Financial Watch

The bond bears were out in force Wednesday and could be back Thursday, as the government auctions billions more in debt.

Stocks drifted quietly lower Wednesday, but the selling action in the Treasury market was fairly dramatic. The government’s auction of $42 billion in 5-year notes went poorly, pressuring an already sagging Treasury market and driving yields higher.

Now, traders anticipate the auction Thursday of $32 billion in 7-year notes could also be weak. Weekly jobless claims could also be a factor in Thursday’s markets, when the data is released at 8:30 a.m. The other big event is Fed Chairman Ben Bernanke’s testimony before the House Financial Services committee on the Fed’s exit strategies.

The Swiss central bank can buy very large quantities of foreign currency to influence the level of the Swiss franc and keep deflation in check, Swiss National Bank President Philipp Hildebrand said Tuesday.

“We won't allow deflation risks to reemerge, our position is crystal clear,” Hildebrand said before a student audience at the University of St. Gallen. A surge in the Swiss franc could give rise to such a danger, he added.

“It looks like the SNB is raising the level of its rhetoric on curbing any franc gains,” said Janwillem Acket, chief economist at Bank Julius Baer (BAER.VX). “The threat of deflation is a bit exaggerated, and they're trying to impress the markets,” he added.

Treasury Secretary Timothy F. Geithner said Wednesday that the United States “can’t force” China to change its currency policies, as debate continues over whether the Obama administration will take action against Beijing as part of an assessment next month about how it sets its exchange rates.

Geithner said he thought the Chinese would take action on their own to allow the yuan to gain in value, fixing a misalignment some argue is a deliberate effort by China to keep its goods cheap on world markets.

The Swiss franc rose to an all-time high against the euro Tuesday as worries about Greece's debt problems weighed on the common currency, and the market tested the Swiss National Bank's resolve to keep the franc's strength in check.

With the lack of a concrete plan to ease Greece's funding problems, the euro sank as low as CHF1.4270, below the CHF1.43 level hit during the financial crisis in October 2008. Despite the spike in the Swiss currency, there was no sign of intervention by the Swiss National Bank.

The cause of our trade deficit goes beyond China’s undervalued currency and America’s credit binge

Last year the United States racked up a $600 billion trade deficit with the rest of the world. This represents 5% of our nation’s gross domestic product (GDP). History has shown a trade deficit this high cannot sustain itself, but figures released so far this year indicate the figure will likely surge past $700 billion during 2005. The United States trade deficit extends to just about every industrialized and emerging economy in the world. Efforts to rein in the imbalance are slowly being discussed both in the United States and abroad, but a lack of genuine urgency exists to find a solution. Participants involved in trade discussions are more concerned about protecting national interests rather than implementing measures to prevent an eventual fiscal collapse.

Backlash of the United States large trade deficit has produced an unusual result in Congress- bipartisan cooperation. With a June deadline looming, Congress will soon begin debate on a bill threatening to slap 27.5% tariffs on Chinese imports unless the Yuan is allowed to appreciate against the U.S. dollar. The proposed bill would grant China six months to adjust the value of its currency or face stiff tariffs on its exports to the United States. There is strong sentiment in Congress, both among Democrats and Republicans, to act in order to stem the continuous flow of manufacturing jobs to cheaper destinations overseas.