The European single currency is facing an 'inevitable break-up' a leading French bank claimed yesterday.

Strategists at Paris-based Société Générale said that any bailout of the stricken Greek economy would only provide 'sticking plasters' to cover the deep- seated flaws in the eurozone bloc.

The stark warning came as the euro slipped further on the currency markets and dire growth figures raised the prospect of a 'double-dip' recession in the embattled zone.

Behind closed doors and with no cameras present, President Obama signed into law Friday afternoon the bill raising the public debt limit from $12.394 trillion to $14.294 trillion.

Freddie Mac said yesterday that it would buy “substantially all” loans with payments late by 120 days or more from its securities in the next month. Fannie Mae said later that it will “increase significantly” its buyouts, setting a less aggressive timeline. The value of Freddie Mac’s delinquent loans is $70 billion, while Fannie Mae has $130 billion of the debt, according to Citigroup Inc. data.

“This is going to be a wad of cash coming into the fixed- income markets and it’s not immediately clear where it’s going to be reinvested,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.

Feb. 14, 2010, 10:25 p.m. EST
Saudi central banker affirms U.S. dollar as reserve currency
By MarketWatch

HONG KONG (MarketWatch) -- The head of Saudi Arabia's central bank defended the U.S. dollar's role as the world's reserve currency and rejected calls for a replacement, according to reports Sunday.

Mohammed al-Jasser, the head of the Saudi Arabian Monetary Authority said the greenback's "pre-eminent" role has not changed meaningfully since World War II.

He rejected the idea that Special Drawing Rights, an accounting unit used a quasi-currency by the International Monetary Fund, could replace the U.S. currency as the main store of value for nations.

"The dollar is still preeminent in its role as a reserve currency," Jasser was cited as saying in several reports, adding that the SDR was "years" away from challenging that role.

[...]

WASHINGTON (AP) -- The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.

The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.

The big drop in China's holdings meant that it lost the top spot in terms of foreign ownership of U.S. Treasuries, dropping to second place behind Japan.

Japan increased its holdings of U.S. Treasuries, boosting them by $11.5 billion to $768.8 billion in December. That amount was higher than China's December total of $755.4 billion, putting Japan back in the top spot in terms of foreign ownership of Treasury securities, a position it had lost in the fall of 2008 when China surpassed Japan.

The $53 billion decline in holdings of Treasury securities came primarily from a drop in official government holdings, which fell by $52.3 billion. The holdings of foreign private investors fell by $700 million during the month of December.

Goldman Sachs Group Inc. Chief Economist Jim O’Neill said China may be poised to let its currency strengthen as much as 5 percent to slow the world’s fastest growing major economy.

“I have a strong opinion that they’re close to moving the exchange rate,” O’Neill said in a telephone interview from London after China’s central bank told lenders on Feb. 12 to set aside larger reserves. “Something’s brewing. It could happen anytime.”

Dollar jumps after Fed hikes discount rate

It went to pains to draw the distinction between the discount rate and its target for overnight interbank rates, its main monetary policy tool, which remains unchanged near zero percent as a fragile U.S. economic recovery struggles to gain traction.

Is America’s banker turning bearish? This week, Japan eclipsed China as the largest foreign holder of U.S. Treasury securities. This news comes one week after it was reported that China may sell-off some of its U.S. Treasury holdings to punish Washington for selling weapons to Taiwan. These developments offer more evidence that Beijing is growing less willing to continue buying and holding U.S. debt.
If China is indeed losing its taste for Treasuries, its timing could not have come at a worse time. The federal government has to finance over $1.3 trillion in deficit spending this fiscal year. And in the past, the U.S. has relied on China to buy not only Treasuries, but corporate and mortgage debt as well. Without China in the picture, it’s unclear where all this money will come from.

For years, concerns over the growing U.S. debt to China—estimated at $755 billion—were met with calming explanations of the economic interdependence of the two superpowers. After all, the argument went, China wouldn’t ever sell off its U.S. paper because the two economies need each other so much.

While that symbiotic relationship remains, it might not be enough to persuade the Chinese to continue lending us billions of dollars annually. Decisions of foreign leaders aren’t driven by budget finances alone: continued arms sales to Taiwan, free-speech issues raised by Google and others, and unhappiness with currency valuations could all come into play. And the Chinese might decide that the benefits of a more diversified portfolio and protection against an inflated dollar might outweigh the costs of selling off T-bills.

The head of China's Central Bank has declared that the country is ready to end pegging its currency in dollars, but said that any changes would be gradual.

Zhou Xiaochuan, governor of the People's Bank of China, described the decision as a "temporary" response to the global financial crisis, but gave no timescale for any change in policy.

"If we are to exit from irregular policies and return to ordinary economic policies, we must be extremely prudent about our choice of timing," Zhou said. "This also includes the [yuan] exchange rate policy."

China could end its near two-year currency peg on the dollar by as soon as next month, according to respected economist Professor Nouriel Roubini, in a prediction that could have major implications for global trade markets.
Prof Roubini – known as "Dr Doom" due to his pessimistic take on the global economic outlook – believes that the Chinese central bank could let the yuan appreciate as soon as the second quarter.

The economist made his predictions ahead of a statement at the weekend by Zhou Xiaochuan, governor of the People's Bank of China, in which he said China should be "very cautious" when making a move.

China could end its near two-year currency peg on the dollar by as soon as next month,

China, the world's biggest holder of foreign exchange reserves, renewed its commitment to the U.S. Treasury market on Tuesday but said it would be wary of substantially boosting its gold holdings.

What else would China say. The last thing they want is for the mountain of cash they are sitting on to be devalued before they get a chance to unload it.