While you were sleeping: Super-currency call, squeeze on AIG

Wednesday 25th March 2009

The weakening US dollar spurred China to urge the International Monetary Fund to create a new "super-sovereign reserve currency," a sign that confidence in the greenback is waning as the Federal Reserve prepares to buy Treasuries.

The Fed said it will make its first purchases tomorrow under a US$300 billion plan to free up credit markets and revive the world's biggest economy. Its first purchases will be of Treasuries maturing from 2016 to 2019, it said in a statement.

Longer-dated Treasury bonds, pushing yields lower, after the Fed released its tentative schedule. The yield on 30-year bonds fell eight basis points to 3.61%. Ten-year Treasuries were little changed at a yield of 2.65%.

China's central bank governor Zhou Xiaochuan called for a new reserve currency in the run-up to the Group of 20 summit, indicating the world's fastest-growing major economy may be seeking to set the agenda at the talks.

China has more than US$1 trillion of its reserves in US dollar assets. It may push the G-20 for specific moves to protect its assets against a slump in the greenback.

The Fed's plan to buy Treasuries is "irresponsible," said Li Xiangyang, a researcher at the Chinese Academy of Social Sciences, Bloomberg reported. The summit in London will allow President Barack Obama and China's President Hu Jintao to meet for one-on-one talks.

The dollar edged higher against the euro and the yen after slumping earlier this week. Wall Street gave up its gains as some investors took advantage of higher prices to pare their holdings The dollar index fell 4.1% last week to 83.84, the biggest decline since 1985, when major economies agreed to devalue the US dollar against the yen and the deutsche mark.

The yen weakened to 97.74 per dollar from 96.95, with some analysts predicting it will crumble to above 100 per dollar in coming weeks. The greenback rose to $1.3456 per euro from $1.3633. The yen traded at 131.57 per euro from 132.17.

Stocks on Wall Street fell as banks pared back some of the previous day's gains, when they led the rally. The Relative Strength Index for the Standard & Poor's 500 climbed above 70 on March 18 and March 23. That's a level where technical analysts say a security or index is poised to fall.

JPMorgan Chase fell 9.2% to US$26.22, Bank of America slipped 8.3% to US$7.15 and Citigroup fell 3.5% to US$3.02.

General Motors slipped 6.9% to US$3.12 and Walt Disney slipped 3.2% to US$18.32.

The S&P 500 fell 2% to 806.34 and the Dow Jones Industrial Average fell 1.5% to 7660.21. The Nasdaq Composite fell 2.4 to 1518.58.

American International Group, the insurer under intense public scrutiny for paying bonuses to executives after receiving its multi-billion dollar bailout, fell 4.7% to US$1.41.

The shares fell as Treasury Secretary Timothy Geithner told a House Financial Services Committee that new regulatory powers should include insurers, allowing regulators to seize control of institutions that pose a risk to the financial system.

"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," Geithner said.

The US$165 million payout to executives at AIG's financial products unit prompted the Houser to impose a tax of 90% on bonuses paid by firms that got more than US$5 billion of aid.

Crude oil rose to a four-month high amid expectations stockpiles of fuel in the US are declining, stoking ooptimism demand will underpin prices.

Gasoline stockpiles fell by 650,000 barrels last week, according to a Bloomberg survey. The US Energy Department is scheduled to release the figures tomorrow.

Crude oil for May delivery gained 0.3% to US$53.98 a barrel on the New York Mercantile Exchange, bringing crude's advance this year to more than 20%.

Gold futures for April delivery fell 3% to US$923.80 an ounce in New York as some traders speculated the Fed's plan to buy Treasuries and toxic mortgage related securities will under economic growth, sapping demand for the precious metal as a haven.

Copper futures for May delivery fell 1.9% to US$1.806 a pound on the New York Mercantile Exchange.

In Europe, Germany's Deutsche Bank rose 4.5% after CEO Josef Ackermann said the lender may return to profit this year. Commerzebank gained 9.6%, leading Germany's DAX 30 up 0.3% to 4187.36. The FTSE 100 Index climbed 0.2% to 3911.46 and France's CAC 40 edged up 0.2% to 2874.39.

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