zealand pioneered in 1990 and Ben S. Bernanke embraced as a goal before he became Federal Reserve chairman in 2006.

Bernanke, 54, and other supporters say that by setting a specific target, rather than simply pledging to hold inflation down, central banks can keep expectations of future inflation under control and provide more clarity about the direction of interest rates.

The ECB's governing council, which decided to establish a target during its first year of existence, isn't alone in shooting wide of its mark. Fels estimates that of the 24 major central banks with official targets, about 80 percent are missing them, including those in the U.K., New Zealand, India and Mexico.

Faced with opposition in Congress and the need to fight the credit crisis, Bernanke has been forced to scratch an explicit target off his ``to-do'' list, says David M. Jones, a former Fed economist who has written several books on the central bank.

`Given Up'

``Bernanke came into office determined to establish an official inflation target at the Fed, but he's completely given up on the idea,'' Jones says.

Nobel laureate economist Joseph Stiglitz dismisses targets as ``a fad.'' Central banks that cling to them are courting ``disaster,'' he said in a May 21 interview with Australian Broadcasting Corp. ``Countries that follow inflation-targeting are likely to get themselves into trouble.''

The ECB's efforts are being thrown off by forces over which it has little control. Manufacturers in emerging markets such as China are raising the prices of goods they export, while growing international demand is driving up costs of oil, metals, grains and other commodities.

European food prices rose 6 percent in April from a year ago, while energy costs jumped 10.8 percent. German import-price growth held close to its fastest pace in more than 1 1/2 years in March.

`Inflationary Pressures'

``Globalization might be a major driver of inflationary pressures,'' Bundesbank President Axel Weber said in a speech May 22.

Another inflationary force is right next door as poorer, faster-growing nations in eastern Europe begin to adopt the euro and their prices rise to catch up with those of the 15 current euro zone nations. Greg Fuzesi, an economist at JPMorgan Chase & Co. in London, says this will put ``significant upward pressure'' on the inflation rate for the entire euro area, adding as much as 0.3 percentage point a year.

The ECB's adherence to a target is already accentuating tensions as individual economies within the euro area diverge.

During the first quarter, Portugal's economy contracted, and Spain's growth was the slowest since the third quarter of 1995; Italy's economy grew at a year-over-year rate of just 0.2 percent in the first quarter. Meanwhile, expansion in Germany, Europe's largest economy, is the fastest in 12 years. Inflation in the region ranges from 1.7 percent in the Netherlands to 6.2 percent in Slovenia.

`Contentious' Choice

``Germany doesn't want inflation, and the weak countries don't want deflation,'' says Bernard Connolly, chief global strategist at American International Group's Banque AIG unit in London. ``The choice between the two alternatives is likely to prove contentious.''

Inflation is eroding confidence among French executives and German consumers, reports today showed. A government index of sentiment among 4,000 French manufacturers dropped to the lowest in more than two years, while Gfk AG's measure of optimism among 2,000 German shoppers declined.

The current inflation target is a relic of the past, when globalization and technology-enhanced productivity gains helped keep a lid on prices, says Charles Wyplosz, director of the International Centre for Monetary and Banking Studies in Geneva.

``The ECB was too ambitious and miserably failed its own criteria,'' Wyplosz says. ``They are losing credibility and will continue to do so until they change.''

Possible Alternatives

Alternatives to the status quo include raising the target to 2.5 percent, as Morgan Stanley's Fels suggests, or emulating the Fed by focusing more on core prices, which exclude food and energy costs. French President Nicolas Sarkozy and Italian Prime Minister Silvio Berlusconi have also urged the ECB to follow the Fed by giving more weight to fostering growth.

The ECB may already pursue a more ``pragmatic approach'' than its mandate implies, says James Nixon, an economist at Societe Generale. Even with inflation accelerating, the global credit squeeze's threat to growth prompted the bank to shelve a planned rate increase last September.

In 2003, the ECB's governing council modified its inflation goal, providing some precedent for change. Before then, the bank targeted an inflation rate between zero and 2 percent. Now, it aims to have prices rise less than, but close to, an annual rate of 2 percent in the medium term.

If the ECB sticks with that mark, it may have no choice but to keep interest rates elevated as inflation proves more persistent. Gilles Moec, London-based senior economist at Bank of America Corp., estimates the ECB will tend to maintain its key rate about a percentage point above the 3.06 percent average since 1998.

``The ECB will have to be even more tough,'' says Lex Hoogduin, who advised former ECB President Wim Duisenberg and is now chief economist at Rotterdam-based Robeco NV. ``Keeping inflation on target will be more difficult than in the last 10 years.''

Oil Falls More Than $2 as Record Prices Curb U.S. Fuel Demand

May 27 (Bloomberg) -- Crude oil fell more than $2 a barrel in New York on signs that U.S. fuel consumption is dropping because of a slowing economy and record energy prices.

U.S. consumer confidence fell to the lowest level in more than 15 years, a report today showed. The dollar rose against the euro today, curbing the appeal of commodities to investors. Energy and metals have become attractive in the past year to those seeking to offset the dollar's fall against the euro.

``We are keeping an eye on the dollar but the primary reason for today's move lower is that prices overshot when moving higher,'' said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. ``We were unable to hold last week's new highs, indicating that the rally may be over for now. We might be headed for $120 in the near term.''

Crude oil for July delivery fell $2.07, or 1.6 percent, to $130.12 a barrel at 11:24 a.m. on the New York Mercantile Exchange. Futures reached $135.09 on May 22, the highest since trading began in 1983. Prices have doubled over the past year.

There was no floor trading in New York yesterday because of the Memorial Day holiday.

``After failing to break through $135 decisively last week, it appears we've put a resistance line there,'' said Phil Flynn, a senior trader at Alaron Trading Corp. in Chicago.

Brent crude oil for July settlement declined $2.18, or 1.7 percent, to $130.19 a barrel on London's ICE Futures Europe exchange. The contract touched a record $135.14 on May 22.

Consumer Confidence

The Conference Board's confidence index declined more than forecast to 57.2, the lowest level since October 1992, from a revised 62.8 in April, the New York-based research group said today. A report earlier today showed property prices in March tumbled the most in at least seven years.

``There's trepidation at these price levels,'' Flynn said. ``High energy prices are having a substantial impact on the economy and potentially on demand.''

The euro reversed gains versus the dollar after reports showed German consumer confidence fell more than economists forecast and French business confidence declined to the weakest in more than two years in May.

The euro fell to $1.573, from $1.5770 yesterday, after rising to $1.5818, the highest level since April 24.

The peak U.S. gasoline consumption period lasts from this past weekend's Memorial Day holiday until Labor Day in early September, as Americans take to the highways for vacations.

``Gasoline is a side show, which is unusual for this time of year,'' said Eric Wittenauer, an energy analyst at Wachovia Securities in St. Louis.

U.S. fuel consumption averaged 20.3 million barrels a day in the four weeks ended May 16, down 1.3 percent from a year earlier, the Energy Department said last week.

U.S. Economy: Consumer Confidence Slides as Home Values Decline

May 27 (Bloomberg) -- Confidence among American consumers fell in May to the lowest level since 1992 as the two-year housing slump showed no sign of bottoming.

The Conference Board's confidence index declined more than forecast to 57.2, the New York-based research group said today. The S&P/Case-Shiller home-price index dropped 14.4 percent in March from a year earlier, the most since the figures were first published in 2001. Separate figures from the Commerce Department showed sales of new homes were the second-lowest since 1991 in April.

The slide in home values, along with gasoline near $4 a gallon and rising unemployment, threatens to hobble the consumer spending that accounts for more than two-thirds of the economy.

``When confidence is as bad as it is on the consumer side, it's hard to believe we're going to be buying a lot of homes in the near term,'' said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis, Minnesota. ``The drag from home-price declines, the credit crunch and oil prices will probably be more severe than some had forecast earlier in the year.''

Stocks initially rallied after the government's report on new home sales exceeded economists' forecasts, and then surrendered some of the gains later. The Standard & Poor's 500 homebuilder index was up 1.2 percent at 350.1 at 11:10 a.m. in New York. Ten-year Treasury note yields rose to 3.90 percent from 3.84 percent at last week's close.

Economists forecast the Conference Board's measure would fall to 60, according to the median of 68 forecasts in a Bloomberg News survey, from a previously reported 62.3. Estimates ranged from 57 to 63.

Waning Optimism

The Conference Board's index of present conditions dropped to 74.4 in May from 81.9 in April. A gauge of expectations for the next six months declined to 45.7 from 50.0 the prior month, the report showed.

``Until you start to see some declines in energy prices and labor markets come back, these numbers are going to look pretty soggy,'' Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview.

Sales of new homes increased 3.3 percent in April after readings for the prior month were revised lower, the Commerce Department's report showed. The April sales pace was an annual 526,000 homes, compared with a 509,000 rate in March that was the lowest in 17 years.

Economists forecast new home sales would drop to a 520,000 annual pace from an originally reported 526,000 rate the month earlier, according to the median estimate.

Inventories Drop

One bright spot is that inventories decreased. The supply of homes at the current sales rate dropped to 10.6 months' worth from 11.1 months in March. The number of homes completed and waiting to be sold decreased to 181,000, the fewest since July.

The median sales price last month increased 1.5 percent from April 2007 to $246,100. The figures can be influenced by changes in the mix of sales at the regional level. For that reason, economists prefer price measures that track the same house over time, such as the S&P/Case-Shiller index.

Property values may drop more than 30 percent from their peak in 2006, Robert Shiller, an economics professor at Yale University and co-creator of a housing-price index, said in an interview with the London-based Times last month.

The measure was down 17 percent through March, from the record set in July 2006.

The percentage of consumers planning to buy a home in the next six months dropped to 2.1 percent from 2.5 percent, the Conference Board's survey showed.

The share of consumers who said jobs are plentiful fell to 16.3 percent from 17.1 percent last month. Those saying jobs are hard to get increased to 28.0 percent from 27.9 percent.

Payrolls Drop

Employers cut 20,000 workers in April, bringing the decline in payrolls so far this year to 260,000, according to the Labor Department.

The proportion of people who expect their incomes to rise over the next six months decreased to 13.4 percent from 15.5 percent, according to the Conference Board survey. The share expecting more jobs dropped to 8.7 percent from 8.8 percent.

As the labor market and wage expectations eroded, auto sales in April slid to a 14.4 million annual rate, the lowest since 1998, according to industry figures.

``With the prospect of $4-a-gallon gasoline on the horizon, this combination of economic stress with the gasoline prices is really having an impact on overall volume,'' Michael Jackson, chief executive officer at AutoNation Inc., the largest U.S. car retailer, said in an interview with Bloomberg Radio last month from Fort Lauderdale, Florida.

Spending Forecast

Consumer spending will probably rise at a 0.5 percent annual pace in the April-to-June period, the smallest gain since the fourth quarter of 1991, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

Another confidence measure, the Reuters/University of Michigan index of consumer sentiment issued last week, fell in May to the lowest level in almost 28 years.

Federal Reserve officials, in minutes of their April 30 policy meeting released last week, lowered their 2008 economic growth projection by a percentage point to 0.3 percent to 1.2 percent.

``Growth in consumer spending appeared to have slowed to a crawl in recent months and consumer sentiment had fallen sharply,'' the minutes said.