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TOPWRAP 3-IMF suggests earlier recovery; U.S. stocks rise

Published 09/08/2009, 04:32 PM
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* Recovery may come quarter sooner: IMF's Strauss-Kahn

* Stocks close higher, dollar weakens above $1.45/euro

* Oil prices jump 4.5 percent, gold tops $1,000 (Updates with closing U.S. stocks, bonds, paragraphs 6-9; metal, gold, commodity and oil prices paragraphs 23-27)

By Eric Walsh

WASHINGTON, Sept 8 (Reuters) - Economic recovery may come three months earlier than forecast, the head of the International Monetary Fund said, but policymakers expressed concern that it may not last if governments reverse stimulus programs too early.

"For the (global) economy, we have been saying for a year that the recovery will come in the first half of 2010. It might even be a quarter ahead," IMF Managing Director Dominique Strauss-Kahn told Il Sole 24 Ore newspaper.

"We are seeing the end of the tunnel, but we are still in crisis," he said in the interview published on Tuesday.

A document obtained by Reuters on Friday showed that the IMF had increased its forecasts for economic activity this year and next. It is due to publish them later this week.

On Tuesday, generally upbeat data from Germany, France and Britain lent credence to the recovery scenario, which has sent stocks soaring since March as fears raised by the bankruptcy of Lehman Brothers a year ago proved to be unfounded.

U.S. stocks closed higher as rising commodity prices and an uptick in merger and acquisition activity fueled hopes the economy is strengthening, while the dollar fell to near a one-year low amid renewed appetite for risk.

Global and emerging market stocks hit a 2009 high on Tuesday, after rises on Monday when U.S. and Canadian markets were closed for a holiday.

The Dow Jones industrial average rose 56.15 points, or 0.59 percent, to unofficially end at 9,497.42. The Standard & Poor's 500 Index was up 8.86 points, or 0.87 percent, at 1,025.26. The Nasdaq Composite Index was up 18.99 points, or 0.94 percent, at 2,037.77.

U.S. Treasuries prices weakened as the higher stock prices eroded their safe-haven appeal.

But governments and central banks were cautious.

A senior member of the European Central Bank said in an interview published on Tuesday that financial markets might be reacting too optimistically to recent data.

"An overreaction to this data is not good, because it could make us forget that governments still face a very significant agenda of reforms. And without completing those reforms we won't return to sustainable paths of growth," ECB Executive Board Member Manuel Gonzalez-Paramo told Spain's Expansion newspaper.

In China, one of the main engines of global growth over the past 10 years, a senior cabinet official said the Chinese economy was stronger but recovery was still not solid.

State Councillor Ma Kai said Beijing would continue to implement its policies to stimulate growth, which have included a $585 billion fiscal spending package, tax incentives and what officials have dubbed an "appropriately loose" monetary policy.

Finance ministers from the G20 economies agreed on the weekend that now was no time to reverse the trillions of dollars of stimulus pumped into the world economy. They say they are waiting until recovery is established.

POSITIVE DATA

Data on Tuesday supported signs of a tentative economic recovery. The Bank of France said the French economy -- which, like Germany, exited recession in the second quarter -- is expected to grow by 0.3 percent in Q3.

German exports increased for a third month running in July, fueling hopes that a recovery in Europe's largest economy has gathered pace.

In Britain, manufacturing output in July rose at its fastest monthly rate in 1-1/2 years.

"These are good strong numbers," said Brian Hilliard at Societe Generale. "It is signalling that we are going to be leaving recession in Q3."

In the corporate world, Airbus, the world's largest producer of passenger jets, said airline traffic had possibly seen "the trough of the recession" and could start to rebound from next year.

A pick-up in mergers and acquisitions activity has also fostered belief in recovery.

A $16.7 billion bid by North America's Kraft Foods Inc for British confectioner Cadbury Plc has been taken as a sign of life in the corporate sector, even though the bid was rejected.

In commodities trading, copper jumped to its highest in more than a week, buoyed by expectations of stronger economic and demand growth in coming months, although analysts say future price direction will depend on China.

Battery lead and zinc also hit highs not seen in more than a year.

Traders said industrial metals were also helped by the weaker dollar, which makes goods priced in dollars cheaper for holders of other currencies.

The dollar slumped to its lowest level in almost a year against a basket of major currencies, weakening above the key $1.45 level against the euro, as gold rallied above $1,000 an ounce. Traders cited talk of reserve diversification into gold as undermining the U.S. currency.

This in turn helped spur oil prices. NYMEX crude for October delivery rose $3.08 to settle at $71.10 a barrel, marking the largest percentage increase since Aug. 19. London Brent crude rose $2.89 to $69.42 a barrel.

RISKS REMAIN

But clear risks remain -- most obviously climbing unemployment and banks' continued reluctance to lend.

Policymakers face a dilemma.

They want to free up lending but are determined to impose new rules on banks to prevent another credit bubble that could be followed again by bust.

Top central bankers said on Sunday banks would have to set aside more profits as a cushion against hard times and face limits on how much debt they could run up.

Bank chiefs defended their business models on Tuesday against new regulation that aims to put them on a tighter leash.

Deutsche Bank Chief Executive Joseph Ackermann told a conference in Germany that regulators could choke off an economic rebound if they made overly restrictive rules on how much capital and liquidity banks need to hold.

"The consequences for credit availability and the price of credit need to be considered," he said.

But he acknowledged that banks did not have enough capital. "And I deem it right that this has to be corrected," he said. (Reporting by Reuters reporters worldwide; editing by Elizabeth Piper and Mohammad Zargham)

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