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Prospects Daily: US dollar up after Bernanke’s testimony…Spanish bad bank loans near record high…South Africa’s central bank keep rates on hold

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Financial MarketsThe dollar strengthened versus global major currencies after Federal Reserve Chairman Ben Bernanke confirmed that gradual scaling back of the central bank’s monetary stimulus program could begin this year. The greenback gained 0.7% against the yen to 100.32, while it appreciated 0.4% against the euro to $1.3077. The dollar also gained considerably against developing-country currencies.

The European Central Bank changed its collateral rules for refinancing banks by extending the eligibility of asset-backed securities (ABS) in an effort to boost lending to small-and medium sized companies. The ECB will lower the risk premium (or haircut) to ABS to 10% from 16%, and it will also lower the credit quality threshold for ABS to single A from triple A.

Chinese stocks fell for a second day, with property and commodity shares leading the decline, amid lingering concern over the slowing growth in the world second-largest economy. The Shanghai Composite Index fell 1.1% to extend yesterday’s 1% loss, while the CSI 300 Index dropped 1.6%.

High Income Economies...Greece’s parliament approved a barrage of new austerity measures today, including controversial plans for overhauling the civil service and a new tax code along with other budget cuts, that will help secure the release of the first installment of $9billion in rescue loans approved by Euro Area finance ministers last week. Plans include putting 25,000 civil servants into a “mobility plan” by the end of the year, docking their pay ahead of forced transfers or dismissals.

Spain’s recession is putting pressure on the banks, whose bad loans swelled to 11.2% of total lending in May, from 10.9% the previous month. This is just below an all-time high of 11.23% in November 2012, and up from 1% in 2007 before the economy and the banking sector was laid low by a bursting housing bubble financed by high levels of private sector borrowing.

The Bank of Japan’s Senior Loan Officer survey showed a slight fall in corporate demand for financing via bank loans in Q2. The balance of banks reporting an increase os those reporting a decline fell to -2 from 5 in Q1 with loan officers citing a slower pace of investment and uncertainty on lending rates. The index had surged to a record high of +43 in Q4 2008 from -5 in the previous quarter after the collapse of Lehman Brothers hurt the ability of companies to borrow directly from financial markets.

Developing Economies…Latin America and the Caribbean: Mexico’s unemployment rate advanced to 5.09% in June from 5.07% in May. Labor force participation rate fell to 59.6% in June, slightly lower than 60.3% recorded a year earlier.

Brazil’s leading economic index (IACE), a composite of eight forward-looking indicators, fell 0.6% (m/m) in June. June was the second straight month in which Brazil’s IACE declined. The index fell 2.3% in the first half of 2013.  The last time the IACE contracted on this scale was in 2011, a year in which Brazil’s economic growth slowed to 2.7% from 7.5% in 2010 and turned negative in the third quarter.

Middle East and North Africa: Tunisia's trade deficit widened to $1.9bon in 2013Q2, up from a gap of $1.5bn in the previous quarter and $1.8bn during the same period a year ago. Merchandise exports posted meager growth of just 0.4% (y/y) while imports rose 2.0% (y/y) during the second quarter. Weak demand from Europe – Tunisia's main trade market – will continue to pressure the country's exports.

Sub-Saharan Africa: South Africa's central bank kept its key interest rate on hold as sluggish global conditions and mounting inflationary pressures prompted the bank to keep its key interest rate at a four-decade low of 5%. Inflation has averaged 5.6% (y/y) in May, near the top of the bank's 6% target ceiling while the central bank lowered its growth forecasts for 2013 to 2% (from 2.4%) in 2013.