China and India lose their appeal for investors on inflation fears

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Fund managers are still super-bullish on Russia, betting that the energy boom has life yet. A net 62pc are overweight oil and gas shares. The most hated trio are travel and leisure (-66), banks (-62) and property (-60).

Karen Olney, Merrill’s European equity strategist, said oil is nearing its cycle peak. “Is the trade too crowded? Probably. As long as fundamentals remain strong, we retain our overweight stance,” she said.

“The burning question is when to sell oil companies and move back to banks.

“We resist the temptation. The time is nearer when inflation rolls over, towards the end of this year and certainly into 2009.”

A record number (net 29pc) are now underweight on European equities; many have switched into cash as they wait for the European Central Bank to inflict punishment – ever more likely after eurozone inflation reached an all-time high of 3.7pc in May.

The ECB’s chief economist, Jurgen Stark, said yesterday that the price spike was a “cause for alarm”.

Mr Bowers said Europe is now facing a triple whammy as the downturn in global export markets combines with a strong euro and a monetary squeeze.

“Eurozone retail sales have been worse than in the US on a year-on-year basis and eurozone GDP growth has also been worse,” he said. “If you look at Spain and Italy, and even France, they are very weak.

“The Fed has eased dramatically, but the ECB hasn’t eased at all. It intends to tighten regardless of the consequences on growth. This is what is eating away at confidence in Europe,” he said.

Merrill Lynch said fund managers were belatedly adapting to a global inflation shock that poses a serious danger to asset prices, and risks setting off “civil protest” in Argentina, Indonesia, South Africa and the Gulf states.

As the new story unfolds, America is coming back into favour, emerging as a sort of safe haven in a fast-changing world where trusted institutions command a premium. Investors are quietly rotating back into Wall Street – despite a chorus of pessimists. A net 23pc are overweight US equities, the highest since August 2001.

The long awaited “decoupling” has begun.

The United States looks like the winner after all.

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Iran stops using U.S. dollar in oil transactions

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ALI AKBAR DAREINI, The Associated Press

April 30, 2008 at 12:25 PM EDT

TEHRAN – Iran has stopped conducting oil transactions in U.S. dollars, an official said Wednesday, a concerted attempt to reduce reliance on Washington at a time of tension over Tehran’s nuclear program and suspected involvement in Iraq.

Iran, OPEC’s second-largest producer, has dramatically reduced dependence on the dollar during the past year in the face of increasing U.S. pressure on its financial system and the fall in the value of the American currency.

World markets price oil in U.S. dollars. Its depreciation has concerned producers because it has contributed to rising crude oil prices and has eroded the value of their dollar reserves.

“The dollar has totally been removed from Iran’s oil transactions,” Hojjatollah Ghanimifard, a top Oil Ministry official, told state-run television Wednesday. “We have agreed with all of our crude oil customers to do our transactions in non-dollar currencies.”

At a summit last year in Saudi Arabia, Iranian President Mahmoud Ahmadinejad called the depreciating dollar a “worthless piece of paper.”

Iran put pressure on other Organization of Petroleum Exporting Countries members at the meeting to price oil in a basket of currencies. But it has not been able to generate support from fellow members – many of whom, including Saudi Arabia, are staunch U.S. allies.

Iran has a tense relationship with the U.S., which has accused Tehran of using its nuclear program as a cover for weapons development and providing support to Shiite militants in Iraq who are killing American troops. Iran has denied the allegations.

Iranian oil officials have said previously that they were shifting oil sales out of the dollar into other currencies, but Mr. Ghanimifard indicated Wednesday that all of Iran’s oil transactions were now conducted in either euros or yen.

“In Europe, Iran’s oil is sold in euros, but both euros and yen are paid for Iranian crude in Asia,” he said.

Iran’s central bank also has been reducing its foreign reserves denominated in U.S. dollars, motivated by the falling value of the greenback and U.S. attempts to make it difficult for Iran to conduct dollar transactions.

U.S. banks are prohibited from conducting business directly with Iran, and many European banks have curbed their dealings with the country over the past year under pressure from Washington.

However, the U.S. has been wary of targeting Iran’s oil industry directly, apparently worried that such a move could drive up crude prices that are already near record levels.

Iranian analysts say Tehran can withstand U.S. pressure as long as it can continue its oil and gas sales, which constitute most of the country’s $80 billion in exports.