Tremonti questions dollar’s role in “new world order”

Italian finance minister Tremonti continues to press his “new Bretton Woods” idea but questions whether the dollar should be the reference currency. What would replace it? The Euro, the basis of which has come under question during the financial crisis? I would think not.

The Europeans are tying to drive home a “new world order” as a result of the credit crisis. Sadly, they will probably get one if the US opinion polls are correct. Secretary Krugman will see to it…

Hey Silvio, take it where you can get it

Italian PM Berlusconi is concerned that Italian companies will become the target of hostile takeovers from Sovereign wealth funds from the oil producing world. He wants to take measures to guard against this happening.

Given the state of the stock market, Sil, take the bids where you can get them…

To meet or not to meet, that is the question

There is lots of wrangling as to whether there will be a G8 meeting early next week to follow up the Finance ministers meeting beginning tomorrow. The White House is knocking down speculation of a meeting, probably not want to raise the market’s hopes for a silver-bullet solution. So far all the silver bullets fired at the market have turned out to be lead…

Just to make you aware

This news was out earlier, but in case you missed it (like me), here it is: South Korean intelligence agencies expect North Korea to launch a missile test “imminently”. Depending how close the tests come to Japan, often these exercise prompt some short-term JPY weakness.

The JPY is anything but weak at the moment as US equities trade in the red. USD/JPY is now at 100.80 after failing to absorb offers at 101.50 early in the session.

Dear Leader must be feeling better

After a months of being out of sight and presumed dead for a time, Kim Jung Il must be feeling a bit more spunky. South Korea reports that the North has fired two short-range missiles into the Yellow Sea. USD/JPY is rebounding as a result as the world is reminded that Japan is within easy range of North Korea. It trades at 101.65 from the 101.20s.

US warplane incursion “unintentional”, crew released

Iranian News Agency reports that the US warplane into their airspace was unintentional and has released the crew.

They probably figured it’s in their interest to release the crew rather than give McCain a campaign issue!

As if we didn’t have enough to worry about

Credit markets in crisis, banks dropping likes flies, Pakistani forces firing on US choppers and now this: Putin and Chavez getting together on nukes…Doc, you gotta up the dosage…

Russia threatens to seize swathe of Arctic.

Ivan seems intent on riling the West at present. More punchy rhetoric from Russian President Medvedev. He has told a meeting of the Security Council “We must finalise and adopt a federal law on the southern border of Russia’s Arctic zone” adding This is our responsibility and simply our direct duty to our descendents. We must surely, and for the long-term future, secure Russia’s interests in the Arctic.” Global warning has made vast natural resources more accessible in the region and galvanised the likes of Russia, Canada, Denmark, Norway and U.S.A. to stake their claims in the disputed region. Looks like an accident waiting to happen. This sort of rhetoric is only going to exacerbate the situation in Russian markets as foreign investment takes flight.

Pair of factors help lift EUR/USD, EUR/JPY

Unwinding of the “Armageddon trade” (short EUR/JPY) has helped boost EUR/USD and EUR/JPY. News that the Fed and Treasury are nursing Lehman through a sale takes any risk of a catastrophic collapse off the table. Despite the fact that a Bear Stearns-like failure was unlikely given Lehman’s access to the discount window, the market likes to latch onto a simple story and drive it to its logical extreme.

The other factor boosting EUR/USD were reports in the Chinese press saying China may cut its exposure to the US in the wake of the Freddie/Fannie takeovers. This near-death experience has supposedly alerted China to the need to diversify reserves. according to a Chinese investment bank. My guess is this is precisely wrong. Like PIMCO, China bought GSE debt based on the implicit backing of the US government. That backing is now explicit. Talk of diversification is like looking to close the barn door after the horse is gone. The fact that the currencies that China could diversify into have fallen like a stone for the last two months makes this argument a bit awkward at the moment as well. Watch what they do, not what they say.

The dollar may stay on the defensive if US retail sales disappoint later this morning as this will turn up the pressure on the Fed to trim rates again, postponing further tightening of US/EU interest rate differentials.

US dependency on foreign capital highlighted in GSE case

While the US intervention in the GSEs has many impacts on Main Street as well as Wall Street, it will also have very profound impacts on the creditor nations which fund the US current account. Lower mortgage rates are the likely outcome for Americans while lower yields (and higher prices) on Freddie and Fannie paper will reward the central banks and sovereign wealth funds who plowed billions into these firms because of their higher yields and implicit government guarantee. Implict was not good enough in recent weeks as the central banks (particularly in Asia) went on a buyers strike as their capital was eroded by the swoon in the fortunes of the GSE. Mr. Paulson succumbed to pressure from Newport Beach to Beijing to make a move on the GSEs.