By Charles Passy

Could debit cards, once a cash cow for banks, be put out to pasture?

A federal court ruling on Wednesday paves the way for a further reduction in the interchange fees (also known as “swipe” fees) that banks levy on merchants for debit cards. It is a victory for retailers, who protested that the 2010 Dodd-Frank financial law, which lowered the fees from 44 cents to 21 cents per transaction, didn’t go far enough. Now, U.S. District Court Judge Richard Leon has essentially scrapped the 21-cent limit and set the stage for an even lower amount, though it may be months, if not years, before any changes are made to the existing cap.

But if changes are indeed made, it could be consumers who ultimately pay the price for banks’ potential loss of billions of dollars in “swipe” fees. As banking industry experts note, the revenue has to be replaced, so higher overdraft penalties and account maintenance charges are all possible. And ultimately, the very existence of debit cards could be in doubt, even if consumers still embrace them as a way to instantly tap into their checking accounts when they reach the cash register. Nevertheless, the math may no longer work out for the banks that issue those cards.

dean bertoncelj / Shutterstock.com
“It is like squeezing one end of a balloon. The air’s going to have to go somewhere,” says Richard Barrington, senior financial analyst with MoneyRates.com.

Certainly, that is what history has shown. When Dodd-Frank was passed in 2010, it resulted in a decline in the percentage of banks offering free checking and an increase in the amounts charged in overdraft penalties. (In the case of the latter, the average penalty rose from $28.71 to $30.01 from 2011 to 2013, according to MoneyRates.com.) But more to the point, say industry experts, it resulted in a culture of nickel-and-diming for just about anything. Those generous debit-card reward programs? Banks have scaled them back considerably. Those free coin-counting machines? “Now banks charge more (for coin counting) than if you took out a home-equity loan,” says Bankrate.com senior financial analyst Greg McBride. (BankRate.com shows the average rate for a $75,000 home-equity loan is currently 5.68%; coin counting at some banks can be as much as 6%.)

And McBride says history is likely to repeat itself. “The consumer got stuck with the bill” on the previous interchange-fee legislation, he says. “A second go-round is only going to lead to further pain.”

To some extent, that is not disputed by the banking industry, which is calling on the Federal Reserve to follow-up on the court decision. “We urge the Federal Reserve to pursue all legal means to mitigate the harm this decision will cause to consumers,” said American Bankers Association president Frank Keating in a statement released on Wednesday.

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Bank of America cuts costs out
Bank of America’s second-quarter profit jumped 63%, boosted by strong income from its global markets arm and improved credit quality. Photo: AP

Nessa Feddis, a senior vice president with the American Bankers Association, explains that if interchange fees are lowered, checking accounts will be the source of revenue most likely to be targeted, since each account already costs a bank around $250 a year to maintain. “Consumers will see fewer free checking accounts, higher checking-account fees and higher minimum balances to avoid those fees,” she says.

It is also possible that banks will try to steer consumers to seek other payment options, especially credit and prepaid cards, which aren’t subject to the same “swipe” fee limits. “It really could mean that the debit-card business is much less viable,” says Sherief Meleis, a partner with Novantas, an advisory firm that tracks the banking industry. See also: 10 things credit bureaus won’t tell you

By JAY SOLOMON And VICTORIA MCGRANE

WASHINGTON—The State Department has extended the closure of many American embassies in the Middle East by a week and has shuttered additional diplomatic missions, underscoring what U.S. officials said was the continued threat posed by al Qaeda and its affiliates.
U.S. officials on Sunday said the decision to close the embassies was based on the same intelligence that led the State Department on Friday to issue a global alert on the possibility for al Qaeda attacks across the broader Mideast and possibly into Europe and the U.S.
Obama administration officials said they are particularly tracking the operations of al Qaeda in the Arabian Peninsula as the primary organization behind the threat. These officials said they’ve monitored communications traffic between the Yemen-based group’s members indicating a major terrorist plot has become operational.
The Obama administration had initially said it was closing most of its Mideast embassies for just one day—Sunday.
“Given that a number of our embassies and consulates were going to be closed in accordance with local custom and practice for the bulk of the week…at the end of Ramadan, and out of an abundance of caution, we’ve decided to extend the closure of several embassies and consulates including a small number of additional posts,” State Department spokeswoman Jen Psaki said Sunday. “This is not an indication of a new threat stream, merely an indication of our commitment to exercise caution and take appropriate steps,” she said.
Among the embassies the State Department said it is closing through next Saturday are the U.S. missions in Egypt, Jordan, the United Arab Emirates, Kuwait and Qatar.
U.S. officials said they didn’t have any specifics on the targets al Qaeda might be pursuing, but stressed the terrorist threat continues unabated with the potential for attacks on embassies, airlines and mass transit systems.
A U.S. official said the Obama administration will be evaluating warnings and embassy closings on an “ongoing basis,” and added: “Sunday was the first day we really cared about.”
Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, said Sunday the terrorism threat leading the U.S. to close most of its embassies in the Middle East is “more specific” than other recent threats and was directed broadly at Western interests, not just those of the U.S.
Gen. Dempsey and a range of American lawmakers speaking on Sunday news shows emphasized both U.S. concern about the threat and the lack of precise details unearthed by intelligence services.
“There is a significant threat stream, and we are reacting to it,” Mr. Dempsey said in an interview with ABC’s “This Week.” The threat is coming from an “Al Qaeda branch,” he said. “The intent is to attack Western, not just U.S. interests.”
House Homeland Security Committee Chairman Michael McCaul (R., Texas) said on CBS’s “Face the Nation” that “this is probably one of the most specific and credible threats I’ve seen perhaps since 9/11.” He said the terror threat was notable because of the link to the Al Qaeda faction in the Arabian Peninsula.
Mr. McCaul and Rep. Peter King (R., N.Y.) were two of several Republican lawmakers Sunday to praise the Obama administration’s pre-emptive steps to alert the public and to protect personnel abroad. “The administration’s call to close these embassies was actually a very smart call, particularly in light of what happened in Benghazi,” Mr. McCaul said, referring to the fatal 2012 attack on a U.S. outpost in Benghazi, Libya, over which the Obama administration has come under intense criticism from Republicans.
And several lawmakers used this latest terrorist threat to buttress their arguments about the importance of intelligence-gathering efforts of the National Security Agency. The NSA has been mired in controversy since former spy contractor Edward Snowden leaked scores of classified documents to media outlets describing the inner workings of U.S. spying and eavesdropping operations.
“The good news is that we picked up intelligence,” said Maryland Rep. C.A. “Dutch” Ruppersberger, the top Democrat on the House intelligence committee. “That’s what NSA does. NSA’s sole purpose is to get information intelligence to protect Americans from attack.”
“The NSA program is proving its worth yet again,” Sen. Lindsey Graham (R., S.C.) said, speaking on CNN’s show “State of the Union.” He did not specify which particular NSA program. He said to his colleagues who are critical of the NSA’s intelligence gathering, “if you want to gut it you’re making us much less safe.”
Other lawmakers drew a distinction between NSA programs directed at overseas intelligence gathering as opposed to those that collect information on U.S. soil. Rep. Adam Schiff (D., Calif), a member of the House Intelligence Committee and a critic of the NSA’s collection of data on Americans’ phone calls, said on CNN that the NSA’s role in helping uncover the latest terror threat doesn’t change his mind about the program. He said he’s seen no indication that the program contributed to the information about this particular plot.
-Siobhan Gorman contributed to this article

Write to Jay Solomon at jay.solomon@wsj.com and Victoria McGrane at victoria.mcgrane@wsj.com

The Chinese state owes a lot of money – but even in Zhongnanhai, the secluded compound where the Communist Party’s top brass have their headquarters, no one really knows how much.

Sovereign debt issued by the central government in Beijing stands at 8.4 trillion yuan ($1.4 trillion), or 16% of GDP, as of the end of last year – wonderfully low by western standards. But the sovereign has kept its balance sheet clean by unloading responsibilities on to local governments and individual ministries, which then borrow to cover their costs. That means adding up the real level of public debt is a complicated job.

Worried that borrowing may be out of control, the leadership has instructed the National Audit Office to do a comprehensive survey of all the official borrowing out there – something private sector economists have been guessing at for years. A quick review of estimates finds a range from the International Monetary Fund’s lowish 46% to Standard Chartered Bank’s more worrying 78% of GDP.

China has one big advantage over neighbors like South Korea and Indonesia that were laid low by the Asian Financial Crisis in 1997 – almost none of that debt is denominated to foreign currency, or owed to foreigners. That means a Greek-style public debt crisis is hard to imagine, according to Andrew Batson of Dragonomics, a Beijing-based research firm. Instead, the risk is that the government will be tempted either to allow higher inflation to eat away at the value of its debt, or else to keep the financial system highly regulated and prop up weak borrowers indefinitely – pushing down efficiency across the economy and leading towards stagnation.

At 60%, Dragonomics’ estimate for total public debt is in the middle of the pack.

Apart from 8 trillion yuan of sovereign bonds, there could be almost 20 trillion yuan of local government debt out there, according to Standard Chartered’s numbers. Most of China’s provinces, cities and counties are technically not allowed to borrow, but in the two years after Lehman Brothers the central government turned a blind eye as they set up investment vehicles to take out loans on their behalf, mostly to pay for an epic infrastructure splurge. That kept China motoring on through the crisis, but it also left city halls staring at a hefty bill.

The last NAO audit found 10.7 trillion of local government debt as of the end of 2010, and analysts expect a significant jump this time around.

Then there is the Ministry of Railways, which charged China’s (undeniably very good) train network straight to its credit card. That left a 3.1 trillion yuan tab, Standard Chartered counts. The debt was transferred to the newly created train operator, China Railway Corp., which was split off from the ministry in March. But the government says it still stands behind the debt.

And that is not to mention 7.6 trillion yuan of debt issued by China Development Bank and other policy banks, whose main purpose is to further the government’s goals. Analysts disagree about whether the policy bank debt should really be added to the government balance sheet – some of it is lent on to other government entities, so double counting could be an issue. While StanChart includes it the IMF’s low-ball estimate leaves it out – and the railway debt as well.

To round it off, the government is still not quite finished cleaning up the mess from the last bad debt crisis more than a decade ago, when it saved the banks’ bacon by taking bad loans off their hands and assigning them to specially created asset management companies. Those AMCs still have some 1.9 trillion of debt to pay off, StanChart reckons.

The flipside of all this is that, though the Chinese state has a lot of debt, it also has an awful lot of assets it could sell to bail itself out. Local governments have been paying their way with land auctions for years. And when the land runs out there are many thousands of state-owned enterprises that could theoretically be privatized – that is, if they’re not too weighed down with debt themselves.

Then again, the national pension fund is underfunded to the tune of 18.3 trillion yuan, according to a joint study by Deutsche Bank and Bank of China. It will take more than the sale of a few local SOEs to raise that much.

– Richard Silk

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By V. Phani Kumar

HONG KONG (MarketWatch) — Japanese stocks retreated Wednesday as several exporters and utilities declined amid a firmer yen and caution ahead of the Federal Reserve’s policy decision later in the day, although Softbank Corp. and KDDI Corp. shares jumped after reporting results. The Nikkei Stock Average JP:NIK -1.29% gave up 1.1% and the broader Topix JP:I0000 -0.71% shed 0.7%. Shares of Fast Retailing Co. slid 3.6% and Suzuki Motor Corp. gave up 3.9%. Earnings were in the focus, with Softbank Corp. JP:9984 +3.49% SFTBF +3.31% rising 3.3% after more than doubling its quarterly profit, and fellow telecommunication firm KDDI JP:9433 +7.91% KDDIY +5.53% spiked 5.9% after also reporting results. In other earnings-driven moves, Fujitsu Ltd. JP:6702 -2.84% FJTSY +6.35% fell 2.6%, Japan Tobacco Inc. JP:2914 +1.01% rose 0.7% and Tokyo Electron Ltd. JP:8035 +3.72% TOELY -3.55% shed 1.3%. Tokyo Electric Power Co. JP:9501 -3.62% TKECY +3.34% slid 3.6% amid concerns over resistance to its planned restart of a nuclear power plant. Toyota Motor Corp. JP:7203 -0.99% TM +1.95% fell 1.3% amid broader market weakness, despite a Nikkei newspaper report it plans to manufacture more than 10 million vehicles worldwide this year.

July 23, 2013 by Isaac Arnsdorf

West African pirates will threaten the region’s oil and shipping industries for years as the measures used to curb attacks in the Indian Ocean aren’t able to help, according to a provider of armed guards for vessels.

While international navies and private security are repelling attacks off the Somali coast, guards can’t carry weapons into ports in West Africa, said Barry Roche, chief executive officer of Protection Group International, the parent company of the largest security service in the Indian Ocean, but with only an advisory role in West Africa. Attacks are more violent because the West African pirates have machine guns and focus on stealing cargoes instead of taking hostages, he said.

“It would be like trying to compare the Iraq conflict with the Afghanistan conflict,” Roche said in a phone interview. “The geographic and political situation in the area makes it much more difficult to operate the model that’s been employed successfully in the Indian Ocean. There need to be changes in governmental thinking.”

The escalating threat will probably last for years and may inhibit the region’s oil exports, Roche said. West Africa shipped about 10 percent of the world’s crude last year, the most after the Middle East and the former Soviet Union, according to figures from London-based BP Plc.

West African piracy overtook Somali attacks as the greatest threat to crews of merchant ships for the first time in 2012, according to organizations including the International Maritime Bureau.

Incidents involving Somali pirates plunged to eight in the first half of 2013 from 69 a year earlier, according to the IMB, which monitors sea crime from London. Pirates operating in the Gulf of Guinea kidnapped 30 crew in the period, compared with three seized worldwide in the first six months of 2012, the group said in a July 15 report.

Code of Conduct
Representatives from 22 nations in western and central Africa signed a code of conduct last month on preventing piracy, according to a June 26 statement on the website of the United Nations’ International Maritime Organization. The agreement will help curb attacks, the IMB said.

About 42,250 vessels a year, including 20 percent of trade in crude oil, navigate the area where Somali pirates operate, costing the global economy about $6 billion in 2012. About 50 percent of ships in the region use private armed guards, up from 30 percent in 2011, according to an April report from Oceans Beyond Piracy, a project of the Broomfield, Colorado-based One Earth Future Foundation.

–Editors: Dan Weeks, John Deane.

By Carla Mozee, MarketWatch
LOS ANGELES (MarketWatch) —

Futures prices for U.S. benchmark crude oil rose Monday, with weakness in the dollar providing a platform for the commodity to reach for a new 52-week high.

Oil for August delivery CLQ3 +0.26% rose 40 cents, or 0.4%, to $108.45 a barrel in electronic trade.

The dollar-denominated commodity benefitted from a decline in the greenback overnight, with the moves weighing on the ICE dollar index DXY -0.33% . The dollar lost some ground against the Japanese yen USDJPY -0.52% as Prime Minister Shinzo Abe’s ruling party consolidated its power in this weekend’s election.

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A weaker U.S. dollar helps send crude-oil futures higher.
Oil and other commodities priced in dollars tend to gain when the U.S. unit loses ground, as the resources become less expensive to buy for holders of other currencies.

On Friday, oil futures rose 1 cent to $108.05 a barrel on the New York Mercantile Exchange, enough to leave them with their highest close since March 2012.

Investors later Monday may look for signs about energy demand from a July reading on U.S. manufacturing activity, national activity data from the Chicago Fed, and June sales of existing homes.

Recent declines in U.S. crude supplies and political turmoil in Egypt have helped oil prices advance nearly 15% over the past four weeks.

“Improving fundamentals, less concern about [the Federal Reserve] tapering and a still tense geopolitical situation have boosted oil prices in recent weeks, but the improvement may not last,” wrote Barclays commodities analysts on Friday.

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Is oil poised to move higher?
Are we likely to see the price of oil stay above the $100 per barrel mark for the foreseeable future?

“We expect the move up in oil prices to run out of steam, as weak demand caps the upside, and we forecast Brent crude to average around $107 a barrel in [the third quarter], slightly below currently prevailing levels.”

September Brent crude UK:LCOU3 +0.17% on Monday was up 13 cents, or 0.1%, at $108.20 an barrel, trading below the price for Nymex oil futures.

Brent crude was also briefly at a discount to Nymex crude on Friday — Previously, Brent had enjoyed a premium to its U.S. rival since 2010, according to weekly settlement prices.

Elsewhere Monday, August gasoline RBQ3 -0.35% rose 1 cent, or 0.2%, to $3.13 a gallon. The contract rose 0.2% last week.

August heating oil rose nearly 1 cents to $3.095 a gallon, adding to last week’s advance of about 2%.

August natural gas NGQ13 -1.74% , however, fell 5 cents, or 1.4%, to $3.74 per million British thermal units, giving up a portion of last week’s 4% gain.

Carla Mozee is a reporter for MarketWatch, based in Los Angeles. Follow her on Twitter @MWMozee.

By Associated Press

BEIJING—A shallow earthquake struck a dry, hilly farming area in western China early Monday, killing at least 54 people, injuring nearly 300 and destroying thousands of homes, the local government said.
The quake hit near the city of Dingxi in Gansu province, a hilly region of mountains, desert and pastureland about 766 miles west of Beijing.
Residents described shaking windows and swinging lights, but there was relatively little major damage or panic in the city itself. Tremors were felt in the provincial capital of Lanzhou, about 110 miles north, and as far away as Xi’an, 250 miles to the east.
“You could see the chandeliers wobble and the windows vibrating and making noise, but there aren’t any cracks in the walls. Shop assistants all poured out onto the streets when the shaking began,” said a front desk clerk at the Wuyang Hotel, in the Zhang county seat, about 25 miles from the epicenter. The clerk, surnamed Bao, didn’t identify herself further.
The government’s earthquake monitoring center said the initial quake, at 7:45 a.m., registered a magnitude of 6.6. Subsequent tremors included a magnitude-5.6.
The quake was shallow, which can be more destructive. The government’s earthquake monitoring center said it struck about 12.4 miles beneath the surface, while the Gansu provincial earthquake administration said it was just 3.7 miles deep.
The U.S. Geological Survey measured the magnitude of the initial quake as a magnitude-5.9 with a depth of 6 miles. Initial measurements of an earthquake can vary widely, especially if different monitoring equipment is used.
The deaths and injuries were reported in Min county and other rural southern parts of the municipality, Dingxi Mayor Tang Xiaoming told state broadcaster CCTV. Tang said damage was worst in the counties of Zhang and Min, where scores of homes were damaged and telephone and electricity services knocked out.
Su Wei, leader of a 120-member rescue team from the paramilitary People’s Armed Police, told CCTV they were on their way to the epicenter, but progress was being slowed by mud and rock slides blocking the road.
The Chinese Red Cross said it was shipping 200 tents, 1,000 sets of household items, and 2,000 jackets to the area and sending teams from both Lanzhou and Beijing to help with relief work and assess further needs.
Heavy rain is expected in the area later in the week.
More than 1,200 homes were destroyed by the quake, with another 21,000 badly damaged, provincial government spokesman Chang Zhengguo was quoted as saying by the official Xinhua News Agency.
With a population of 26 million, Gansu is one of China’s more lightly populated provinces, although the New Jersey-sized area of Dingxi has a greater concentration of farms in rolling hills terraced with fields for crops and fruit trees. Dingxi has a total population of about 2.7 million.
China’s worst earthquake in recent years was a 7.9-magnitude temblor that struck the southwestern province of Sichuan in 2008, leaving 90,000 people dead or missing.

Twin concerns—market volatility and their families’ futures—are leading rich Chinese to buy expensive, complicated life-insurance products. For many, simpler and cheaper policies would be the better way to go.
Hong Kong’s insurance market has had an influx of mainland consumers. The value of new premiums grew by 18% from a year earlier in the first quarter, and mainland Chinese consumers account for almost one-eighth of the total premiums for new policies, according to the Office of the Commissioner of Insurance in Hong Kong.
Hong Kong offers more choice than mainland China, but it is still hard to shop for a policy. Unlike in developed markets such as the U.K., insurance companies in Asia don’t generally offer quotes online. Getting quotes from agents can be time-consuming, and products from different insurers can be hard to compare, even for financial professionals.
In other places, an insurance shopper might turn to an independent agent, not affiliated with a particular company, but they make up less than 5% of the total number of agents in China and Hong Kong, according to Arjan van Veen, an analyst at Credit Suisse. While both independent agents and agents employed directly by insurance companies sell on commission, the independents often work for advisory firms that counsel clients on other investments, too.
They can benefit from building a long-term relationship, rather than pitching policies from their own company that would provide a big short-term payoff, but might not align with the customer’s goal of getting the best product at the best price.
“Commissions for insurance brokers are very high—can be worth up to a year’s premium,” said Feisal Alibhai, founder of Hong Kong-based Qineticare, which provides healthcare advisory services to wealthy families and works with insurance agencies. “All the money for them is paid up front, so for most brokers, it’s a one-hit game.”
In steering people away from basic term-insurance policies—in which paying a fixed amount each year provides a fixed amount of coverage over a fixed number of years—agents often argue that such policies are like gambling, with the insurance company on the other side. The policyholder bets on dying during the term of the policy, and the insurance company bets the policyholder will live, they say.
Agents also compare it to renting property, appealing to a basic Chinese view that this is like throwing money away. When a term policy comes to an end, the argument goes, the policyholder has nothing, like a tenant whose lease has expired. By contrast, insurance policies with investing features have a cash value that accumulates over years, so buying one is similar to paying off a mortgage.
But basic term policies, in addition to being the cheapest option as a rule, provide what most buyers of insurance need: a payout to the survivors if the policyholder dies.
Still, these policies are less popular with investors. Instead, policies that offer investment gains or guaranteed returns are growing fast, in part because increased volatility has discouraged people from managing their own money.
Premiums paid on such products jumped by 18.6% in the first quarter from a year earlier in Hong Kong, official data show. Premiums paid on non-investment-linked savings products—which offer annual returns of 3% to 5%—were up 14.5%. Insurances agents say they are selling well in this time of low interest rates.
Insurance buyers who are looking to invest money as well as obtaining coverage have two choices. One is to buy a simple term policy with part of their money and have the rest managed by professional fund managers, which tend to be more transparent than insurance companies about their fee structure and payouts, said Wayne Yu, professor of finance at Hong Kong Polytechnic University.
The other is to have insurance companies handle it all. Families making that choice should avoid bundled products, analysts say.
“Where insurance companies make most money is when they bundle a lot of products together,” said Mr. van Veen, the Credit Suisse analyst. “Consumers don’t know how much they should be charged.”
For the consumer, stand-alone policies can offer better value. An all-in-one life-insurance policy from China Life Insurance Overseas Co.’s Hong Kong branch can be replicated by buying a similar stand-alone savings product from the same company, supplemented with a 20-year term policy from U.K. insurer Friends Provident. China Life Insurance Hong Kong didn’t return calls seeking comment.
For a client who wants 2.5 million Hong Kong dollars (US$320,000) in life-insurance protection, both plans will generate a cash value of US$600,000 after 20 years. But buying separately saves the policyholder about $1,550 a year in premiums, a savings of US$31,000 over 20 years. Agents said this kind of discrepancy is common among insurance companies. (If customers want just the protection, they can get that for US$450 a year, and invest the rest of their funds, almost US$20,000 a year, elsewhere for more flexibility.)
Most people regard life-insurance policies as something that they will never use themselves, so they pick a random one from a well-known provider. But large and complex insurance policies can be a person’s biggest investment after property, so it pays to do thorough research.
“Insurance products are never plain vanilla or commoditized, and insurance companies don’t like to give much information,” said Scott Russell, an analyst at Macquarie. “Consumers need to do a lot of comparison and cherry picking to find the best solution.”

Write to Wei Gu at wei.gu@wsj.com

By Michael Kitchen, MarketWatch

LOS ANGELES (MarketWatch) — The U.S. dollar pulled back from its gains, losing ground against most other majors Friday and falling almost half a yen against its Japanese rival.

The ICE dollar index DXY -0.12% , which measures the greenback against six other major currencies, slipped to 82.571 from 82.783 late Thursday in North America.

Shutterstock Enlarge Image
The yen rises after Japanese stocks take a sudden dive in morning trade.
The WSJ Dollar index XX:BUXX -0.17% , which uses a slightly larger comparison basket, fell to 74.76 from 75.93.

The yen USDJPY -0.05% was saw strong gains, with the dollar dropping to ¥100.01 from late Thursday’s ¥100.50 after Japanese stocks took a sudden dive in morning trade due to selling on the futures market.

Tokyo’s blue-chip Nikkei Stock Average JP:NIK -1.48% lurched from an almost 1% gain to a more than 2% loss as futures traders unwound positions, with investors looking ahead to a likely win for the ruling Liberal Democratic Party in the weekend’s upper-house elections.

The yen had lost ground in recent days, with Credit Agricole strategists attributing the loss to rising risk sentiment, as well as the view that should the LDP take a majority in the upper house as expected, it would ease passage of pro-growth policies from Prime Minister Shinzo Abe.

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Bernanke’s tools to promote economic recovery
Fed Chairman Ben Bernanke discusses the labor-market outlook and the tools the central bank has to aid economic recovery. Photo: AP.

However, they also said that “should [Abe’s LDP] win two-thirds of the upper house, it may negatively impact sentiment, as expectation for him to start focusing on nationalistic policies would rise,” though they added that such a large victory remains unlikely.

The euro EURUSD +0.13% also improved against the dollar, rising to $1.3136 from $1.3110 late Thursday, while the British pound GBPUSD +0.22% advanced to $1.5234 from $1.5220.

Likewise, the Australian dollar AUDUSD +0.46% edged up to 91.81 U.S. cents from 91.71 cents.

Michael Kitchen is Asia editor for MarketWatch and is based in Los Angeles. You can follow him on Twitter at @KitchenNews.

By Sara Sjolin and Michael Kitchen, MarketWatch

LONDON (MarketWatch) — Oil prices slipped below the $108 level on Friday, partly erasing solid gains seen in the prior day’s trade on the back of strong U.S. data.

Oil for August delivery CLQ3 +0.69% dropped 11 cents, or 0.1%, to trade at $107.95 a barrel, after leaping 1.5% in Thursday’s regular New York Mercantile Exchange action.

Likewise, September Brent crude UK:LCOU3 +0.39% fell 18 cents, or 0.2%, to $108.52 a barrel.

Bloomberg News Enlarge Image
Oil adds to its two-session rally, with both Nymex and Brent crudes higher.
The subtle moves came as the U.S. dollar was broadly unchanged, with the ICE dollar index DXY -0.13% trading around 82.77 from late Thursday’s 82.783 level. A weaker U.S. currency can discourage buying of dollar-denominated oil by making it more expensive to holders of other currencies.

Thursday’s rally came as jobless claims in the U.S. fell more than expected and Federal Reserve Bank of Philadelphia’s economic index this month rose to the highest level since March 2011.

Meanwhile, Thursday’s rally in the Nymex-traded West Texas Intermediate (WTI) crude well outpaced a 9-cent advance in its London-traded Brent North Sea crude rival, compressing the spread to less than $1.

The Nymex-Brent spread has been shrinking recently—at the start of the month, Brent was at a $5 premium to Nymex, while at this time in 2012, the Nymex-Brent spread was roughly $14.

Citi Futures strategist Timothy Evans said falling crude-oil supplies in the U.S. had helped Nymex WTI catch up to Brent.

“WTI is the flavor of the month, having easily eclipsed the performance of Brent crude oil in this year’s version of the ongoing popularity contest between the two major global benchmarks,” he wrote late Thursday.

U.S. joins WTO case against Russia
The U.S. will join a WTO case against Russia, adding pressure on Moscow over laws that Americans and Europeans say discriminate against global companies and violate trade rules. Photo: AP.

Evans said that with Nymex crude “in backwardation, the holding of inventories has become costly, and so we also think there’s a good chance that the decline [in U.S. crude stockpiles] will be steeper than usual.”

Backwardation means the futures are trading below the expected spot price, implying the futures will increase in value as they approach expiration.

Elsewhere in the energy complex, August gasoline RBQ3 +1.61% gained 1 cent, or 0.4%, to $3.12 a gallon in Friday trade after having closed flat in Thursday’s Nymex trade.

“It looks as though the poor recent price performance may have been enough to convince some traders that gasoline represents a relative bargain,” wrote Citi Futures’ Evans.

In other energy trade, August heating oil HOQ3 +0.59% added 1 cent, or 0.2%, to $3.11 a gallon, while August natural gas NGQ13 -0.74% slipped a penny, or 0.3%, to $3.80 per million British thermal units.

Sara Sjolin is a MarketWatch reporter based in London. Follow her on Twitter @sarasjolin.
Michael Kitchen is Asia editor for MarketWatch and is based in Los Angeles. You can follow him on Twitter at @KitchenNews.