Without a credible plan to rein in fiscal spending, the agency said external creditors could reduce dollar holdings, which could put pressure on the United States’ ‘AAA’ credit rating, which keeps government borrowing costs low.

For now, the credit ratings agency said the size of the U.S. economy — the world’s largest — and the depth of its financial markets mean the dollar will continue to dominate global trade and foreign exchange transactions.

Those advantages helped the dollar retain its top status despite the financial crisis of 2008-09, which began in the United States, S&P said in the report.

The agency also said the dollar’s role is an important factor supporting the United States’ AAA credit rating — the highest investment-grade rating.

The main risk to the dollar’s status comes from the growing amount of U.S. government debt, S&P said, particularly the share held by foreign central banks and sovereign wealth funds.

It also said widening U.S. fiscal deficits were a risk, adding “without a medium-term fiscal consolidation plan that the market views as credible, external creditors could reduce their dollar holdings, especially if they conclude that euro zone members are adopting stronger macroeconomic policies.”

China held 23 percent of outstanding U.S. debt in 2009 and Japan held 21 percent, the agency said. Overall, 46 percent of U.S. government debt held by the public in 2009 was owned abroad — by both official and private investors.

That amount has increased nearly every year since 2001, when foreigners held 30 percent.

The U.S. budget deficit is forecast to near 11 percent of output in fiscal year 2010, while the ratio of net general government debt to gross domestic product will have reached 82 percent by 2013, more than double its 2007 level of 38 percent, the ratings agency reported.

“In our opinion … inflation figures, trade volumes, foreign exchange volatility and the current account will be the leading indicators if the dollar’s role were to diminish,” the report said. “Such a scenario could even weigh on the ‘AAA’ rating of the United States.”

Some of the largest U.S. creditors, including China and Russia, have complained about U.S. fiscal and monetary policies over the past year and talked about future alternatives to the dollar.

So far, however, there have been few indications that investors or governments are shying away from the greenback.

S&P noted that the U.S. dollar still accounts for about 62 percent of foreign exchange reserves at central banks, down only slightly from about 72 percent in 2001.

“Any decline in the dollar’s share … will most likely continue to be steady, gradual and protected over many years,” the agency says.

The dollar still accounted for 86 percent of foreign exchange transactions in the fall of 2009, S&P said, off only slightly from 90 percent in 2001.

And while the euro has made some inroads when it comes to cross-border finance, the dollar still dominates world trade.

“For every country surveyed, the share of exports invoiced in U.S. dollars exceeds the U.S. share of the country’s exports — often by a wide margin,” the report said. Hard money training.

London’s benchmark FTSE 100 index added just 0.09 percent to 5,5607.24 points, Frankfurt’s DAX 30 gained 0.25 percent to 5,900.79 points and in Paris the CAC 40 was up 0.32 percent to 3,922.62 points.

The Stoxx 50 index of top eurozone shares rose 0.27 percent to 2,888.68 points.

“European markets were largely subdued on Wednesday with many investors sitting on the sidelines and waiting for macroeconomic news to help dictate their next moves,” City Index analyst Joshua Raymond said.

“You get the feeling that the markets are on a bit of a crossroads right now. Investors … are largely sitting on the sidelines.”

Markets were waiting for US figures on trade and weekly jobless claims that are scheduled to be released on Thursday.

Investors also continued to focus on Greece and the risk that its public debt problems might spread to Portugal and other European nations.

In London, traders also absorbed an official announcement that the British government will unveil its annual budget on March 24, a step widely taken to mean the country will go to the polls in early May.

In Germany, power company E.ON shares gained 0.95 percent to 27.135 euros after reporting a steady 2009 net profit of 5.33 billion euros (7.25 billion dollars).

In earlier Asian deals on Wednesday, Tokyo’s Nikkei-225 index dropped a marginal 0.04 percent to end at 10,563.92 points.

Investors were cautious ahead of consumer price data from key export destination China due on Thursday that could stoke concerns about further steps by Beijing to cool its fast-growing economy, dealers said.

Shares in troubled automaker Toyota closed down 1.4 percent after news of an another accelerator-related incident involving a Prius model in the United States.

On Tuesday, Wall Street stocks posted modest gains on the one-year anniversary of the beginning of the market’s rebound from its lows last year.

The Dow Jones Industrial Average rose 0.11 percent to 10,564.38 points after closing on a flat note a day earlier in the absence of market-moving news.

Investors were cautious as Wall Street marked the anniversary of the stock market’s 12-year low set on March 9, 2009 at the nadir of the financial crisis.

Since then, the blue-chip Dow index has rallied more than 60 percent, leading other global markets to similar gains. Hard money training.

During the holidays last year, Aydin Senkut and Elad Gil gathered 50 of their friends at a health-food restaurant in Palo Alto. Over turkey burgers and tofu wraps, they talked about tech trends and how to get rich. Or, more precisely, how to get richer.

Senkut, Gil, and their dining circle are alumni of Google, one of the greatest engines of wealth creation the U.S. has ever known. Since going public six years ago, Google has generated more than $170 billion for its employees and investors. Many of the millionaires the company has produced are young, wired into the latest developments in tech, and at ease with risk. Which explains why so many Google alums — including many of those at Senkut and Gil’s gatherings — are active angel investors, attempting to add another zero to their bank accounts and another innovative company to their list of accomplishments.

“I feel like we have such a strong network, it’s almost like we’ve recreated Google outside of the Google walls,” says Andrea Zurek, a 39-year-old backer of 26 startups.

More than 40 ex-Googlers have invested in about 200 fledgling companies since 2005, according to the research firm YouNoodle and reporting by Bloomberg BusinessWeek. At least six current Google executives, including CEO Eric Schmidt and co-founders Larry Page and Sergey Brin, are also financing young companies.

Numerous angel-watchers say the Google group has more in common than just pedigree. Unlike many venture capitalists, the Googlers like to swap investment ideas and back startups together. They’re also willing to take big chances. “[They're getting into] very risky deals that can be extremely rewarding,” says Jeff Clavier, a veteran venture capitalist who founded Palo Alto-based SoftTech VC in 2004. “They have been very active as a group over the past two to three years.”

The results have been impressive. Companies backed by Googlers include Twitter, Tesla Motors, and gamemaker Tapulous. “As Google matures, its alums are continuing to have a huge impact on Silicon Valley and the tech industry,” says Ron Conway, one of the Valley’s most active angel investors, who has backed 190 companies, including Google, Facebook, and Twitter.

One reason for their success is that Google’s angels have more to offer struggling entrepreneurs than just money. Bart Decrem, a Stanford University law grad, turned to the Google network when he was starting Tapulous in 2008. The company’s Tap Tap Revenge game requires players to tap on-screen balls to the beat of a song — not exactly a sure thing of an idea. But Decrem thought the game might become a substantial business by selling it on Apple’s iPhone. He raised $500,000 from a dozen angels, including Senkut and Zurek, who advised on strategy, connected the company with new partners in Asia, and helped it explore platforms for mobile phones that use Google’s Android software. Today, Tap Tap games have been downloaded more than 25 million times and Tapulous is solidly profitable, with $1 million in revenues a month.

Google’s Angels dabble in a wide variety of businesses. Zurek has money in a premium vodka maker and a South Korean frozen yogurt emporium. Yet the angels tend to concentrate their cash in what they know — search technology, mobile computing, and the consumer Internet. Already, Twitter, backed by former Google executive Chris Sacca, is the hottest startup in Silicon Valley, pioneering a new field of real-time communications. The online personal finance service Mint.com, with money from Senkut, proved so popular that market leader Intuit bought it for $170 million last year and made founder Aaron Patzer one of its top execs. Search provider Powerset, backed by Senkut, was acquired by Microsoft in 2008, and its technology became a key part of the Bing search engine. Hard money training.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said credit-worthy borrowers are still not getting enough access to loans, and more needs to be done.

“A policy of low interest rates is clearly appropriate given the struggling economy,” Bair said in remarks to the National Association for Business Economics.

The Federal Reserve has vowed to keep borrowing costs ultra low for an “extended period.” Most big banks that do business with the U.S. central bank believe it will raise the benchmark rate this year from the current zero, a Reuters poll showed.

She said a public spotlight needs to be shined on banks for having pulled back too far on extending credit.

Ramping up small business lending as a way to jump-start economic growth is a key policy initiative of the Obama administration.

U.S. bank regulators have repeatedly issued advisory notes to banks, urging them to extend prudent loans, but Bair said they should stop short of mandating the activity.

“If you cross a line and get into a situation where regulators are starting to order banks to lend, the history on that isn’t good,” she said.

The FDIC’s more recent quarterly banking profile showed that loan balances industrywide declined another 1.7 percent, the sixth consecutive quarter of contraction.

Bair said on Monday that smaller banks seem to be doing a better job than the larger institutions in making loans and maintaining loan balances.

The FDIC reported that large banks were responsible for 90 percent of the decline in loan balances during the fourth quarter.

“Clearly there was too much credit leading into this crisis and there had to be some pullback, but I am concerned with it moving too far the other way,” she said. “It is frustrating.” Hard money training.

The Federal Deposit Insurance Corp. took over Sun American Bank, based in Boca Raton, Fla., with $535.7 million in assets and $443.5 million in deposits. Also seized were Bank of Illinois of Normal, Ill., with $211.7 million in assets and $198.5 million in deposits; Waterfield Bank in Germantown, Md., with $155.6 million in assets and $156.4 million in deposits; and Centennial Bank in Ogden, Utah, with $215.2 million in assets and $205.1 million in deposits.

First-Citizens Bank & Trust Co., based in Raleigh, N.C., agreed to assume the assets and deposits of Sun American Bank and to share losses with the FDIC on $433 million of the failed bank’s loans and other assets. It was First-Citizens’ fourth acquisition of assets of a failed bank since last July; the others were First Regional Bank of Los Angeles, Venture Bank of Lacey, Wash., and Temecula Valley Bank of Temecula, Calif.

Heartland Bank and Trust Co., based in Bloomington, Ill., is buying the assets and deposits of Bank of Illinois, and is sharing losses with the FDIC on $166.6 million in loans and other assets.

For Waterfield Bank, because no buyer was found, the FDIC set up a new savings institution that will operate until April 5 to allow customers access to their deposits and give them time to open accounts at other banks.

The FDIC was also unable to find a buyer for Centennial Bank, and it approved the payout of the institution’s insured deposits. As a result, checks to the retail depositors for their insured funds will be mailed on Monday. Zions First National Bank in Salt Lake City agreed to accept the failed bank’s direct deposits from the federal government, including Social Security and Veterans’ payments.

The failure of Sun American Bank is expected to cost the federal deposit insurance fund $103.8 million. The cost of resolving Bank of Illinois is estimated at $53.7 million; that of Waterfield Bank is $51 million; and Centennial Bank is $96.3 million.

The pace of bank seizures this year is likely to accelerate in coming months, FDIC officials have said.

As the economy has weakened, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have mounted, sapping billions of dollars out of the deposit insurance fund. It fell into the red last year, hitting a $20.9 billion deficit as of Dec. 31.

Banks, meanwhile, have tightened their lending standards. U.S. bank lending last year posted its steepest drop since World War II, as the volume of loans fell $587.3 billion, or 7.5 percent, from 2008, the FDIC reported recently.

President Barack Obama recently promoted a $30 billion plan to provide money to community banks if they boost lending to small businesses. The program, which must be approved by Congress, would use money repaid by banks to the $700 billion federal bailout fund.

But many lawmakers want the $30 billion sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.

The number of banks on the FDIC’s confidential “problem” list jumped to 702 in the fourth quarter from 552 three months earlier, even as the industry squeezed out a small profit. Banks earned $914 million, compared with a $37.8 billion loss in the fourth quarter of 2008, at the height of the financial crisis. Still, nearly one in every three banks reported a net loss for the latest quarter.

The 140 bank failures last year were the highest annual tally since 1992, at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion. There were 25 bank failures in 2008 and just three in 2007.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors’ money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government. Apart from the fund, the FDIC has about $66 billion in cash and securities available in reserve to cover losses at failed banks. Hard money training.

The average rate on a 30-year fixed rate mortgage was 4.97 percent this week, down from 5.05 percent a week earlier, mortgage finance company Freddie Mac said Thursday.

Rates dropped to a record low of 4.71 percent in December and have hovered around 5 percent since, kept down by a Federal Reserve campaign to spur homebuying by lowering how much it costs to get a home loan.

The central bank’s $1.25 trillion program to buy up mortgage securities is set to expire March 31. But the Fed has held the door open to extending the program if the economy weakens.

Some analysts argue that rates could rise once the Fed’s program ends, hurting both the recovery in housing and the overall economy. Government officials are optimistic that the Fed will be able to end its program without a major disruption.

In a research note Wednesday, Goldman Sachs analyst Sven Jari Stehn said mortgage rates should only show a modest increase once the program ends, though “uncertainty remains significant.”

Also Thursday, data showed pending sales of existing homes dropped 7.6 percent in January from December as stormy weather kept prospective East Coast buyers at home and sales tumbled in the West. The report from the National Association of Realtors was the lowest reading since last April and a disappointment to economists, who had expected the metric to rise.

The index has declined for two out of the past three months because home shoppers feel less rushed after a deadline for a homebuyer tax credit was extended from Nov. 30 to April 30.

Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders around the country. Rates often fluctuate significantly, even within a given day, often in line with long-term Treasury bonds.

This week, the average rate on a 15-year fixed-rate mortgage was 4.33 percent, down from 4.4 percent last week, according to Freddie Mac.

Rates on five-year, adjustable-rate mortgages averaged 4.11 percent, down from 4.16 percent a week earlier. Rates on one-year, adjustable-rate mortgages rose to 4.27 percent from 4.15 percent.

The rates do not include add-on fees known as points. One point is equal to 1 percent of the total loan amount.

The nationwide fee for loans in Freddie Mac’s survey averaged 0.7 of a point for 30-year and 15-year loans and 0.6 of a point for five-year and one-year loans. Hard money training.

Kentucky Republican Jim Bunning relented on Tuesday evening, freeing the Senate to approve stopgap legislation extending for another month a host of programs, including highway funding, health insurance subsidies for the unemployed and benefits for the long-term jobless. That gives Congress time to consider the far larger measure covering most of the same programs.

But the daunting price tag on the longer-term measure guarantees more complications and an even rougher path through the Senate than experienced by the bill passed Tuesday.

Bunning held up action for days, causing the government to furlough highway workers and allowing some unemployment benefits to expire. He wanted to force Democrats to find ways to finance the bill so it wouldn’t add to the deficit. But his move sparked a political tempest that subjected Republicans to withering media coverage and cost the party politically. Bunning’s support among Republicans was dwindling, while Democrats used to being on the defensive over health care and the deficit seemed to relish the battle.

Once Bunning gave in, the stopgap bill — which passed the House last week — passed the Senate by a 78-19 vote. President Barack Obama signed it into law late Tuesday.

“During these difficult economic times, supporting American workers, their families and our small businesses must be everyone’s focus,” Obama said in a statement. “I’m grateful to the members of the Senate on both sides of the aisle who worked to end this roadblock to relief for America’s working families.”

Rather than winning the fight over funding the bill, Bunning eventually settled for a vote to close a tax loophole enjoyed by paper companies that get a credit from burning “black liquor,” a pulp-making byproduct, as if it were an alternative fuel. The amendment failed.

Dick Durbin of Illinois, the Senate’s No. 2 Democrat, said Bunning was accepting an offer he had rejected for days.

“As a result … unemployment benefits were cut off for thousands of people across America, assistance for health care was cut off across America, thousands of federal employees were furloughed,” Durbin said.

Doctors faced the prospect of a 21 percent cut in Medicare payments, and federal flood insurance programs had also lapsed with Monday’s expiration of an earlier stopgap bill that passed late last year.

Democrats promised to retroactively restore unemployment benefits and health care subsidies for the unemployed under the COBRA program. Transportation Secretary Ray LaHood ordered furloughed employees back to work Wednesday. Hard money training.

“When you have zero rates that go on indefinitely, you are inviting future problems,” Kansas City Federal Reserve Bank President Thomas Hoenig told CNBC television in an interview.

“We know that zero is non-sustainable … the market already knows that,” Hoenig said.

Hoenig, who is voting this year on the Fed’s policy-setting committee, is one of the more vocal anti-inflation hawks among policymakers. He dissented at the Fed’s January meeting on the issue of maintaining a pledge to hold rates — currently near zero — exceptionally low for an extended period, arguing the economy had improved enough to drop the language.

The Kansas City Fed chief said the Fed — the U.S. central bank — should be ready to raise benchmark rates, even with the U.S. unemployment rate above 9 percent.

“Removing and exiting these … quantitative easing effects is not tight policy. It’s removing very substantial easing policy,” he said.

The Fed is not expected to lift its low-rate long-time promise at its next meeting in mid-March because the labor market remains weak and the risk of inflation is slight. The economy is expected to have shed an additional 50,000 jobs in February and the jobless rate is anticipated to creep up to 9.8 percent, according to analysts polled by Reuters.

However, Hoenig argued that the Fed should lay the groundwork for higher interest rates.

“We need to begin to prepare the market, take away the extended period language so that … the policy rate could come up slightly, maybe as high as one percent over time,” he said.

The Fed would then start draining off reserves and, later on as the economy continues to improve, allow mortgage-backed securities to roll off, he said. Active sales of assets are unlikely this year, he added. Home Security Systems.

Factory activity expanded across Asia last month, although powerhouse China showed some signs of weakening, while in Europe growth rates hit 30-month highs despite contraction in laggards Spain and Greece.

Data due later on Monday from the United States (11:00 a.m. ET) is expected to show the index there dipped to a still robust 57.5 from January’s 58.4.

“There is a sense that the Asian upswing may have run into the sand slightly but it was coming from a very strong base so it was anticipated we would see some slowdown. European numbers continue to show more dynamism,” said Peter Dixon, economist at Commerzbank.

Markit’s Purchasing Managers’ Index for the euro zone jumped to 54.2 in February from 52.4 the month before, slightly higher than previously thought, but the Spanish and Greek indexes remained below the 50.0 divide mark between growth and contraction.

It was something of a mixed bag in Asia where factory activity in its main economies expanded, with India and South Korea growing at their fastest pace in around two years but a pair of surveys showed the pace of manufacturing growth in China, the world’s third biggest economy, eased slightly.

“Policymakers are driving with low visibility on the Chinese activity data at the moment,” said Brian Jackson, a strategist with Royal Bank of Canada, adding that the timing of the Chinese New Year holidays complicated interpretation of data.

“So it would be premature to conclude that today’s fall in the headline PMI numbers show a broader easing in the momentum of China’s recovery.”

The UK saw growth levels matching January’s 15-year high of 56.6.

Swedish data surprised markets earlier on Monday with news that its economy unexpectedly slid back into recession in the fourth quarter of 2009.

The euro was little moved after the European data but the Australian dollar dipped and copper prices pared their gains after Asia’s releases, which markets took as a sign Chinese demand for metals and commodities might soften.

Exports in the euro zone grew at their fastest rate in three years last month, boosted by the euro being battered near nine-month lows due to worries over heavily indebted smaller euro zone countries such as Greece and Portugal.

“The strength in the manufacturing sector reflects a surge in exports,” said Nick Kounis at Fortis Bank.

Price pressures were also building in Asia and Europe with input prices at 17-month highs in the euro zone but a negative reading for output prices shows firms are still having to discount goods to boost sales.

The PMI derived from a survey conducted by the China Federation of Logistics and Purchasing for the National Bureau of Statistics (NBS) fell to 52.0 in February, well below the median forecast of 55.45 in a Reuters poll and down from 55.8 in January.

A separate survey conducted by research firm Markit for HSBC showed the PMI dipping to 55.8 from a record high of 57.4 in January.

India’s PMI rose to 58.5 in February, its strongest reading since June 2008, from 57.7 in January, boosted by expanding output and new orders.

“The headline index is consistent with ongoing double-digit gains in industrial production which in turn is likely to mean that spare capacity is being eaten into rapidly,” said Robert Prior-Wandesforde, Senior Asian Economist at HSBC.

South Korea saw its headline PMI rise to the highest level since December 2007 at 58.2. Home Security Systems.

The economy grew at a blistering 5.7 percent pace in the final quarter of last year, according to a preliminary government estimate. And an updated estimate due out Friday is expected to produce the same figure, according to Wall Street economists surveyed by Thomson Reuters.

Roughly two-thirds of last quarter’s growth came from a burst of manufacturing — but not because consumer demand was especially strong.

Rather, factories were churning out goods for businesses that had let their stockpiles dwindle to save cash. If consumer spending remains lackluster as expected, that burst of manufacturing — and its contribution to economic activity — will fade.

The signs aren’t hopeful. Consumer confidence took an unexpected dive in February. Unemployment stands at 9.7 percent. Home foreclosures are at record highs. And many Americans are still having trouble getting loans.

Against that backdrop, the economy’s growth is probably slowing in the current January-to-March quarter. Forecasters at the National Association for Business Economics predict the economy will expand at a 3 percent pace in the first quarter of this year. The next two quarters should log similar growth, they predict.

In normal times, such growth would be considered respectable. But the nation is emerging from the worst recession since the 1930s. Sizzling growth in the 5 percent range would be needed for an entire year to drive down the unemployment rate, now 9.7 percent, by just 1 percentage point.

For all of this year, the economy is expected to grow 3.1 percent, according to the NABE forecasters. Though modest, that pace would mark a big improvement from 2009, when the economy contracted by 2.4 percent — the worst showing since 1946.

As government stimulus wanes and Federal Reserve economic-support programs end, the economy — especially the fragile housing market — could suffer. Economists say the odds of the economy sliding back into a recession this year are low, but they won’t rule it out.

In appearances on Capitol Hill on Wednesday and Thursday, Federal Reserve Chairman Ben Bernanke said record-low interest rates are still needed to make sure the recovery becomes firmly rooted and to help ease high unemployment.

“If the economy strengthens, that makes people go shopping in shopping malls — new employment fills up office buildings and so on, and that helps solve that problem,” Bernanke told lawmakers.

The Fed’s goal is for low borrowing costs to spur people and businesses to spend more, which would bolster the economy.

But Sen. Mike Johanns, R-Neb., voiced skepticism that low rates will be much help.

“I’m beginning to wonder whether low interest rates really have any possibility of spurring this economy,” Johanns told Bernanke at a hearing Thursday. “Unless we can get consumers back into it, it just seems very unlikely to me that you’re going to see much growth. I talked to people who handle the freight, the railroads, the trucking companies. They’re not seeing much improvement.”

Unlike past rebounds driven by the spending of shoppers, this one is hinging more on spending by businesses and foreigners.

Business spending on equipment and software in the fourth quarter grew at the fastest pace since early 2006. Economists think such spending will continue to rise, though at a slower pace. And exports of U.S. goods and services to foreign buyers posted double-digit gains in the final quarter of last year.

Consumer spending, which slowed in the fourth quarter, will aid the recovery — not lead it. Home Security Systems.