US: China to Drop Some Trade Subsidies

Administration Announces Agreement With China to Eliminate Distorting Trade Subsidies.

The Bush administration announced Thursday that China has agreed to eliminate improper trade subsidies it was using to the detriment of U.S. and other foreign companies.

The deal, announced in Washington by U.S. Trade Representative Susan Schwab, represented a major breakthrough in the tense trade relations between the two countries. It came after lengthy negotiations that started when the administration filed a case against China on the issue in February before the World Trade Organization, the Geneva-based body that oversees the rules of world trade.

Schwab said China had agreed to eliminate WTO-illegal tax breaks that encouraged Chinese companies to export more to the United States and other countries. She said the Chinese had also agreed to scrap tax and tariff penalties that had penalized U.S. and other foreign countries in trying to sell their goods in China.

"This outcome represents a victory for U.S. manufacturers, producers and their workers," Schwab said in a statement. She said it would eliminate a variety of trade subsidies the Chinese government was using to the detriment of a wide range of U.S. products from steel to information technology.

But Democratic critics of the administration's trade policies said many more Chinese practices must be changed to make a significant impact on a U.S. trade deficit with China that last year reached $233 billion, the largest ever recorded with a single country.

"China's currency doesn't float freely, certain U.S. industries with competitive advantages can't operate freely in China's economy and some of the products it exports are faulty and dangerous," said Sen. Charles Schumer, D-N.Y. "It seems that China has taken a small step on the long road toward playing more fairly in global trade, but only time will tell."

The subsidy case is one of four WTO cases the administration has filed against China in the past two years as it has sought to show Congress it is taking a harder line in economic dealings with China.

Schwab said the negotiated settlement -- hammered out by delegations from both countries meeting in Geneva -- showed President Bush's trade policies were having results and would be more successful than the retaliatory tariffs some in Congress would like to impose on Chinese products. "This announcement makes clear that the administration's policy of serious dialogue and resolute enforcement is delivering real results," she said. "It clearly shows the wisdom of this approach over some legislative approaches that would simply impose retaliatory tariffs."

The breakthrough in the subsidy case comes less than two weeks before Treasury Secretary Henry Paulson is to lead a Cabinet-level delegation to China for the third round of the U.S.-China Strategic Economic Dialogue. While Paulson has said the talks offer the best hope of resolving a number of trade disputes with China, congressional critics say few results have been achieved through the first year of discussions.

In the other pending WTO cases, the U.S. has charged that China is failing to crack down on rampant copyright piracy of U.S. products while another case contends China is hampering the sale of American movies, music and books through the use of censorship rules that do not apply to Chinese products. A fourth U.S. case -- filed with the 27-nation European Union -- contends China is maintaining a WTO-illegal tax system to block imports of foreign-made auto parts.

Schwab said the U.S. would continue to push forward with the other WTO cases, but she made no predictions that there would be other breakthroughs before the upcoming U.S.-China trade talks. She said it was difficult to quantify the economic boost U.S. companies would receive from the elimination of the unfair government subsidies, but she said it should be significant given the broad array of manufacturing companies that could qualify for the subsidies.

Bernanke Signals of Further Rate Cuts

Bernanke Hints Further Rate Reduction May Be Needed to Head Off Economic `headwinds'.

Federal Reserve Chairman Ben Bernanke on Thursday hinted that another interest rate cut may be needed to bolster the economy. The worsening credit crunch, a deepening housing slump and rising energy prices probably will create some "headwinds for the consumer in the months ahead," he said.

Bernanke said he expects consumer spending will continue to grow and suggested the country can withstand the current problems without falling into a recession. But he indicated that consumers could turn more cautious as they try to cope with all the stresses.

The odds have grown that the country could enter a recession. A sharp cutback in consumer spending could send the economy into a tailspin. Against this backdrop, Fed policymakers will need to be "exceptionally alert and flexible," Bernanke said.

That comment probably will be viewed as a sign the Fed may lower interest rates when it meets on Dec. 11, its last session of the year. "Bernanke is leaning in the direction of a rate cut," said Brian Bethune, economist at Global Insight.

Twice this year the central bank has trimmed rates to keep the housing collapse and credit crunch from throwing the economy into a recession. Those cuts came in September and late October.

In the October meeting, Bernanke and his Fed colleagues signaled that further cuts might not be needed. Since then, however, financial markets have endured more turmoil. The housing slump has deepened, consumer confidence has plummeted and consumer spending "has been on the soft side," Bernanke said in a speech Thursday night to business people in Charlotte, N.C.

The economic outlook has been "importantly affected over the past month by renewed turbulence in financial markets, which has partially reversed the improvement that occurred in September and October," Bernanke said. "These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors," he said.

Bernanke spoke hours after the White House lowered its economic growth projection for 2008 due to the deteriorating housing market. The White House also raised its estimate for unemployment next year, but said inflation should moderate.

The Commerce Department reported that the economy grew at a 4.9 percent rate from July through September, the fastest pace in four years. The impressive performance, though, was not expected to carry into the final three months of the year, when analysts expect growth of 1.5 percent or less.

Just a day before Bernanke's speech, the Fed's No. 2 official suggested the central bank may be inclined to slice rates again because of Wall Street's turbulence and the worsening problems in housing and in credit markets. Donald Kohn's remarks sent the market soaring, with the Dow Jones industrial average gaining more than 300 points. Bernanke echoed some of the same concerns. Kohn had said policymakers must remain "nimble" and he spoke of the need for "flexible and pragmatic policymaking."

Some analysts believed the similarity in tone and language of the Fed's top two officials was deliberate. It appears they are trying "to send a message to financial markets that a rate cut could be in the offing" at the Dec. 11 meeting, said Richard Yamarone, economist at Argus Research. "When you have the top two people at the Fed reading from the same script, that is in itself a signal."

Bernanke, like Kohn, is keenly interested in how all the economic stresses will affect consumers. "I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead," Bernanke said in his speech.

In his remarks, Bernanke said rising gasoline and heating oil prices as well as higher food costs have the potential to raise inflation. He said that is something the Fed also is watching.

At the October meeting, the Fed said the risk of higher inflation was roughly in balance with the risk of slower economic growth. Bernanke said Thursday that Fed policymakers "will have to judge whether the outlook for the economy or the balance of risks has shifted materially."

Analysts said the Fed's next move on interest rates probably will be cinched by the outcome of next week's employment report. If the report shows a weaker employment climate, that could seal a rate cut, economists said. A sturdy labor market that has meant income gains and jobs has served as a shock absorber for consumers. Those positive forces have helped to offset the negative ones from weaker home value and harder-to-obtain credit. The November employment report, released by the government next week, is expected to show the unemployment rate climbing to 4.8 percent, from 4.7 percent, as new job-creation slows.

Bernanke is facing his biggest challenge since taking over at the Fed in February 2006. Some analysts have questioned whether he waited too long to cut key interest rates and whether he has acted aggressively enough in reacting to the nation's economic problems.

Japan Industrial Output Hits Record, Asian Markets Rally

Japan Industrial Production Jumps to Record High on Auto, Semiconductor Output.

Japan's industrial production rose 1.6 percent in October to a record high, boosted by output of semiconductors and autos, the trade ministry said Thursday.

Industrial production climbed a seasonally adjusted 1.6 percent from a month earlier, according to the Ministry of Economy, Trade and Industry. Production dropped 1.4 percent in September after jumping 3.5 percent in August.

The index of industrial output climbed to 112.1 against a base of 100 for the year 2000. That's the highest the index has recorded since the government began tracking relevant production data in 1953, the ministry said. October's rise was in line with the average forecast of economists polled by Dow Jones Newswires and was underpinned by a healthy output of automobiles and electric parts for export.

Still, analysts are skeptical whether Japan's output can continue growing amid recent sluggishness in the housing construction sector. Japan's housing starts tanked 44 percent on year in September, their sharpest fall on record. A revision to Japan's Building Standards Law has forced construction companies to wait months for approvals.

The housing slowdown could hurt business investment, which in turn could hurt industrial output and the broader economy, analysts say.

Asian Markets Rally After Wall Street

Asian stocks rallied Thursday, tracking an overnight surge on Wall Street, amid a brightening outlook for the U.S. economy -- a key export market for Asian companies. Investors took heart after the Dow Jones industrial average mustered its biggest two-day point gain in five years after a Federal Reserve official hinted that the central bank may lower interest rates again.

Hong Kong's Hang Seng Index soared more than 4 percent to 28,4621.59 points by midday. A rate cut in the United States usually means lower Hong Kong rates as the local dollar is pegged to the U.S. dollar. Those hopes boosted property companies, which benefit from lower interest rates. Ports-to-property conglomerate Wharf Holdings was the best performer, up 6.5 percent at HK$43.10.

In Tokyo, investors also took cues from a weaker yen to buy auto and banking shares. The Nikkei 225 index was up 2.6 percent at 15,548.73 by early afternoon. A weaker yen helps the country's exporters by increasing their foreign revenues when they are converted back to yen. The dollar was trading at 110.26 yen in Tokyo, up from 109.97 yen late Wednesday in New York.

Markets in Singapore, Australia and South Korea were also up sharply.

Sentiment on Wall Street has improved as companies that made losing bets on subprime mortgages, such as Citigroup Inc. and Freddie Mac, are coming up with ways to raise cash. The market was clearly optimistic that at least some of the damage from the months-long credit crisis was finally being mitigated.

The Dow soared 331.01, or 2.55 percent, to 13,289.45 on Wednesday, adding to the blue chip index's 215 point gain on Tuesday and giving the market's best known indicator its largest two-day point gain since Oct. 11, 2002.

Fed: Economy Loses Speed, Shopping Slows

Fed Says Economy Logged Slower Growth As Shoppers Watched Pennies Heading Into Holiday Season.

The economy grew at a slower pace in the late fall as shoppers watched their pennies heading into the busy holiday season. The Federal Reserve's new snapshot, released Wednesday, suggested the strains from a severe housing slump and a painful credit crunch are affecting the behavior of individuals and businesses alike -- making them somewhat more cautious.

Yet, the hope that the Federal Reserve will cut a key interest rate for a third time this year to energize the economy sent stocks soaring on Wall Street. The Dow Jones industrials jumped for the second day in a row, gaining 331.01 points to close at 13,289.45. It marked the index's biggest two-day point gain in five years.

"Reports on retail spending were downbeat in general," the Fed survey said. "Most retailers said that they were expecting a slow holiday season, with only small gains in sales volumes compared with last year," the Fed added.

Spending by consumers and businesses is the lifeblood of the country's economic activity. The big worry for economists is that consumers and businesses will cut back on spending and investing, dealing a blow to economic growth. The odds of a recession have grown this year. Still, Fed officials and many other economists remain hopeful the country will weather the financial storm without falling into recession.

The Fed report found the national economy continued to grow during the survey period of October through mid-November but at a "reduced pace." Of the 12 Fed regions surveyed, seven reported a slower pace of economic activity, while the remainder generally pointed to "modest expansion or mixed conditions," the Fed said.

The findings will figure prominently into discussions when Federal Reserve Chairman Ben Bernanke and his colleagues meet on Dec. 11 to decide their next move on interest rates. Investors and some economists believe the Fed report, along with recent turbulence on Wall Street, would justify another rate reduction. "The Fed realizes markets are fragile, and the ongoing dislocations we expect will lead the (Fed) to ease on Dec. 11," said T.J. Marta, fixed income strategist at RBC Capital Markets.

Fed Governor Donald Kohn, in a speech Wednesday, warned that if the financial turmoil seen in recent weeks were to persist, it could further crimp the flow of credit to people and businesses, raising risks to economic growth. Kohn, the No. 2 official at the Fed, said the recent gyrations on Wall Street "partly reversed some of the improvement in market functioning" seen in late September and in October. The credit crunch had taken a turn for the worse in August, causing stocks to nosedive.

"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," Kohn said in remarks to the Council on Foreign Relations in New York. Against the backdrop of such uncertainty about how forces will play out with consumers and businesses, Kohn once again said Federal Reserve policymakers must remain "nimble."

Wall Street viewed Kohn's comments as hinting that another rate cut could be forthcoming. The Fed has sliced interest rates twice this year -- in September and late October -- to keep the housing collapse and credit crunch from throwing the economy into a recession. Fed policymakers at the October meeting signaled that further rate reductions may not be needed. Since then, however, financial markets have suffered through another period of turmoil.

Besides "relatively soft" spending at the nation's retailers, the Fed survey said manufacturing production was mixed. Demand was weak for products related to housing but was solid in other areas, including information technology equipment and machinery used in the energy sector and mining industries. In a separate report from the Commerce Department, orders for costly manufactured goods dropped 0.4 percent in October. It was the third straight decline.

On the inflation front, the Fed report said expensive energy and food put "significant" pressure on the prices of products and services that rely heavily on these materials. But most other prices were largely stable or down a bit, the Fed said. That suggested that high energy and food prices aren't spreading inflation through the economy.

National employment conditions are still mostly good, although construction and other jobs have taken a hit. In general, increases in workers' wages were moderate. The positive forces of job creation and wage growth are helping to offset some of the negative forces of weaker home values and harder-to-get credit.

"Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amid the ongoing slowdown," the Fed survey said. Builders continued to shelve projects and lay off workers in many areas. The number of unsold homes continued to mount. Builders and others in the business "generally do not expect a significant pickup in homebuilding until well into next year at the earliest," the Fed said.

The National Association of Realtors reported sales of previously owned homes fell 1.2 percent in October, the eighth month in a row of declining sales. The median price of a home sold last month declined to $207,800, a drop of 5.1 percent from a year ago. It was the biggest annual decline on record.

The Fed survey was based on information that the Fed's 12 regional banks collected before Nov. 16 and is consistent with the view that economic growth will slow sharply in the October-to-December quarter. The economy is expected to log growth at a 1.5 percent pace or less in the final three months of this year.

UK Housing Market Set For a Squeeze

Fears that the credit squeeze will hit the housing market were reignited on Wednesday after a warning that rising borrowing costs are leaving banks struggling to find the money to fund new mortgages.

Three-month interbank interest rates - the price at which banks borrow from each other - hit 6.59 per cent on Wednesday, a level not seen since the week the Treasury stepped in to save Northern Rock depositors.

Raised borrowing costs are dealing a severe blow to smaller lenders, who have few alternative financing options, the Council of Mortgage Lenders said on Wednesday. Figures from the Land Registry showed the first tentative signs of house prices falling in London - 0.6 per cent down in October on the previous month.

The rise in three-month sterling Libor came as Jackie Bennet, head of policy at the CML, told a City audience it was an illusion to think banks' retail deposits could cover any shortfall in wholesale funding for mortgage lending. "There is not enough retail funding about to fund mortgage markets if the capital markets do not open next year," she said.

Net mortgage lending in the UK has averaged about £9.5bn a month over the past year, while Bank of England figures show retail deposits have grown by an average of £6bn a month over the same period. With short-term wholesale lending markets seized up and other funding strategies, such as covered bonds, facing difficulties, the shortfall in bank financing is likely to drive up mortgage costs, making loans harder to obtain

While many in the markets are still hoping the Bank of England will intervene to boost three-month liquidity, senior bank officials are saying privately that they are unsure there is anything they can do to temper the rise. While they have met banks' demands for immediate liquidity - holding the overnight Libor rate at close to 5.75 per cent - they are unsure if they should cut rates on longer maturities even if they felt it would work.

The Bank's reticence in providing term liquidity contrasts with that of the US Federal Reserve. On Wednesday, Don Kohn, the second most senior official at the Fed, dropped what investors saw as a clear hint that it was willing to cut interest rates again next month if market conditions did not improve. His comments, that the central bank would be "flexible and pragmatic" prompted a surge in global stock markets which sent the FTSE 100 up 2.7 per cent at 6306.2. The Eurofirst enjoyed its biggest one-day rise for more than four years while the S&P 500 was up 2.58 per cent at luncthime.

But for all the cheer in equity markets, economists expect little good news in the coming days. The first concrete sign of a crunch in credit availability is likely to emerge this morningwhen Bank of England figures are expected to show a large fall in mortgage approvals for October. Weaker house-price inflation figures are also expected to be published by the Nationwide building society.

Sovereign Wealth Funds' Might Grows

Abu Dhabi Stake in Citigroup Highlights Growing Power of Sovereign Wealth Funds.

The decision by the world's largest sovereign wealth fund to invest billions in struggling Citigroup has highlighted the growing economic power of Arab Gulf states, awash with money because of high oil prices.

U.S. officials have voiced concerns about such funds' secrecy in the past. But the injection of money by the Abu Dhabi Investment Authority could help stabilize Citigroup Inc., the United States' largest bank, as it struggles with billions in losses from America's mortgage crisis.

The tension illustrates the broader dilemma the U.S. faces in deciding how to deal with such sovereign funds: It relies on their capital inflows to bolster the U.S. economy, but some officials worry that foreign ownership of key U.S. companies could jeopardize national security.

"The investment emphasizes the complexity of the (sovereign fund) issue," said Edwin Truman, a senior fellow at the U.S.-based Peterson Institute for International Economics. Some people, he noted, "want to define national security more broadly, to cover banks or financial institutions."

Analysts said Abu Dhabi's minority investment appeared to be structured to produce the least possible backlash from politicians concerned about its strategic implications. The issue is likely to grow: Merrill Lynch estimates the total assets managed by sovereign funds already may exceed $2 trillion -- more than all the world's hedge funds combined -- and could grow to $7.9 trillion by 2011.

The bank estimates the assets of the Abu Dhabi Investment Authority -- a secretive government fund that is composed of the emirate's oil revenues and ultimately controlled by the city-state's ruler -- alone could total $875 billion.

Washington has relied on the oil-rich Gulf countries, and China, to fund its growing budget deficits by purchasing vast amounts of U.S. Treasury securities, propping up the value of the ailing dollar.

Record oil prices, which have risen more than 60 percent this year, have swelled the coffers of Gulf countries like the United Arab Emirates. That has prompted them to look for other financial opportunities, like Abu Dhabi's planned $7.5 billion investment in Citigroup announced late Monday. Morgan Stanley estimates the funds have spent $35 billion since the start of last year on stakes in financial organizations, with $26 billion coming in roughly the last six months.

Kenneth Rogoff, a Harvard University economics professor, said the latest investment in Citigroup could help improve the funds' image over time. "The (Abu Dhabi) fund has a very professional reputation and will probably be a good shareholder and will cast sovereign funds in a good light. But that won't happen overnight," he said. Rogoff also warned that some people might view Abu Dhabi as buying Citigroup at a "firesale price."

The bank's shares have lost about 45 percent of their value since the beginning of this year, wiping away $124 billion in market capitalization, as the drumbeat of bad news about its investment losses has mounted.

Abu Dhabi's investment in Citigroup, which was expected to close in the next several days, could help stabilize the bank, which has said it will likely write down the value of its portfolio by $8 billion to $11 billion in the fourth quarter because of the mortgage crisis. In the third quarter, Citigroup's investments in subprime mortgages led to losses totaling about $6.5 billion, prompting the departure of the bank's chairman and chief executive officer, Charles Prince.

The Abu Dhabi investment also will help Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said. "We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth," said the Investment Authority's managing director, Sheikh Ahmed Bin Zayed Al Nahayan when the deal was announced on Monday. "This investment reflects our confidence in Citi's potential to build shareholder value."

Abu Dhabi's move recalls the early 1990s investment in Citigroup made by Saudi Prince Alwaleed bin Talal. After the bank made some losing bets on U.S. real estate and Latin America, Alwaleed bought a stake for less than $600 million that has since ballooned into billions.

Some analysts said Abu Dhabi appeared to have structured the deal to minimize political fallout. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank. Also, the eventual 4.9 percent ownership falls far short of a controlling stake.

Despite these steps, Truman predicted there will be concerns about the opacity of Abu Dhabi's fund. He has devised a scorecard that rates 32 of the world's largest sovereign funds according to a number of criteria -- including structure, governance, transparency, accountability and behavior -- and said Abu Dhabi "came out near the bottom because we don't know very much about them."

Analysts say Abu Dhabi appears to regularly purchase less than 5 percent of the companies it targets to avoid having to disclose the investments. Rogoff believes the concerns about transparency are overblown, pointing out that hedge funds "are pretty opaque as well." "It's very hard to conjure up stories where sovereign wealth funds prove to be a disaster; minus investments in very sensitive national security industries, some sort of James Bond scenario," he said.

HSBC Fund Bailout Raises Citi Questions

HSBC Fund Bailout Raises Questions About Whether Citigroup Should Follow Its Lead.

Calls for more transparency at Citigroup Inc. grew louder Monday when HSBC Holdings PLC said it would put two funds with mortgage exposure on its balance sheet and spend $35 billion to bail them out.

Citigroup said it has no plans to mimic HSBC's move. So far, Citi has committed $10 billion in liquidity to the seven structured investment vehicles it manages on an "arm's length" basis, and has kept them off its balance sheet -- meaning Citi has not been counting the SIVs' debt as its own.

That strategy may end up backfiring, though, some industry watchers say, because shareholders, fed up with remaining in the dark about how much risk the largest U.S. bank holds, are selling off.

HSBC, Europe's biggest bank, saw its shares slide 1.9 percent in London Monday. Citigroup shares, meanwhile, dropped 3.2 percent and hit a five-year low, dampened additionally by worries about possible layoffs.

"Citi is in what I'll call a reputation race," said Ed Ketz, associate professor of accounting at the Smeal College of Business at Pennsylvania State University and co-author of a new book called "Fair Value Measurements." "It is competing with HSBC and others in terms of who can be trusted."

HSBC is betting that taking ownership of Cullinan Finance Ltd. and Asscher Finance Ltd. -- SIVs that in total have $45 billion in assets -- will restore investor confidence. "I like what HSBC has done. It's a very simple solution. It's one that's transparent. We can see the promise of liquidity. That's something that, to me, would create a feeling of trust," Ketz said. "Citi could go a long way in following this example."

SIVs, which JPMorgan Chase & Co. CEO Jamie Dimon recently predicted will "go the way of the dinosaur," have hit snags this year. The vehicles sell short-term debt, such as unsecured commercial paper, to investors such as hedge funds, then use the proceeds to buy longer-term assets, like mortgage-backed securities, that yield richer returns.

SIVs normally generate money through fees and the difference between short-term and long-term rates. But demand for short-term assets has vanished in the midst of the U.S. housing market implosion, creating liquidity problems for the vehicles.

Citi, still awaiting a new chief executive, is caught in a bit of a Catch-22. If Citi changes its mind and put its SIVs on its balance sheet, it may be forced to take even bigger write-downs than the $8 billion to $11 billion it projected for the fourth quarter. The seven SIVs have, in total, about $83 billion in assets.

But if Citi doesn't put its SIVs on its balance sheets and other banks do, it risks looking as if it is deliberately obscuring its holdings. Other companies that manage SIVs besides Citi and HSBC include MBIA, Rabobank, Standard Chartered Bank, Bank of Montreal and Societe Generale.

HSBC's move also complicates Citi's plans for a "super fund" to buy up hard-to-sell securities -- an arrangement that does not appear to be attracting as many participants as Wall Street hoped. So far, only Wachovia Corp. has officially agreed to participate in the plan, after Citi, JPMorgan Chase & Co. and Bank of America Corp. announced the project seven weeks ago.

"With someone like HSBC throwing in the towel, going for transparency ... it makes Citi and the other parties look conspiratorial at this point if they don't 'fess up and do that," said Jack Ciesielski, publisher of the industry newsletter The Analyst's Accounting Observer.

So far, auditors have not told Citi it must put its SIVs on its balance sheets. "Variable interest entities" like SIVs are allowed to be off-the-books as long as the bank does not hold more than 50 percent or more of the risk or reward involved in the entity, said Russ Golden, director of technical application and implementation activities at the Financial Accounting Standards Board.

Still, banks remain under close scrutiny for their fixed-income holdings, particularly the products known as collateralized debt obligations, or CDOs. CDOs are chopped-up and rebundled chunks of assets, including mortgage-backed assets, and have plunged in value in recent months.

The four major auditing firms -- PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG -- as well as BDO International and Grant Thorton have drawn up standards to appropriately value bank holdings. The paper, still in draft form, will be published in December, said PwC partner Pauline Wallace.

Stocks Slide Despite Fed Move on Funding Fears

US stock prices and bond yields plunged on Monday as credit fears grew in spite of aggressive efforts by the Federal Reserve to head off a year-end funding squeeze.

Traders said investors were shifting out of equities for the security of government debt in a flight to quality that gained momentum in the final hours of trading. US bond yields touched their lowest levels in more than three years, while the S&P 500 index finished 2.3 per cent lower, 10 per cent off its record high in October - a technical "correction" in stock-market parlance.

"This had all the fingerprints of a massive allocation shift out of equities and into long-dated bonds," said William O'Donnell, UBS interest-rate strategist.

The US trading day began with the Fed promising to ensure there was enough money in the system to keep the overnight borrowing rate at or near its target level, now 4.5 per cent, around December 31. It announced a series of long-term liquidity operations to span the new year, starting with an $8bn repo deal that matures on January 10. These operations will allow banks to lock in funds to carry over the year end.

A New York Fed official said "we hope to reassure market participants of our commitment to providing sufficient balances at that time by starting to provide these balances now." The US central bank also said it was relaxing the terms on which market participants could borrow Treasury securities from its own portfolio, in a bid to help meet intense demand for these safe asssets.

The Fed move came as HSBC, Europe's largest bank, unveiled plans to take on to its balance sheet $45bn (£22bn) of debt - much of it mortgage-linked - that is owned by structured investment vehicles (SIV) it manages. HSBC said its decision to bail out its SIVs would provide certainty for investors in the funds, for HSBC shareholders and for the bank and could help support the broader market by removing the threat of a firesale of the assets its vehicles held.

However, its decision to go it alone deals a blow to US banks attempting to push through a US Treasury-backed plan to create a so-called super SIV. HSBC will not provide any of the liquidity for the super SIV as the US banks had hoped. Shares in banks began selling off in late London trading after Goldman Sachs said HSBC might need to make an additional $12bn of provisions for its US subprime mortgage and home equity loan exposure. The FTSE 100 fell 1.3 per cent.

Losses were heavier in New York as the S&P ended up in negative territory for the year and investors piled into government bonds. Yields on two-year Treasury note fell 19 basis points to 2.885 per cent, its lowest level since November 2004. The 10-year Treasury fell 16 basis points to 3.835 per cent, its lowest level since March 2004. Shares in Citigroup, which has the largest exposure of any bank to SIVs, fell 6 per cent, its lowest level in more than five years.

The latest Fed moves, which coincide with new expected money market operations by the European Central Bank today, come amid increasing fears that financial turmoil could spill over into the real economy.

Sarkozy Presses China on Currency

French President Sarkozy Emphasizes Currency, Environment on Visit to China.

French President Nicolas Sarkozy kicked off his first state visit to China Sunday by urging the Communist leadership to let its currency rise before Beijing's trade imbalances become unmanageable. "A great country must have a strong currency," Sarkozy told Chinese and French business leaders in a speech at a Beijing hotel. He called for a "fair balance between the major currencies -- the dollar, the euro, the yen or the yuan."

China says it is committed to the gradual reform of its currency, the yuan, but critics charge it remains undervalued, making Chinese products unfairly cheap and boosting its trade surplus with France and the rest of Europe. "China has an important role to play, in consultation with the other players, in not letting imbalances accumulate to a point where we won't know how to get out of them," Sarkozy said.

Sarkozy's three-day visit was expected to focus on economic ties with China while playing down human rights concerns that would be sure to receive a cool reception from Beijing. However, at a dinner Sunday with President Hu Jintao, Sarkozy gently urged China to apply the death penalty less frequently, the French presidential Elysee palace said.

"I am not asking for it to be abolished completely, but to accentuate the tendency that is taking shape quite naturally," the Elysee quoted the French leader as saying. Hu responded that he hoped "to have things evolve" in such a way as to "reduce the number of cases in which the death penalty is applied," the Elysee said.

The French leader also asked for freedom for journalists working in China, it said. Hu did not make any precise pledge in response, it said. Paris-based advocacy group Reporters Without Borders had earlier appealed to Sarkozy to raise the cases of 33 journalists and 50 cyberdissidents imprisoned in China.

Sarkozy said after the meeting that he had also urged Hu to "engage vigorously" in finding a solution to the crisis in neighboring Myanmar, where the ruling junta violently suppressed pro-democracy protests in September. "If there is a country that can change" things on the ground in Myanmar, "it's obviously China," he said.

The Elysee compared the Sarkozy-Hu meeting to a "nice pingpong" game, with the leaders politely batting ideas back and forth.

During his speech to business leaders in Beijing, Sarkozy also warned of the costs of China's five consecutive years of double-digit economic growth, saying that development must not deplete natural resources or accelerate global warming. "Chinese growth must not and cannot happen at the expense of the world environment," Sarkozy said. "If not, what would be the good of developing?"

Sarkozy also addressed the widespread counterfeiting of products in China, including famous French brands such as Louis Vuitton and Christian Dior, saying China, as a "great economic power," has every interest in respecting the rules of world commerce.

Sarkozy's formal meetings with Chinese officials were to start Monday. Aides said Sarkozy would focus on the environment, commercial ties, Africa, China's international role, and bilateral concerns. France's concerns about Iran's nuclear programs are also expected to feature in discussions, especially support from Paris for new U.N. sanctions against Tehran that Beijing has opposed.

Sarkozy's trip comes about one week before a visit by European Union leaders to lobby China to lower barriers to imports and foreign investment and ease currency controls. China's European trading partners complain that Beijing is violating World Trade Organization commitments by trying to nurture Chinese companies at the expense of foreign rivals.

Sarkozy's arrival in Beijing was preceded by a brief trip to the former imperial capital of Xi'an in western China to view the famed terra cotta army of China's first emperor. He will fly to Shanghai on Tuesday before leaving for Paris that night.

Weekend's Special: Ancient City of Teotihuacan in Mexico

The ancient city of Teotihuacan is the most visited of Mexico’s archaeological sites and a must-see if you’re in Mexico City. The site is impressive for its scale, both in the size of the Pyramid of the Sun (the third largest pyramid in the world) and the majesty of the Calle de los Muertos (Street of the Dead) - originally 4km long and flanked by temples, palaces and platforms. Look for amazingly well preserved murals in the Palace of the Jaguars or the Palace of the Quetzal-butterfly and bold sculptures in the Temple of Quetzalcoatl.

Be prepared for lots of walking and climbing here, and remember that the altitude will make your exertions more tiring than usual. The Pyramid of the Sun is the tallest of the two major pyramids, though it is an easier climb than the Pyramid of the Moon which has larger steps. If at all possible, we’d recommend climbing to the top of the Sun and then at least to the first platform of the Moon for the awesome view down the Calle de los Muertos.

Bearing the above in mind, bring some water (the refreshment stalls are quite a distance from the pyramids) a sunhat, camera, guidebook - but little else to drag around. As usual it’s best to arrive early in the morning or towards the end of the day to avoid the crowds or the heat (morning is best in summer, when rainfall is more common in the afternoon). Most of the tour buses have an annoying habit of starting out early in the morning but then stopping at other less strenuous sights on the way, and/or calling in at a souvenir shop before the site, so that you finally arrive around noon. Note that in winter it can actually be quite cool (even if it is warm in the city), and a sweater is recommended.

You’ll find a visitors’ complex with restaurant, toilets and shops at the entrance near the citadel. There’s also a museum housing a scale model of the city at its peak - well worth a look before or after your visit.

History

Teotihuacan was a large settlement by 150BC, its importance probably arising from a cave system with religious significance, located underneath the present day Pyramid of the Sun. As other settlements in the area diminished, Teotihuacan flourished and became a religious and economic center, controlling the region’s production of obsidian (the black stone used to make weapons and utensils).

Between 1AD and 250AD the ceremonial core was completed, including the Pyramids of the Sun and Moon and the Calle de los Muertos. The massive pyramid structures were painted red and must have been an awe-inspiring sight. Trading relationships were established with Monte Alban in Oaxaca and the gulf coast - there is little evidence of any hostility during the years of prosperity. (You will not see any depictions of warfare or human sacrifice in the carvings and murals at Teotihuacan, unlike many contemporary cities in Mexico).

Major expansion in population and housing occurred between 250-450AD. As many as 200,000 inhabitants have been estimated and at least 2000 "houses" counted. Most of these buildings were home to large family groups or artisan communes. There were even delegations from other cities - a group of craftsmen from Monte Alban is known to have shared a workshop here. The prosperity continued to 650AD and around this time it was the sixth largest city in the world.

However, in 650AD, a great fire swept through the city, devastating many communities. For some unknown reason a swift decline ensued and there was no massive reconstruction exercise. Several theories prevail - invasion from a rival city taking advantage of temporary weakness, or a culmination of the erosion of natural resources by over-exploitation. Whatever the cause, the population soon moved to other growing cities and Teotihuacan was virtually deserted. By the time the Aztecs arrived on the scene, the area was little more than an ancient ruin. In 400AD, with around 200,000 inhabitants Teotihuacan was the sixth largest city in the world - 300 years later it was found virtually abandoned.

The Nunnery Quadrangle

This collection of four buildings around a quadrangle was named "Casa de las Monjas" (The Nunnery) by the Spanish, because the 74 small rooms around the courtyard reminded them of nuns’ quarters in a Spanish convent. Each of the four buildings has a unique ornate façade, and each is built on a different level. The northern building is the oldest and the grandest; here you can see many typical Puuc embellishments - Chac masks arranged one over another vertically, serpents and lattice work. The building to the east and closest to the House of the Magician is the best preserved, with a stack of Chac masks over the central doorway and serpents above the doorways to the left and right. The exact purpose of the group is not known, though, given the size and importance of the site, it is thought likely to have housed visiting dignitaries or administrative offices.

To the Aztecs, Teotihuacan was a holy place, where the sun, moon and universe were created. It was they who gave Teotihuacan its name, meaning "The place where men become gods". They also named the Calle de los Muertos, thinking (wrongly) that the many ruined temples and monuments along the "road" were burial places of early rulers. However, the city never regained its concentration of population.

In time earth and grass covered the great pyramids, until they appeared little more than large hills on the landscape. Cortés passed through the area in the 16th century and paid little attention to what structures were visible. It was not until the 19th century that proper excavation and restoration was begun.

The Citadel and Temple of Quetzalcoatl

The main entrance and visitors’ center is directly opposite the La Ciudadela (The Citadel). This large sunken plaza was the city’s administrative center; you’ll see the foundations of several rooms and buildings around the perimeter. Its name was given by the Spanish, who mistook the perimeter platform and pyramid remains for a fortress and towers.

At the eastern end of the plaza, furthest from the visitors’ center, is the Temple of Quetzalcoatl. On approach you will see a four tier pyramid, with steep steps up the nearest side. This construction completely covered a previous pyramid and temple, but excavations on the eastern side have revealed a section of this original building. To see this, walk around the railed platform.

The exposed four-tier (originally six) pyramid has protruding sculptures of serpents alternating with masks of Tlaloc, god of rain and maize. The serpents have plumes or feathers around their necks (Quetzalcoatl being the ‘plumed serpent’) and their bodies curve from the left of the head, ending in a rattle. The Tlaloc masks have corn-cob faces, with big circular eyes and two fangs. Carvings of shells and snails around the masks are earth and water symbols. Originally these would all have been painted in bright colors; green plumes and obsidian eyes for the serpent, white fangs and red jaws for Tlaloc. Some traces of paint can still be seen.

Calle de los Muertos

Leaving the citadel, walk up the Calle de los Muertos towards the Pyramid of the Moon. On the left you’ll pass the "Edificios Superpuestos" (superimposed buildings) where excavations have unearthed living quarters below the present level, filled in with rubble in order to build the second stage.

Pyramid of the Sun

Early reconstruction work by Leopoldo Batres in the early 20th century has unfortunately removed evidence of the true appearance of the pyramid, including its original height. It is now around 215 feet (65 m) high with five tiers, though the fourth and fifth tier were divided by Batres and there were probably only four original, roughly even tiers.

Climb the steps to the top of the pyramid; most of the tiers have small steps that are relatively easier on the legs than those of the Pyramid of the Moon. At the top there would almost certainly have been a temple, of which no trace remains. The view, however, is tremendous and well worth the climb.

Directly under the pyramid is the cave system that is believed to have determined its location. An man-made entrance was discovered in 1971 at the perimeter of the pyramid, with steep stone steps cut into the walls of a shaft 23 feet (7m) deep. From the bottom, a tunnel leads to the natural caves, extended to form four rooms. Here various artefacts were found which indicate early use, probably for religious purposes (caves and water sources, which this was likely to be, were seen as holy places).

Palaces of the Jaguar and Quetzal-butterfly

Approaching the Pyramid of the Moon from the Sun, a grand plaza opens up at the base of the pyramid. Several platforms and smaller pyramids surround the plaza, each pyramid with a central staircase originally leading to a temple.

On the left hand side are the remains of palaces, some with murals and carvings still visible. The Palace of the Jaguar has murals of jaguars with feathered headdresses, whilst in the Palace of the Quetzal-butterfly are carved pillars depicting a hybrid bird-butterfly. The eyes of these creatures were set with obsidian and some still pieces are still intact.

These palaces were elaborately decorated and are assumed to have been the homes of high priests. Other murals can be seen in residential areas outside of the main complex; at Tepantitla behind the Palace of the Sun and also at Tetila and Atetelco, west of the main site.

Pyramid of the Moon

Although this pyramid is smaller than that of the Sun, it was constructed on higher ground and its peak is roughly at the same height. Here there are four tiers, and some of the steps are so large that climbing the pyramid requires much effort. It is worth at least climbing to the first platform though, for the view directly down the Calle de los Muertos is highly memorable.

Getting There

By bus - Autobuses Teotihuacan leave the North bus station every half an hour or so. Check that your bus goes to the site entrance and not just to the town of San Juan Teotihuacan nearby. It will take around an hour, and the buses run until about 6:00pm - check the last departure before you leave.

By tour bus - most travel agencies offer half or full day tours to the site, often combined with the Plaza de la Tres Culturas and the Basilica of Guadalupe, both of which are outside the city center. It’s a convenient way to combine the three, but note our comments above about getting to the site early. The price is around 500 pesos ($50).

By car (or taxi) - it will take about 45 minutes from the city center if you use the toll motorway, much longer if you use the old free road. There is a small fee for parking at the site. Private tours with a car and driver/guide can be arranged at most hotels for a reasonable fee if you want the convenience (for a family it may work out less expensive than taking a tour).

Weekend's Featured: Greenhouse Gases Hit Record in 2006

Two of the most important Greenhouse gases in the Earth's atmosphere reached a record high in 2006, and measurements show that one — carbon dioxide — is playing an increasingly important role in global warming, the U.N. weather agency said Friday.

The global average concentrations of carbon dioxide, or CO2, and nitrous oxide, or N2O, in the atmosphere were higher than ever in measurements coordinated by the World Meteorological Organization, said Geir Braathen, a climate specialist at the Geneva-based agency. Methane, the third of the three important greenhouse gases, remained stable between 2005 and 2006, he said.

Braathen said measurements show that CO2 is contributing more to global warming than previously. CO2 contributed 87 percent to the warming effect over the last decade, but in the last five years alone, its contribution was 91 percent, Braathen said. "This shows that CO2 is gaining importance as a greenhouse gas," Braathen said.

The concentration of carbon dioxide in the atmosphere rose by about half a percent last year to reach 381.2 parts per million, according to the agency. Nitrous oxide totaled 320.1 parts per billion, which is a quarter percent higher than in 2005. Braathen said it appears the upward trend will continue at least for a few years.

The World Meteorological Organization's annual Greenhouse Gas Bulletin provides widely accepted worldwide data on the amount of heat-trapping greenhouse gases in the atmosphere.

Studies have shown that human-produced carbon dioxide emissions heat the Earth's surface and cause greater water evaporation. That leads to more water vapor in the air, which contributes to higher air temperatures. CO2, methane and N2O are the most common greenhouse gases after water vapor, according to the meteorological organization. They are produced by natural sources, such as wetlands, and by human activities such as fertilizer use or fuel combustion.

There is 36.1 percent more carbon dioxide in the atmosphere than there was in the late 18th century, primarily because of combustion of fossil fuels, the World Meteorological Organization bulletin said.

A report presented by a U.N. expert panel said last week that average temperatures have risen 1.3 degrees Fahrenheit in the last 100 years, and that 11 of the last 12 years have been among the warmest since 1850. Global Warming also led to a sea level increase by an average seven-hundredths of an inch per year since 1961, according to the U.N. Intergovernmental Panel on Climate Change.

The panel's report, which said human activity is largely responsible for global warming, noted that the concentration of carbon dioxide in the atmosphere is far higher than the natural range over the last 650,000 years.

The World Meteorological Organization also concluded that "Greenhouse gases are major drivers of global warming and climate change." The World Meteorological Organization said it based its findings on readings from 44 countries.

The U.N. Intergovernmental Panel on Climate Change forecast that by 2020, 75 million to 250 million people in Africa will suffer water shortages, residents of Asia's large cities will be at great risk of river and coastal flooding, Europeans can expect extensive species loss, and North Americans will experience longer and hotter heat waves and greater competition for water.

UK Economy Slows Down in Third Quarter

The economy expanded at a slower-than-expected rate of 0.7 percent in the third quarter of 2007, according to official data published Friday.

That was a downgrade from the previous figure of 0.8 percent, the Office for National Statistics (ONS) said in its latest estimate. The reading also marked a slowdown from 0.8 percent in the second quarter.

Gross domestic product (GDP) grew by 3.2 percent during the three months to the end of September, from the same quarter of the previous year, the ONS added. That also marked a downward revision, from 3.3 percent previously. Both numbers dashed market expectations for a quarterly reading of 0.9 percent and an annual pace of 3.3 percent.

Analysts pointed out that the quarterly rate had fallen beneath 0.8 percent for the first time since the third quarter of 2006. However, the economy also enjoyed the seventh successive quarter above the so-called trend rate -- the growth level which does not spark higher inflation and is deemed by economists to lie between 0.6-0.7 percent.

"Overall, today's report confirms an above trend growth environment in the third quarter, with the service sector remaining the engine to UK economic growth," CIBC economist Audrey Childe-Freeman said. "This is all positive, but we all know that it will not be such a rosy story in 2008," he added.

Earlier this year, Chancellor of the Exchequer Alistair Darling predicted that the economy would grow at a slower than expected rate in 2008 because of the fallout from the global credit squeeze. Darling has said economic growth would likely come to 2.0-2.5 percent in 2008 -- a downgrade from the prior official forecast of 2.5-3.0 percent.

Denmark to Hold New Referendum on Euro

Denmark Will Hold a New Referendum on Whether to Adopt the Euro.

Danes will get a new chance to adopt the euro in a referendum, the prime minister said Thursday. Denmark opted out of the European Union's common currency as well as efforts to forge closer cooperation on defense policy and law enforcement in the early 1990s. Voters rejected the euro again in a 2000 referendum.

Prime Minister Anders Fogh Rasmussen, a staunch EU supporter, told a news conference that voters should reassess the exemptions in a referendum, saying "a lot has changed" since they were introduced in 1993. "It is the right time to take a decision," Fogh Rasmussen said. "We have always said that the Danish exemptions are a hindrance for Denmark."

The euro entered circulation in 12 EU countries in 2002. At the time, Denmark, Britain and Sweden were the only EU members to stay outside. After the bloc expanded in 2004, Slovenia has adopted the currency, while Cyprus and Malta will start using the euro on Jan 1, 2008.

No date was set for a vote but it will be held during the next four years, said the prime minister, whose center-right government was re-elected last week. The referendum -- or referendums -- will be on whether to drop exemptions that have kept the Scandinavian nation outside various important areas of EU cooperation. It was not immediately clear whether there would be a separate vote for each of the exemptions.

Fogh Rasmussen's announcement came as a surprise. EU policies did not figure in the campaign leading up to the Nov. 13 election. Analysts said the prime minister may have sensed that attitudes among euro-skeptic Danes have shifted.

"The government has not moved very much on this issue in the past seven years," said Knud Erik Joergensen, a professor in European integration at the University of Aarhus. "However, Danes have since been traveling abroad and have had the euro in their pockets and realized that it was not so bad after all." He said scrapping the krone for the euro would be "chiefly symbolic" because Denmark is not able to chart an independent monetary policy from the EU. The Danish central bank's decisions always mirror those taken by the European Central Bank.

Danes stunned fellow EU nations in 1992 by rejecting the Maastricht treaty on closer European cooperation. A year later, Danish voters approved a revised treaty with clauses keeping the country outside a single currency and banking system, refraining from joining a European defense structure, or conforming to EU citizenship laws and common law enforcement. The citizenship issue has since been dropped by the EU.

Fogh Rasmussen said the referendum would be held after Denmark ratifies the new EU reform treaty, which includes changes in decision-making rules designed to make the union function more effectively. The treaty replaces the failed EU constitution, which was rejected two years ago. Fogh Rasmussen's Liberal-Conservative coalition won the election Nov. 13 with support from its nationalist ally, the Danish People's Party, and a smaller centrist group.

Denmark, a country of 5.4 million people, has held five referendums on EU-related issues since it joined the bloc in 1973. In the most recent, on Sept. 28, 2000, Danes voted 53.1 percent to 46.9 percent against replacing the Danish krone with the euro. Recent opinion polls have shown a narrow majority of Danes now favor switching to the euro.

Fogh Rasmussen also said he would seek a "noticeable reduction of income taxes" and improved conditions for asylum-seekers in Denmark as he presented the government's platform for the next four years. The prime minister was expected to reshuffle his Cabinet on Friday.

Dollar Safe from Challenge of The Euro

Less than six years ago, as euro notes and coins were launched, politicians sought to champion the new currency.

"The euro could become a reserve currency with equal status to the dollar," said Hans Eichel, then Germany's finance minister. Back then the euro was worth less than 90 US cents. This week, as the euro heads towards $1.50, lifted by speculation that the world's central banks might cut links to the dollar and switch to its younger rival, Europe's politicians might regret what they had once wished.

The threat to exports from a strengthening euro is sounding alarm bells across the continent, raising concern that the eurozone is bearing an unfair burden of global economic adjustment and that a significant economic slowdown lies ahead.

In spite of politicians' worries, however, few economists expect that the euro will threaten the dollar's global role in the foreseeable future. The euro has notched up successes: the value of euro notes in circulation now comfortably exceeds the value of dollar bills and the euro has overtaken the dollar as the main denomination of international debt issues.

But a switch from pricing oil in dollars to euros, as mooted by some, would have largely symbolic significance. More crucially, the dollar still forms by far the largest part of official foreign exchange reserves.

"Nobody knows what will happen in 20 years from now but this process of substituting a leading currency with another one is a long process," says Otmar Issing, former chief economist at the European Central Bank. "The incumbent always has advantages."

A greater international role for the euro would reflect logical diversification by central bankers - and could be seen as a tribute to its underlying strengths. Mr Issing, a former Bundesbank official, recalls how in the 1970s Germany's central bank was wary about the global status of the D-Mark and the additional responsibilities it felt, but came to change its mind. "As a central bank, it [the currency] is your baby. And if it is so widely appreciated, it is an expression of credibility and trust in the future stability of the currency."

Will the global attention on the euro create problems for the ECB? Simon Derrick at Bank of New York Mellon dates the start of the currency's long-term rise to eurozone politicians' lobbying efforts earlier this decade. Between early 2002 and the second quarter of this year, the euro's share of known official foreign exchange reserves rose from 19.7 per cent to 25.6 per cent, according to International Monetary Fund figures. One advantage for the ECB, Mr Derrick argues, is that it has not had to be as aggressive in lifting interest rates - the stronger euro has done its work for it. "But it means that they don't have the whip hand when it comes to how tight monetary conditions are."

Still, that would have been true whatever the causes of the euro's appreciation. Meanwhile, the ECB would argue strongly that, like the US Federal Reserve, it sets monetary policy in the best interests of the geographical region for which it has responsibility.

Talk about the international role of the euro is, anyway, likely to prove inflated, says Holger Schmie­ding, economist at Bank of America. "Regardless of short-term cyclical fluctuations, the long-term demographic and economic prospects for the US economy and currency are better than for the eurozone. Once the dollar has hit its cyclical bottom, talk of the euro dethroning it will die down."

China Wants Strong Dollar, Called Out on WTO Pledges

Report: China's Central Bank Chief Says Beijing Wants Strong Dollar.

The head of China's central bank says Beijing wants a strong dollar, a government news agency said Thursday. Zhou Xiaochuan, governor of the People's Bank of China, made the comment to U.S. Treasury Secretary Henry Paulson at a conference in South Africa, the Xinhua News Agency said.

"Zhou said he told Paulson China hopes to see a strong dollar," Xinhua reported. It said Zhou was responding to Paulson's prediction of a long-term recovery of the weakening dollar, which fell to another record low against the euro Thursday. Zhou's comments put "weight behind the slumping currency," Xinhua said.

The U.S. dollar has been falling against the euro, yen and other major currencies amid fears for the health of the American economy, stoked by the subprime mortgage crisis. Concerns about the United States' huge trade deficit, which leaves more dollars in the hands of foreigners, also is weighing on the currency. On Thursday, the dollar rebounded slightly against the yen, inching back up to 108.70 yen after touching a 2 1/2-year low of 108.25 yen overnight. But the euro continued to rise to new highs, climbing as high as $1.4873.

China keeps a large share of its $1.43 trillion in reserves in dollar-denominated assets such as U.S. Treasuries, which means a falling dollar erodes the value of its holdings. Financial markets are watching to see whether Beijing shifts to a stronger currency such as euros.

Zhou said that only when the dollar "devalues drastically can it be called weak, the scenario of which is likely to bring uncertainty to the world economy, to the reluctance of all parties concerned," Xinhua reported.

Zhou and Paulson were attending a meeting in South Africa of the G20, which groups together the world's 20 biggest economies.

European Companies Call Out China on Trade

European companies say China is trying to avoid carrying out WTO pledges. They believe China is trying to avoid fully carrying out its free-trade pledges, according to a survey released Thursday ahead of a visit by European Union leaders for talks on trade, currency and other disputes.

The report by the European Chamber of Commerce in China adds to mounting complaints that Beijing is violating World Trade Organization commitments by trying to nurture Chinese companies at the expense of foreign rivals. "People see that government bodies are trying to avoid (carrying out WTO pledges) more actively, so that is bad news," Joerg Wuttke, president of the European chamber, said at a news conference.

European leaders plan to lobby China to lower barriers to imports and foreign investment and ease currency controls when the two sides meet next week in Beijing, according to EU officials. Europe has shown greater urgency lately about pressing China for action to narrow its swelling trade surplus, an area where Washington has long taken the lead in lobbying Beijing.

Both the U.S. and EU accuse China of improperly using tax, investment and other policies to promote the growth of Chinese champions in industries ranging from oil to banking while putting foreign companies at a disadvantage.

The investment climate is "not getting better," said Wuttke, who is the China manager for German chemical company BASF AG. He cited rules on auto parts imports and access to its retail gasoline and diesel market as areas where China is violating promises to give foreign companies equal treatment. The number of European companies complaining about China's rampant product piracy is about the same as last year, he said.

The EU delegation is led by the president of the European Commission, Jose Manuel Barroso, and Prime Minister Jose Socrates of Portugal, which holds the rotating presidency of the 27-nation group.

Also next week, European currency officials are to meet separately with Chinese officials to seek an easing of controls on China's currency, the yuan. The EU, United States and other trading partners say the yuan is kept undervalued, giving Chinese exporters an unfair price advantage and adding to the country's surplus.

China's trade surplus with Europe, its biggest trading partner, rose nearly 50 percent to $13.9 billion in October over the same month in 2006, according to the government.

The survey of 220 European companies found "the majority are skeptical about the government's ability and willingness to implement WTO regulations," said a report by the European chamber. Some 38 percent thought Beijing is "actively seeking loopholes to circumvent, avoid or delay" carrying out WTO pledges, it said. Such sentiment was strongest among companies selling consumer goods and professional services such as accounting, the chamber said.

The American and European chambers of commerce both have complained that regulators are trying to protect Chinese companies by obstructing foreign investment in banking and other industries. Washington has filed a WTO case challenging China's use of different tax rates to encourage automakers to use domestically made parts. Foreign oil companies that want to set up filling stations say they face obstacles because China's refineries are controlled by two state companies.

At the meetings next week, "we hope that the leaders of both nations will discuss opening their markets or keeping them open and try to get rid of protectionist arguments in both regions," Wuttke said.

Oil Costs a Burden on Asia, Almost Touches $100

Record-High Oil Prices Are a Burden on Asian Countries: Singapore PM.

Asian countries are concerned about the rise of oil prices to record highs and their impact on consumers, Singapore's leader said, as crude futures approached US$100 a barrel.

"For those of us who are not oil exporters and we import all our oil, this is a burden which is growing," Prime Minister Lee Hsien Loong said late Wednesday. "It is particularly a burden on the low-income groups and it's also a factor in increasing the inflation rate and the cost of living for consumers in their countries."

Lee quoted the leader of India, which subsidizes fuel, as telling other Asian heads of state during meetings in Singapore that the cost of energy is of greater concern to him than the effects of climate change.

Rising oil prices are also making it costlier for many countries in the region to subsidize fuel for their citizens, even if they are earning more from oil exports, Lee told reporters. "For the net exporters, it means more revenue, but ... many of them have held domestic prices low and subsidized their domestic oil consumption," he said. "As world oil prices rise, that increasingly becomes a problem and a burden on their finances."

Also in Singapore, Philippine Trade Secretary Peter Favila said Southeast Asian countries discussed the rise in oil prices, but had not come up with any recommendations on how to address the issue. Favila said the Philippines is placing greater emphasis on finding alternative, renewable sources of energy. "We need to negate the effect of an increase or a high oil price because 40 percent of our requirements are imported," he told reporters.

Oil Flirts with Record $100 a Barrel

Analysts said it was a pause, not a retreat for crude futures that reached as high as $99.29 in electronic trading overnight. "Not exciting enough to get us over the hump just yet," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Overall crude inventories fell, and distillates including heating oil dropped more than expected last week, the Energy Department's Energy Information Administration reported. The mixed report did little to shake prevailing view that oil supplies will tighten amid rising global demand, particularly from fast-growing economies in China and India. "It's two steps forward, then one back in terms of this week's inventory cushion," said Tim Evans, an analyst at Citigroup Inc. in New York.

Wednesday's inventory report could mean more bad news for heating oil customers already expecting costs to rise 22 percent this winter. Heating oil futures fell 0.27 cent to settle at $2.6874 a gallon on the New York Mercantile Exchange after earlier hitting $2.7154, a new record.

Light, sweet crude for January delivery fell 74 cents to settle at $97.29 a barrel on the New York Mercantile Exchange. Before the inventory report, prices rose as high as $99.29 a barrel in electronic trading to break the previous intraday record of $98.62 set earlier this month. Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.

A swoon in the stock market also pressured oil prices Wednesday. Energy investors worry that falling equities are a symptom of a weakening economy, which would use less oil and gasoline. Analysts said trading in energy futures was volatile Wednesday due to light volumes before Thanksgiving. The Nymex will be closed Thursday and will close early Friday.

"This is holiday trade, and some pension fund comes in with a sizable order ... and you're down half a buck," said Jim Ritterbusch, president of Ritterbusch & Associates, in Galena, Ill.

Central Banks Weigh Up Dollar Problem

The sliding dollar has presented custodians of the world's massive foreign exchange reserves with a conundrum.

Countries such as China and those in the Gulf, which peg their currencies to the dollar, risk inflationary pressure that has the potential to trigger serious economic and social problems. But any move to cut their links to the dollar could spark a run on the currency that would undermine the value of their reserves.

Global currency reserves have soared from $2,000bn in the second quarter of 2002 to $5,700bn (EU3,885bn, £2,780bn) in the corresponding period this year, according to the International Monetary Fund. Furthermore, two-thirds of the world's reserves are in the hands of six countries: China, Japan, Taiwan, South Korea, Russia and Singapore.

But China tops the league, with the latest official figures showing the value of its reserves at $1,443.6bn in July. Many of China's trading partners argue that this stockpile - which grew at $40bn-$50bn a month in the first half of the year - has been caused by what they believe to be an undervalued renminbi.

Most analysts say that the country's reserves have accumulated rapidly since July and that this explains the growing concern about the dollar expressed by Chinese officials. On Tuesday the dollar plunged to a record low of $1.4813 against the euro.

Beijing does not reveal the currency composition of its reserves. However, informed observers say the weightings of its various currencies roughly follow the latest figures from the IMF. Central banks which have revealed the make-up of their reserves hold on average 64.7 per cent in dollars, 25.5 per cent in euros and the remainder in currencies such as sterling, yen and the Australian dollar.

China's concerns have been highlighted by Wen Jiabao, the premier, who said the country had never experienced such pressure over its reserves and that he was worried about how to preserve their value.

Hans Redeker at BNP Paribas says these comments are a clear indication that China wants to slow down the pace of increase of its reserves. Primarily driven by food prices, China's rising rate of inflation currently stands at 6.5 per cent. Mr Redeker suggests that a rising renminbi is now favourable for the country as itwill reduce import price pressure for food products. "The undervalued renminbi supplied the globe with excess liquidity while the investment boom created demand for raw materials," he says. "This overvaluation [of raw materials] is now going to correct as China leads its currency closer to its fair value and tighter domestic conditions slow investment spending."

While an appreciation of the renminbi would slow China's accumulation of foreign exchange reserves, it would not address the problems caused by the weak dollar undermining their value. Simon Derrick at Bank of New York Mellon says it is ironic that a large part of the reason for the dollar's fall can be attributed to central bank reserve managers.

IMF data reveal that, in the second quarter of 2002, the dollar represented 71 per cent of central bank holdings, while only 19.7 per cent was held in euros. "All the available evidence indicates that the phenomenal growth in foreign exchange reserves over the past five years has been accompanied by a notable push to diversify away from the dollar and into the euro," he says. "This explains the rise of the euro."

However, other analysts were less sure of the role played by central bank reserve diversification in the dollar's fall. They say cyclical factors are the main driver behind the dollar's 40 per cent drop against the euro since 2002, arguing that the shift in reserve currency allocations needed to drive the dollar so far would be much greater than the shifts reported by the IMF.

Marc Chandler, at Brown Brothers Harriman, says central banks may well be diversifying new reserve accumulation away from the dollar, but China's recent comments do not mean they are diversifying existing holdings. "What incentive do they have to tip their hand, even if that is what they intend to do?" he says. In any case, Mr Chandler believes it is unlikely that the Peoples' Bank of China has turned from the traditional role of a central bank to become a currency speculator.

Fed Predicts Slower Growth, More Jobless

Fed Forecasts Slower Growth and More Out of Work Next Year.

The housing collapse and credit crisis will slow economic growth and nudge up unemployment next year, the Federal Reserve said Tuesday in a first-of-its-kind forecast that some economists believe will lead to interest rate cuts early in 2008.

Don't count on a cut in rates at the Fed's December meeting, however, analysts say. The Fed called its rate reduction in late October a "close call" and hinted that its two cuts this year may be sufficient to energize the economy, according to minutes of the Oct. 31 closed-door meeting made public Tuesday.

Policymakers raised concerns at that meeting that inflation might flare up again in the short term, especially in the face of rising energy prices. But with the Fed's longer-term forecast calling for moderating inflation next year and beyond, economists believe the central bank will have leeway to reduce rates next year.

"The economy is walking on a high wire. Eventually the Fed will have to cut rates again to put a net or a cushion under a falling economy," said Stuart Hoffman, chief economist at PNC Financial Services Group. He and other economists predicted more rates cuts early next year to prevent the possibility of the economy falling into a recession.

On Wall Street, the Dow Jones industrials gained ground after the Fed issued its forecast and minutes of the October meeting. The Dow Jones industrials were up more than 50 points.

The Federal Reserve, in the first of its quarterly economic reports to the nation, said it believes business growth will slow next year, with the gross domestic product gaining between 1.8 percent and 2.5 percent. That would be weaker than how the Fed expects the economy to perform this year and would mark a downgrade to a previous projection released in the summer. GDP is the value of all goods and services produced within the United States and is the best barometer of the country's economic fitness.

The downgrade to GDP was due to a number of factors, including "the tightened terms and reduced availability of subprime and jumbo mortgages, weaker-than-expected housing data and rising oil prices," the Fed explained.

The credit crunch has made it both more costly and more difficult for people and companies to borrow money. The worst carnage has taken place in the market for subprime home loans -- those made to people with spotty credit histories. Credit problems started there and have spread to more creditworthy borrowers, including those who are looking for home loans of more than $417,000, so-called jumbo loans.

The big worry is that these housing and credit problems will make people and businesses less inclined to spend, dealing a larger-than-expected blow to national economic growth. "The possibilities that markets could relapse or that current tighter credit conditions could exert unexpectedly large restraint on household and business spending were viewed as downside risks to economic activity," the Fed said in its quarterly forecast. "Participants were concerned about the possibility for adverse feedbacks in which economic weakness could lead to further tightening in credit conditions, which could in turn slow the economy further."

T.J. Marta, fixed income strategist at RBC Capital Markets, said he expects "negative developments in financial markets will tip the Fed toward easing" interest rates by the first quarter of next year.

With economic growth slowing, the unemployment rate would rise to between 4.8 percent and 4.9 percent next year -- still low by historical standards. A previous forecast estimated the unemployment rate next year would be about 4.75 percent. For all of last year, the jobless rate dipped to 4.6 percent, a six-year low.

The Fed said the "unemployment rate would increase modestly" in 2008, stabilize in 2009 and then decline slightly in 2010. Overall inflation should ebb next year to between 1.8 percent and 2.1 percent. Inflation should moderate further in 2009 and 2010, the Fed said. "Overall inflation was expected to edge down over the next few years, fostered by an assumed flattening of energy prices," the Fed said.

So far, surging energy prices this year haven't touched off a major inflation problem throughout the economy. Oil prices last week hit a record high of $98.62 a barrel. They have ebbed a bit and are hovering above $96 a barrel. Gasoline prices have topped $3 a gallon.

The Fed's forecasts are based on estimates of activity in the final quarter of one year compared with the same period of a previous year. Meanwhile, the central bank's decision on Oct. 31 to slice interest rates for a second time this year to combat housing and credit troubles was not necessarily an easy one for Fed officials. "Many members noted that this policy decision was a close call," the minutes revealed.

In the end, Fed Chairman Ben Bernanke and all but one of his colleagues agreed to lower its key interest rate by a one-quarter percentage point to 4.50 percent. It marked the second rate reduction in six weeks.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, was the sole dissenter at the meeting. He preferred no change in the funds rate. The smaller, October rate cut followed up a bolder, half percentage-point reduction in September, the first time the Fed had lowered its key rate in more than four years.

The decision to cut rates last month was seen by most Fed officials as a way to protect the business climate against the possibility that these problems could worsen and throw the economy into a recession. "Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity," the minutes said.

Moreover, many Fed policymakers believed the rate cut could help calm still-fragile financial markets. Wall Street has been suffering through an especially turbulent period over the past several months due to the spreading credit troubles and the deepening housing slump.

Tuesday's economic forecast was a fulfillment of Bernanke's pledge to bring more openness to an institution that historically has been enshrouded in secrecy. It marked the biggest move yet by Bernanke to put his imprint on the Fed, which he has been running since February 2006.

Alan Greenspan, Bernanke's predecessor, made progress on that front in his 18 1/2 years, but Bernanke has sought to pry the door open even further, providing investors, businesses and individuals with more insights into the thinking of Fed policymakers.

Doing that helps the Fed do its job -- keeping the economy and inflation on an even keel. Improving the public's understanding of the Fed's objectives and strategies reduces uncertainty, allowing businesses and people to make more informed financial decisions. If investors have a better understanding of how Fed policy is likely to respond to incoming information, stock prices and bond yields will tend to respond to economic data in ways that further the central bank's objectives.

Bernanke last week announced steps to bring greater openness to the institution that historically has substantially operated behind closed doors. With Tuesday's report, the Fed is now releasing quarterly economic forecasts, versus twice-a-year projections. The Fed is also saying what it thinks the business environment will be for the following three years, not two. The Fed also is giving unprecedented detail into policymakers' thinking into the economy's outlook and the risks facing it.

A research paper released Tuesday by Fed drove home the point that forecasting is as much an art as it is a science. "If past performance is a reasonable guide to the accuracy of future forecasts, considerable uncertainty surrounds all macroeconomic projections" -- including those of Fed policymakers -- the paper said.

Major Asian Markets Recover From Swoon

Major Asian Markets Recover From Early Swoon After Wall Street Plunge; Tokyo Leads Turnaround.

Major Asian markets recovered from an early swoon Tuesday with investors in Japan leading an afternoon turnaround by snapping up stocks that had been battered in recent weeks.

But smaller bourses in Australia, Malaysia and the Philippines sank amid lingering concerns about U.S. housing and banking woes and their broader impact on the U.S. economy, a key export market for Asia. In a roller-coaster day, markets across the region tumbled in early trading as investors reacted to a 1.7 percent slide Monday in New York in the Dow Jones industrial average.

But by afternoon trading, even jittery investors in Japan were beginning to feel the market had overcompensated, says Tomochika Kitaoka, equity strategist at Mizuho Securities Co. in Tokyo. Since the start of November, Japan's benchmark Nikkei 225 index had dropped more than 10 percent through Monday to its lowest since July 2006. "It's conceivable people will start to rethink their recent selling as an overreaction to the U.S. problem," Kitaoka said, although he cautioned that more news about U.S. economic woes could trigger another sell-off.

By day's end, the Nikkei index, which fell as much as 1.9 percent earlier, rose 1.1 percent to finish at 15,211.52 points. Gainers included machinery maker Komatsu Ltd. and mega-bank Mizuho Financial Group Inc. Tokyo's recovery heartened investors in Hong Kong, where the Hang Seng index, down as much as 3.8 percent, climbed 1.1 percent to 27,771.21.

In mainland China, the benchmark Shanghai Composite Index gained 0.5 percent to 5,293.70, while Singapore's benchmark index bounced back 0.8 percent. South Korea's benchmark index pared early losses, ending down 1.1 percent after having fallen as much as 3.9 percent. In Europe, major markets were also higher. In morning trading, London's FTSE 100 Index was up 0.4 percent, France's CAC-40 rose 0.3 percent and Germany's DAX was up 0.8 percent.

Asian stock markets have been among the world's best-performing this year, but trading has been extremely volatile in recent months amid persistent worries over defaults in risky, or subprime, mortgages in the United States, and their wider fallout.

The morning drop followed a sell-off on Monday in New York, where investors were unnerved by Goldman Sachs Group Inc.'s downgrade of large banks, and its estimate that Citigroup Inc. would have to write down $15 billion due to its exposure to risky debt.

In Manila, investors dumped shares, sending the Philippine Stock Exchange Index down 2.9 percent. Australia's benchmark S&P/ASX 200 index closed down 1.7 percent. "We are continuing to feel the effect of the subprime crisis that started in the middle of this year," said Jose Vistan, AB Capital Securities research director in Manila. "Most likely it will persist. It's hard to reverse because of the negative sentiment that's prevailing."

But other analysts said recent declines offered a possible buying opportunity. "It's not safe to say we've already seen the bottom today as uncertainties over the U.S. market are still lingering, but a nice rebound is likely to become visible at the current level," said Oh Hyun-Suk at Samsung Securities in Seoul.

Fed Likely to Give Investors a Surprise

The US Federal Reserve will on Tuesday publish its first set of enhanced economic forecasts alongside the minutes of the last meeting of the Federal Open Market Committee, and the result may surprise some investors.

The new economic projections are likely to show that Fed policymakers expect the US economy will pull through an expected near-term rough patch and regain strength over the course of 2008, even though they see downside risks to that ­forecast.

This relatively upbeat assessment will reinforce the impression that the US ­central bank is more bullish on growth than the financial markets, and challenge market expectations of further interest rate cuts.

Fed funds futures are pricing in a near-90 per cent probability that the Fed will cut interest rates again in December, and the market expects the central bank will ­probably cut rates twice more during next year - a base case view top Fed officials apparently do not share.

The projections themselves will not offer a clear picture of the likely path of interest rates, because they are made by each policymaker individually on the assumption of appropriate monetary policy. But the minutes to be published alongside the projections will show that at the time of the October meeting - when the projections were made - most Fed officials were not expecting to cut interest rates further.

Taken together, the two are likely to suggest the Fed does not think that further aggressive rate cuts are likely to prove necessary to underwrite the expected recovery in growth. The caveat is that the projections were made on October 31 and credit market conditions have deteriorated since then. However, recent comments by Fed officials suggest that they do not regard these changes as significant enough to shift their policy stance.

The new forecasts will also lift the veil on Fed thinking about a range of important longer-term economic issues. They will demonstrate once and for all that the Fed does not have an agreed "comfort zone" for inflation of between 1 per cent and 2 per cent when measured by the personal consumption expenditure deflator - as some in the markets still believe.

Instead they will probably show that most Fed officials target a number in the higher end of that range - perhaps between 1.5 per cent and 2 per cent - because of the risks associated with very low inflation.

The projections will also probably show that, while some Fed officials think food and energy prices will rise faster than others in the years ahead, most do not. They will demonstrate that Fed policymakers now see US trend growth as slightly below 3 per cent, with most officials probably estimating trend to be somewhere in the region of 2.8 per cent, but some possibly seeing it lower than that.

Meanwhile, they will indicate that the Fed is not very sure what the lowest sustainable rate of unemployment is, seeing it as somewhere between 4.5 per cent and 5 per cent. These insights were already implicit in existing Fed communications, but will become much clearer with the publication of the new forecasts and the accompanying commentary.

A National Association of Business Economists survey suggests most economists still think the economy will recover next year without the help of further Fed rate cuts. The median forecast is for 2.6 per cent growth next year, with rates on hold at 4.5 per cent throughout 2008.

OPEC Interested in Non-Dollar Currency

Ahmadinejad: OPEC Members Interested in Converting Cash Reserves Into Non-Dollar Currency.

Iranian President Mahmoud Ahmadinejad said Sunday that OPEC's members have expressed interest in converting their cash reserves into a currency other than the depreciating U.S. dollar, which he called a "worthless piece of paper."

His comments at the end of a rare summit of OPEC heads of state exposed fissures within the 13-member cartel -- especially after U.S. ally Saudi Arabia was reluctant to mention concerns about the falling dollar in the summit's final declaration.

The hardline Iranian leader's comments also highlighted the growing challenge that Saudi Arabia, the world's largest oil producer, faces from Iran and its ally Venezuela within the Organization of Petroleum Exporting Countries.

"They get our oil and give us a worthless piece of paper," Ahmadinejad told reporters after the close of the summit in the Saudi capital of Riyadh. He blamed U.S. President George W. Bush's policies for the decline of the dollar and its negative effect on other countries.

Oil is priced in U.S. dollars on the world market, and the currency's depreciation has concerned oil producers because it has contributed to rising crude prices and has eroded the value of their dollar reserves.

"All participating leaders showed an interest in changing their hard currency reserves to a credible hard currency," Ahmadinejad said. "Some said producing countries should designate a single hard currency aside from the U.S. dollar ... to form the basis of our oil trade."

Venezuelan President Hugo Chavez echoed this sentiment Sunday on the sidelines of the summit, saying "the empire of the dollar has to end." "Don't you see how the dollar has been in free-fall without a parachute?" Chavez said, calling the euro a better option.

Saudi Arabia's King Abdullah had tried to direct the focus of the summit toward studying the effect of the oil industry on the environment, but he continuously faced challenges from Ahmadinejad and Chavez.

Iran and Venezuela have proposed trading oil in a basket of currencies to replace the historic link to the dollar, but they had not been able to generate support from enough fellow OPEC members -- many of whom, including Saudi Arabia, are staunch U.S. allies.

Both Iran and Venezuela have antagonistic relationships with the U.S., suggesting their proposals may have a political motivation as well. While Tehran has been in a standoff with Washington over its nuclear program, left-wing Chavez is a bitter antagonist of Bush. U.S. sanctions on Iran also have made it increasingly difficult for the country to do business in dollars.

During Chavez's opening address to the summit on Saturday, the Venezuelan leader said OPEC should "assert itself as an active political agent." But Abdullah appeared to distance himself from Chavez's comments, saying OPEC always acted moderately and wisely.

A day earlier, Saudi Arabia opposed a move by Iran on Friday to have OPEC include concerns over the falling dollar included in the summit's closing statement after the weekend meeting. Saudi Arabia's foreign minister even warned that even talking publicly about the currency's decline could further hurt its value.

But by Sunday, it appeared that Saudi Arabia had compromised. Though the final declaration delivered Sunday did not specifically mention concern over the weak dollar, the organization directed its finance ministers to study the issue.

OPEC will "study ways and means of enhancing financial cooperation among OPEC ... including proposals by some of the heads of state and governments in their statements to the summit," OPEC Secretary General Abdalla Salem el-Badri said, reading the statement.

Iran's oil minister went a step further and said OPEC will form a committee to study the dollar's affect on oil prices and investigate the possibility of a currency basket. "We have agreed to set up a committee consisting of oil and finance ministers from OPEC countries to study the impact of the dollar on oil prices," Gholam Hussein Nozari told Dow Jones Newswires.

Iraqi Oil Minister Hussein al-Shahristani said the committee would "submit to OPEC its recommendation on a basket of currencies that OPEC members will deal with." He did not give a timeline for the recommendation.

The meeting in Riyadh, with heads of states and delegates from 13 of the world's biggest oil-producing nations, was the third full OPEC summit since the organization was created in 1960.

Abdullah tried to take the focus off the dollar debate, announcing the donation of $300 million to set up a program to study the effect of the oil industry on the environment. Kuwait, Qatar and the United Arab Emirates also agreed to donate $150 million each to the fund, Prince Saud Al-Faisal, Saudi Arabia's foreign minister, said Sunday.

The run-up to the meeting was dominated by speculation over whether OPEC would raise production following recent oil price increases that have approached $100. But cartel officials have resisted pressure to increase oil production and said they will hold off any decision until the group meets next month in Abu Dhabi, United Arab Emirates.

They have also cast doubt on the effect any output hike would have on oil prices, saying the recent rise has been driven by the falling dollar and financial speculation by investment funds rather than any supply shortage.

During his final remarks, el-Badri stressed he was committed to supply -- but did not mention changing oil outputs. "We affirm our commitment ... to continue providing adequate, timely, efficient, economic and reliable petroleum supplies to the world market," he said.