Monday 22nd September 2008

Friday saw initial gains made by the dollar slip away as investors weighed up the effects of the US government’s colossal takeover of bad assets from financial firms. US Treasury Secretary Hank Paulson highlighted the requirement to address the root cause of the current financial turmoil. He called for a government sponsored package that would effectively remove the illiquid mortgage assets ‘that are weighing down our financial institutions and threatening our economy’. Under the draft Treasury plans, any financial institutions with ‘significant operations in the US’ are eligible to sell or auction their bad debts to the Treasury fund – this morning, the scope of the $700bn plan was widened to include assets other than mortgage-related securities. Although the change to include other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress, George Bush defended the plan, saying the cost to taxpayers of shoring up markets was better than the alternative of job losses and diminished pensions. Ben Bernanke and Hank Paulson will provide testimony to Congress this week.

Meanwhile, fears that Morgan Stanley and Goldman Sachs would not be able to survive the continuing pressure have been allayed by the Federal Reserve granting their requests to change their regulatory status. Last night, both become bank holding companies, allowing them to take deposits from investors as opposed to using borrowed money – the leverage that led to the undoing of Bear Stearns and Lehmans. The move concluded that there is no future remaining in investments banks now that investors have determined the model is broke.

The dollar fell against most major currencies, except the yen, as risk aversion receded. The weekend press emphasised that the implications of the US bailout plan could undermined the dollar due to the inflationary impact and the fact that US Treasuries would be less attractive to foreign investors and central Banks.

Having recently taken a back seat to events in the financial sectors, there is some important economic data out this week both at home and abroad:

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