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Swiss National Bank intensifies measures against strong Swiss franc

The measures taken thus far by the Swiss National Bank (SNB) against the strength of the

Swiss franc are having an impact. Nevertheless, the Swiss franc remains massively

overvalued. The SNB has therefore decided to expand again significantly the supply of

liquidity to the Swiss franc money market. In so doing, it is increasing the downward

pressure on money market interest rates with a view to further weakening the Swiss franc

exchange rate. With immediate effect, it aims to expand banks’ sight deposits at the SNB

further, from CHF 120 billion to CHF 200 billion. In order to achieve this new target level

as quickly as possible, it will continue to repurchase outstanding SNB Bills and to employ

foreign exchange swaps. Furthermore, the SNB reiterates that it will, if necessary, take

further measures against the strength of the Swiss franc

Brent crude rises, above $109 on U.S. gasoline draw

(Reuters) - Brent crude rose on Wednesday, staying above $109 a barrel as a larger-than-expected drawdown in U.S. gasoline stocks and positive U.S. economic data trumped concerns over the euro zone debt crisis.

A meeting between French and German leaders didn't result in any concrete measures to try and find a way out of Europe's sovereign debt problems, but better-than-expected U.S. industrial production numbers helped bolster sentiment.

Brent crude for October rose 55 cents to $109.68 by 0455 GMT. U.S. crude was up 78 cents at $87.41 a barrel, after slipping $1.23 on Tuesday to settle at $86.65.

"The meeting between Sarkozy and Merkel didn't amount to too much and that will cap gains in oil futures," said Victor Shum, an analyst with energy consultancy Purvin and Gertz.

French President Nicolas Sarkozy and German Chancellor Angela Merkel proposed a tax on financial transactions and closer joint governance of economic policy, but did not propose increasing the euro zone bailout fund or selling euro zone bonds.

Asian shares fell on Wednesday and the euro wobbled after the meeting, while safe-haven asset gold held steady near a record high.

U.S. stockpiles of gasoline fell 5.4 million barrels in the week to August 12, well above analyst expectations for a 1.3 million barrel draw, data from the American Petroleum Institute (API) showed on Tuesday. <API/S> The U.S. Department of Energy will release inventory data later on Wednesday.

"The API numbers were quite supportive as gasoline supplies have come down, but risks continue to be on the economic front," said Shum.

ECONOMIC OUTLOOK

Concerns about the debt crisis have weighed on oil markets in recent weeks, adding to worries about weak U.S. economic data that could hit fuel demand.

The euro zone economy slowed sharply in the second quarter, hobbled by sluggish growth in Germany and stagnation in France, raising fears of a longer-term dip.

There was more upbeat data out of the U.S., with industrial output at the world's top oil consumer recording its best gain in seven months in July.

Also boosting sentiment were comments by China's top state planner on Wednesday that the world's second-largest economy is expected to expand by 7 percent annually over the next five years.

Brent crude may end its rebound at around $109.57 a barrel, while U.S. oil is unlikely to reach $90 per barrel as it faces a strong resistance at $88.17, Reuters technical analyst Wang Tao said.

The conflict in Libya and Syria could further disrupt supplies and support oil prices, analysts said.

"The scale of disruption to Syrian oil production remains unclear, but Syria is reportedly importing gasoline from companies operating in the Mediterranean despite the existing sanctions," said analysts at J.P. Morgan in a report on Tuesday.

"As highlighted by recent statements by the US, even tougher sanctions may be required to limit Syria's ability to participate in the oil market."

Syrian tanks fired on low-income Sunni Muslim districts in the port city of Latakia on Tuesday, the fourth day of an assault which has killed 36 people and forced thousands of Palestinian refugees to flee, activists said on Tuesday.

Asian shares fall, euro shaky after summit let-down

(Reuters) - Japanese shares fell on Wednesday, dragged down mainly by hi-tech firms, while the euro wobbled after French and German leaders failed to deliver a solution to the euro zone debt crisis and restore investor confidence after a global market rout.

Electronics stocks were weak across Asia after computer maker Dell slashed its 2012 sales forecast late on Tuesday, a deeply bearish signal not only for the shaky state of

global demand but for other hi-tech manufacturers, many of which are listed in Tokyo, Seoul and Taipei.

Japan's Nikkei fell 1 percent, with bellwether tech exporter Sony sliding 2.7 percent after it cut the price of its Playstation 3 gaming console to boost sales.

In South Korea, LG Electronics tumbled 4.5 percent, though the benchmark KOSPI stock index was little changed.

Adding to the cautious mood in Asia, S&P stock futures fell almost half a percent, extending losses on Wall Street overnight.

"Investors have been dumping emerging markets stocks across the board for the first time in the post-Lehman era," said a market report from TrimTabs Investment Research. "Investors are selling Asia without discrimination."

The euro fell to $1.4370 from Tuesday's session high of around $1.4470, as traders expected more downward pressure once markets in Europe open later in the day.

A hotly anticipated meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel fell short of producing a plan of dramatic action to tackle the euro zone's debt crisis, an outcome many market watchers had anticipated.

While long-term deficit reduction has become a pressing problem for many developed economies, many investors fear that calls for immediate spending cuts in many euro zone countries and the United States could retard global growth further.

Germany reported on Tuesday that its economy came close to stalling in the second quarter, though other data showed U.S. industrial output rose at its fasted pace in seven months in July, perhaps indicating the economy started the second half of the year on better footing than many analysts had feared.

ASIAN DEMAND

Still, many fund managers see Asian markets as more promising investment targets than the United States and Europe.

"Asia is not immune to the developed world woes, as the region remains a key exporter," said a survey of investment managers published on Wednesday by Singapore-based Russell Investments.

"However, the domestic story is becoming more and more powerful as countries look inward to drive future growth."

MSCI's broadest index of non-Japanese Asia Pacific shares edged higher, supported by gains in Hong Kong and Australia.

The index has lost around 10 percent since the start of the year, much of it in recent weeks, as sovereign debt problems in Europe and the United States and fears that the U.S. could slide back into recession prompted investors to sell equities and other riskier assets in both emerging and developed markets.

Shares in Hong Kong were boosted by a speech by Chinese Vice-Premier Li Keqiang in which he promised to open more sectors for investment from Hong Kong, while a rise in Australia's main index was tempered by global concerns.

DOLLAR

The dollar index against major currencies rose 0.1 percent. Against the yen, the dollar traded around 76.76, down from more than 80 yen earlier in August.

Gold, attractive to some investors as a refuge from turmoil in currencies, bonds and shares, is one of the best-performing assets this year. It traded at $1,785 per ounce on Wednesday, little changed from the previous session around $30 below the peak it touched last week.

U.S. crude oil futures were up 11 cents to $86.75 per barrel after sliding on Tuesday on worries that flagging global growth will dampen energy demand.

Sarkozy and Merkel push tax plan, closer economic coordination

(Reuters) - The leaders of France and Germany, under pressure to counter a debt market crisis in Europe, have agreed to float proposals in September for a tax on financial transactions and push for closer joint governance of economic policy, French President Nicolas Sarkozy said on Tuesday.

After talks in Paris, Sarkozy said he and German Chancellor Angela Merkel were also proposing that all 17 euro zone countries commit to balanced finances and write that goal into their constitutional law by summer 2012.

Among other measures announced, he said they would also seek to ensure better cross-border economic government for the euro zone via twice-yearly meetings of leaders and the creation of a two-and-a-half-year presidency to steer this forum.

"We want to express our absolute will to defend the euro and assume Germany and France's particular responsibilities in Europe and to have on all of these subjects a complete unity of views," Sarkozy told a news conference at his Elysee Palace offices, where he was flanked by Merkel.

The two are under pressure to come up with plans to shore up the euro zone and restore financial market confidence after a year and a half of turmoil that has refused to die down despite bailouts of Greece, Ireland and Portugal and the creation of an anti-contagion fund.

Poor German data hits stocks and euro

(Reuters) - Stagnant growth in Europe's powerhouse Germany knocked stocks lower on Tuesday and hit the euro, adding to investor fears that the world economy is slowing more than expected.

Focus was also on a meeting in Paris between French President Nicolas Sarkozy and German Chancellor Angela Merkel, with investors looking for any signs of new measures to contain the spreading euro zone debt crisis.

Germany's gross domestic product grew just 0.1 percent in April-June from the previous quarter, below market expectations for an expansion of 0.5 percent.

"The global slowdown is gradually reaching Germany," said Andreas Scheuerle, economist at Dekabank.

The data showed Germany was actually growing at a slower pace than battered, debt-ridden Spain, where gross domestic product grew by 0.2 percent in the second quarter.

Germany's slowdown sent European stocks lower, dragging world equities with them.

The FTSEurofirst 300 was down more than 1 percent and MSCI's all-country world stock index lost a third of a percent.

Stocks have been rebounding somewhat from a battering that took the MSCI index down as much as 20 percent from a three-year high in May.

The U.S. S&P 500 index gained 2.18 percent on Monday. Japan's Nikkei closed up 0.23 percent on Tuesday.

EURO ANGST

The euro was down against both the Swiss franc and the dollar, extending losses after the German data.

It was down 0.8 percent against the Swiss franc at 1.1232 francs and 0.4 percent against the dollar at $1.4301.

The Swiss franc has been a key safe haven for investors during recent market turmoil.

Gold, the other major choice and one of the best-performing assets this year, was up around half a percent at $1773 an ounce.

German government bonds firmed after the growth data, with short-dated paper outperforming.

Some investors were hoping the Franco-German meeting later in the day would come up with ways to improve euro zone governance.

Talk of common euro zone bonds -- increasingly seen as a powerful tool against the region's debt hurdles -- in some of the German media in recent days has lifted hopes before the meeting in Paris.

Both countries have said, however, that euro bonds are not on the agenda.

Selloff raises stakes in Sarkozy-Merkel euro zone talks

(Reuters) - The leaders of France and Germany face a stark choice in talks on Tuesday over whether to begin steering the embattled euro zone toward closer fiscal union or risk watching the bloc unravel.

French President Nicolas Sarkozy and German Chancellor Angela Merkel meet in Paris to discuss what further measures they can take to contain Europe's debt crisis, which is now spreading to the continent's core.

Italy has been forced to ramp up its austerity measures and financial market jitters hit France last week with French banks' shares subject to panic selling following rumors that the country could be next to lose its prized AAA debt rating.

Many experts say the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the euro area to issue joint euro zone bonds -- although officials in Paris and Berlin said Tuesday's talks would not address that possibility.

Although the German government has long opposed the idea, support is beginning to emerge, with the country's export association saying on Monday that all other means of fighting the crisis had run out.

Italian Economy Minister Giulio Tremonti said on Saturday that euro bonds would be the best solution to Europe's debt crisis, and some economists say that the euro zone will inevitably come around to accepting the idea.

Ordinary Germans have opposed more help for their weaker neighbors even while their economy has been roaring along. Figures on Tuesday showing German GDP barely grew in the second quarter suggests a slowdown is starting to grip there, making underwriting of euro zone debt an even harder sell politically.

"While German politicians are currently racking their brains on the pros and cons of common Euro bonds, the luxury of having an economy running at "wonder" speed is fading away," said Carsten Brzeski at ING.

The German economy grew by just 0.1 percent in the second quarter, while the French economy stagnated.

"EURO ZONE COLLAPSE"

French economist Jacques Delpla, who co-authored a paper proposing how euro bonds could work, said the euro zone faced collapse unless leaders went beyond an agreement reached at a July 21 emergency summit on the debt crisis.

"If we just stick to the July 21 agreement then, before the end of the year, there will be no euro zone, unless the ECB buys everything."

At the July summit, euro zone leaders agreed to a second bailout package for Greece and to give their European Financial Stability Facility rescue fund broader powers, but the moves provided only a brief respite in the debt crisis, forcing the European Central Bank to buy Italian and Spanish bonds last week.

Euro bonds aside, Sarkozy and Merkel will focus on proposals to improve the euro zone's economic governance, which they told fellow leaders in the bloc at last month's summit that they would issue by the end of August.

In particular, they could discuss holding regular euro zone summits, as France has long sought, or ways of improving peer monitoring of fiscal policies.

Economist Frederic Bonnevay at French think-tank Institut Montaigne said more radical measures were needed even if they did not include euro bonds for now.

"The size and powers of the EFSF need to be expanded dramatically -- that's a secret to no-one," he said, suggesting that its firepower should be raised to as much as one trillion euros from 440 billion euros currently.

Sarkozy, who broke off his summer holiday last week to deal with the market meltdown in French stocks, is to meet with Prime Minister Francois Fillon over lunch to fine tune France's position before he meets Merkel from 10 a.m. EDT.

A joint news conference is due at 12 p.m. EDT.

Cheap prices and Japan recovery lift world stocks

(Reuters) - World stocks climbed further out of their August hole on Monday, lifted by signs of earlier-than-expected recovery in Japan and a growing belief that shares may now be cheap.

European shares, however, failed to keep early gains and dropped into negative territory.

Gold and the Swiss franc, two of the main beneficiaries of recent global risk aversion, fell.

Investors were also weighing calls by Italian Economy Minister Giulio Tremonti for a more coordinated response to the euro zone debt crisis, including the creation of euro bonds, against an immediate rejection of the idea from Germany.

MSCI's all-country world stock index, a broad measure of global equity health, was up half a percent, ratcheting up roughly a six percent gain since hitting an 11-month low last Thursday.

"The markets have been technically very oversold and on that basis alone, they are due for a period of remission from the selling," said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin.

Bank of America-Merrill Lynch said a "buy" signal had been triggered last week as outflows out of risky assets hit significant levels.

"We note that since 2004, global equities have rallied an average 6.7 percent (in the four weeks that followed the trigger)," the bank's strategists wrote in a note.

Nonetheless, the pan-European FTSEurofirst 300 stocks index was slightly lower.

Shares in Asia were boosted by data showing Japan's economy shrank less than expected in April-June following a devastating earthquake and tsunami in March.

Japan's Nikkei closed up 1.37 percent.

SPILL OVER

The albeit tentative rise in confidence spilled into other assets.

The euro extended its gains against the Swiss franc to more than 3 percent after a Swiss newspaper report said the Swiss National Bank was poised to set a limit for the euro-Swiss franc exchange rate and will use all means to defend it.

The dollar also rallied against the franc, surging 2.7 percent to 0.79883.

Otherwise the U.S. currency was down around a quarter of a percent against a basket of major currencies.

On the euro zone crisis front, Tremonti's call for common euro zone debt issuance was rejected by German Finance Minister Wolfgang Schaeuble, who said such euro bonds would undermine the basis for the single currency by weakening fiscal discipline among member states.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to meet in Paris on Tuesday to discuss the crisis.

Core euro zone debt was mixed with yields rising on longer-term bonds.

Stocks bounce on U.S. cues; sentiment wary

(Reuters) - Asian equities bounced on Monday and safe-haven assets like gold and the Swiss franc fell as market players cautiously returned to pick up bargains after last's week wild ride, though concerns over the weak global economic outlook may keep gains in check.

A modest 0.4 percent rise in U.S. stock futures also encouraged some bargain hunting in Asian markets, but investors may be more likely to sell into rallies than buy into any dips ahead of fresh readings on the U.S. and euro zone economies this week.

Japan's Nikkei finance/markets/index?symbol=jp%21n225">.N225 rose 1.5 percent after main Wall Street .N indices advanced on Friday but without the wild intra-day swings that marked the first few days of trading last week after the U.S. credit rating was downgraded by Standard and Poor's.

Japanese shares were also boosted by data showing Japan's economy shrank less than expected in April-June following a devastating earthquake and tsunami in March. .T

Asian stocks outside of Japan rose by a similar margin .MIAPJ0000PUS, after tumbling nearly 4 percent last week, with key indexes in Hong Kong and Australia up nearly 2 percent.

Frances Cheung, senior strategist at Credit Agricole in Hong Kong, said a meeting between the leaders of France and Germany on Tuesday would be crucial to determining whether any longer term solution to the euro zone's sovereign debt crisis is in the works.

"There is still a huge focus on money markets ... and looking at them shows not everything is solved," she said.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to meet in Paris to hammer out a solution to the sovereign debt crisis which has shown signs of ensnaring the big euro zone economies like Italy and Spain and heightened strains in money markets to levels not seen during the 2008 crisis.

In recent days, France itself has come under attack from the markets.

While dollar funding costs evident from cross currency basis swap rates in dollar/yen and dollar/euros have cooled from last week's peaks, they are still at elevated levels.

On a valuation basis, the MSCI index of Asia stocks outside Japan trades at 11.5 times forward 12-month earnings, according to Thomson Reuters I/B/E/S, above the 7.9 times seen during the depths of the 2008 financial crisis.

That suggests investors may still not be in a hurry to buy despite the 13 percent decline over the last two weeks.

Markets also remain vulnerable to declines as debt cutting plans in Europe and the United States threaten to act as a further drag on already weak economic growth at a time when latest data has been patchy.

U.S. consumer sentiment plunged to its lowest level since 1980 in early August, data showed on Friday, though July retail sales rose 0.5 percent.

FRANC TUMBLES

Still, signs that equities might have marked a temporary bottom after last week's volatile moves and persistent chatter that Swiss authorities may peg the franc against the euro to battle its surge sent the safe-haven currency tumbling by two percent against the euro and the dollar.

The euro, which plumbed a record low around 1.0075 francs last week, climbed to a high of 1.1294 francs in morning trade, up from 1.1079 late in New York on Friday.

But Barclays Capital analysts warned expectations of a peg seemed overdone, believing the franc would rally once again this week if markets started to change their view on its probability.

"We remain CHF bears in the medium run - we agree with the SNB's view that it is "massively overvalued" - but, this week, we are not expecting the recent appreciation of EUR/CHF to hold," said Paul Robinson, strategist at Barclays Capital.

The drop in the franc rippled over into gold markets with the precious metal slipping after a 1.5 percent slide in the previous session. Before Friday's slide, gold had gained 9 percent so far this month.

U.S. crude futures were steady around $85.50 a barrel after settling down slightly on Friday.

Trading activity is expected to be thin with Korea and India out and Japan's summer "obon" holidays this week.

Gold fell more than 1 percent in early trade before paring most of its losses. By late morning it was at $1,744 an ounce, little changed from late Friday U.S. levels.

Italy austerity plan draws wide criticism

(Reuters) - Italy's second austerity package in less than a month met with a chorus of criticism a day after becoming law, with the largest union federation threatening a general strike over the "injustice" of the measures.

President Giorgio Napolitano on Saturday signed the emergency decree introducing sweeping austerity measures to cut the fiscal deficit by some 45.5 billion euros ($64.7 billion) and balance the budget in 2013, a year ahead of its previous schedule.

"A missed opportunity," was the comment by the chief economist of the Paris-based Organization for Economic Co-operation and Development, Pier Carlo Padoan, in daily La Stampa on Sunday.

Padoan said the plan was positive in the pledge to bring forward the balanced budget but it lacked measures to boost growth and tackle tax evasion. Employers' lobby Confindustria estimates Italy's tax evasion totals 120 billion euros.

CGIL union confederation leader Susanna Camusso told la Repubblica the package "hits only those who already pay their taxes," adding that the date of a general strike would be decided at an emergency union meeting on August 23.

The austerity plan sets a "solidarity tax" on those earning more than 90,000 euros per year, to be levied for three years.

Economists, unionists and business leaders agreed a tax on wealth rather than on labor income would have been better because it would have targeted tax evaders who do not declare their real income but often own large assets.

Ferrari Chairman Luca Cordero di Montezemolo told Corriere della Sera newspaper the solidarity tax was "a scandal."

"It's one thing to ask for a solidarity contribution from me or (media tycoon and Prime Minister Silvio) Berlusconi, but it's different to hit an executive supporting his family," he said.

Newspaper editorial comment was largely negative, with former European Commissioner Mario Monti telling Corriere della Sera the package lacked fairness, weighed too heavily on the middle classes and did too little to help growth.

TAX BURDEN

In an interview with business daily Il Sole 24 Ore Confindustria head Emma Marcegaglia said the new tax regime could force managers to seek employment abroad, adding to Italy's hemorrhage of talented workers.

"We are reaching an absolutely disproportionate tax rate on so-called high incomes," Marcegalia said.

She also called the so-called 'Robin Hood Tax', due to hit companies in the energy sector with more than 10 million euros in revenues and 1 million euro in taxable income, a "folly."

Marcegaglia called for an increase in value added tax and a reform of the system allowing early retirement on the basis of years of pension contributions. Pension spending in Italy is around two percentage points above the euro zone average.

The austerity decree must be passed by parliament within 60 days, during which it will almost certainly be amended. Debate will begin in the Senate on August 22.

Some 4 billion euros of the 20 billion euros of savings slated for 2012 and 12 billion euros of the 25.5 billion set for 2013 are to come through tax and welfare measures still to be drawn up.

French economist Jean-Paul Fitoussi told Rome daily Il Messaggero that market pressure had forced Italy to take steps which were of no real value and would damage its weak growth.

"Italy is like the protagonist of a Greek tragedy: forced to do things that will be useless and damaging in the long run, but necessary for survival in the short run."

Stock futures signal retreat for equities

(Reuters) - U.S. stock index futures pointed to a weaker open on Wall Street on Friday after sharp gains in the previous session, with futures for the S&P 500, for the Dow Jones and for the Nasdaq 100 down 0.8 to 0.9 percent.

The Commerce Department releases July retail sales data at 8:30 a.m. EDT. Economists in a Reuters survey expect a 0.5 percent rise compared with a 0.1 percent increase in June. Excluding automobiles, sales are expected to rise 0.2 percent versus a flat reading in June.

Thomson Reuters/University of Michigan Surveys of Consumers release preliminary August consumer sentiment index at 9:55 a.m. EDT. Economists expect a reading of 63.0 compared with 63.7 in the final July report.

Bank of America Chief Executive Brian Moynihan met privately this week with Treasury Secretary Timothy Geithner and Federal Reserve governor Daniel Tarullo amid the campaign to calm investors and employees about the bank's share price fall, the Wall Street Journal reported.

The Commerce Department issues Business Inventories for June. Economists in a Reuters survey expect a 0.5 percent increase versus a 1.0 percent rise in May.

At 10:30 a.m. EDT, Economic Cycle Research Institute (ECRI) releases its weekly index of economic activity for August 5. In the prior week the index read 128.3.

China's yuan currency looks set for a speedier rise against the U.S. dollar in the coming months as Beijing tries to tamp down inflation and reduce its exposure to U.S. and European debt, Chinese media and traders said on Friday.

Dollar funding costs edged up on Friday, hovering around the highest levels since the 2008 financial crisis, as markets saw Europe's move to ban short-selling of shares as only a temporary fix that would not address deteriorating conditions within the euro zone.

Korean company Samsung Electronics will go to a German court on August 25 to try to overturn a ban on it selling flagship Galaxy tablets in most of the European Union. Earlier this week, a Duesseldorf court temporarily barred Samsung from selling its tablets, following an injunction filed by Apple which had said the Galaxy line of mobile phones and tablets "slavishly" copied its iPad and iPhone.

Department store chain J.C. Penney is set to announce results.

The FTSEurofirst 300 index of top European shares was up 0.7 percent on Friday, extending the previous session's gains of 2.7 percent.

U.S. stocks shot up 4 percent on Thursday as bargain-hungry investors overcame the recent wave of fear that drove selling over the last two weeks.

The Dow Jones industrial average surged 423.37 points, or 3.95 percent, to 11,143.31. The Standard & Poor's 500 Index shot up 51.88 points, or 4.63 percent, to 1,172.64. The Nasdaq Composite Index jumped 111.63 points, or 4.69 percent, at 2,492.68.

China urges action on EU and U.S. debt, to keep yuan policy

(Reuters) - China is worried about challenges that the European Union faces in the next two months and urged the bloc as well as the United States to hold down government debt, its trade minister said on Friday.

Speaking at a meeting of Southeast Asian trade ministers, Chen Deming called on governments in the United States and Europe, China's top two trading partners, to act responsibly and get their fiscal houses in order.

"We support stabilizing measures taken by relevant countries, but we hope these countries will take measures to control their government debt proportion and take bigger responsibilities," Chen said.

"We are also concerned about new challenges facing European countries in August and September," he said, but did not elaborate.

His remarks echo recent comments from Beijing, which has invested nearly all of its $3.2 trillion foreign exchange reserves, the world's largest, in dollars and euros and would loathe to see the currencies plummet on economic problems.

World financial markets have swung wildly in the past week on fears that Europe cannot contain its debt crisis and after a downgrade of the U.S. sovereign credit rating, which amplified concerns that the U.S. economy may slide back into another recession or a prolonged period of meager growth.

U.S. Deputy Trade Representative Demetrios Marantis, attending the meeting, said the United States was now on a path toward fiscal discipline, following a deal this month to lift its debt ceiling.

He brushed off concerns by trade ministers at the meeting worried about weaker U.S. demand for Asian goods.

"The U.S. is the biggest market in the world and will continue to be a driver of global growth," he told Reuters.

STRONGER YUAN

The U.S. Federal Reserve has vowed to maintain interest rates near zero until 2013 to prop up its economy, and Chen said Asian governments should work together to monitor the impact, after funds seeking higher yields have driven up Asian stocks and currencies in the past year.

Chen noted the world was still struggling with the excess cash left behind by the loosening of monetary and fiscal policies during the 2008 financial crisis, which was "like taking medicines that will have a side effect."

"Where would the excessive liquidity flow to? Commodities, stock markets or bond markets? We are not quite sure yet," Chen said.

On the yuan, a controversial issue among China and its trade partners, Chen reiterated Beijing's usual refrain that the currency should only rise gradually and said it will stick to restructuring reforms of the domestic economy.

"We will also stick to gradual and steady currency reform," he told Reuters, adding that yuan volatility would be greater when global markets were jumpy. "But looking from a longer term perspective, the yuan currency policy will not change."

Chen's remarks come amid market talk that China may be about to shift its policy stance on the yuan soon after guiding the currency to a series of record highs. <CNY/>

A flurry of Chinese media reports that predicted speedier gains in the yuan have also fueled speculation.

China keeps the yuan on a tight leash as it worries any sharp gains could hurt its exports and weigh on the world's second-biggest economy.

Its trade partners, however, accuse Beijing of deliberately suppressing the yuan for trade advantage, an allegation that China has always denied.

Indeed, new data from Washington that showed the U.S. trade gap with China grew almost 12 percent in the first six months of 2011 could fuel efforts in Congress to get tough with China's currency practices.

By contrast, export-dependent Southeast Asian countries, whose currencies have risen along with the yuan, would prefer to avoid a rapid rise in the Chinese currency which could curb their export competitiveness.

"That's a problem for everyone," Surin Pitsuwan, the secretary general of regional bloc ASEAN, told Reuters.

Big ups and downs give daytraders a way to thrive

(Reuters) - These days, every day in the market is an adventure. But some daytraders are making a killing, taking advantage of wild market swings that have scared off even strong-stomached investors.

The Dow industrials have traded in a range of 400 points every day in the last five days, while the CBOE Volatility index has more than doubled from a recent closing low on July 22.

Fear has increased alongside signs of slowing growth and an unprecedented downgrade of the U.S. credit rating by Standard & Poor's. But swings have gone both ways: the S&P recently posted not only its worst day since 2008, but also its best.

"I trade the way the market tells me. And if you're like that, this is one of the best markets you'll ever have," said Joe Donohue, money manager at Dimension Trading in Red Bank, New Jersey, a proprietary trading services firm.

Donohue said his focus is more short-term to play this market. A few weeks ago he held positions for two or three days, but now he closes out positions at the end of a session.

"If you need to play, be squared out at the close," he said. "Don't carry much exposure overnight because you could be long and then have a 400-point drop at the open ... We're in such a risky market that anything could come out of Europe or Asia to change things completely."

Daytraders take a short-term outlook on the market, holding positions for less than a day. They often sell securities short to profit from both upward and downward movements, bringing the chance of big wins, or equally large losses.

Donohue said he primarily traded in the Direxion Daily Small Cap Bull 3X Shares ETF, which seeks returns of 300 percent of the daily performance of the Russell 2000, and the Direxion Daily Small Cap Bear 3X Shares ETF, which is trice-short the Russell, tapping into market volatility.

On Tuesday afternoon, markets swung madly as investors parsed comments from the U.S. Federal Reserve pledging two more years of near-zero interest rates. Indexes reversed course six times before ending more than 4 percent higher.

"After the market dipped, I sensed there would be a move to the upside so I went long," Donohue said. In Wednesday's similarly volatile session, "I was long in the morning then went to TZA late in the day."

BELLE OF THE BALL

Donohue isn't the only trader embracing favorite names to avoid the fluctuations of the broader market.

"Right now the belle of the ball is the FactorShares 2X: Gold Bull/S&P500 Bear ETF," said Joshua Brown, vice president of investments at Fusion Analytics in New York, referring to a fund that is double-short S&P futures and double-long gold prices.

Volume on the fund has surged in recent sessions, with the 10-day moving average more than triple the 50-day average.

It "was built for this moment," Brown said of the fund, which is up 76 percent from its July 1 recent closing low. "The chart looks like the Empire State Building."

Of course, the velocity of the changes in market direction means traders who are not nimble can get caught on the wrong side of a trade, exposing themselves to massive losses.

The FactorShares fund "is a momentum heavy story," Brown said. "if you're not quick on it, it's the kind of instrument that can wipe you out."

With sudden moves between gains and losses an ever-present concern, traders do what they can to find an edge.

SEIZE THE MOMENT

Chicago-based Bright Trading trains its traders to manipulate mechanics like the opening gap, where they take advantage of price gaps in the initial trading of the stock.

"The other day General Electric Co opened and moved up 40 cents within 60 seconds," said Donald Bright, one of the firm's directors.

"Traders made thousands of dollars on it right then, and when you see openings where the market moves 300 points, the returns are even bigger... Lately we've had the best days on (opening gap plays) that we've had in maybe a year."

Toward the close, the firm looks to take advantage of order imbalances, which are published 15 minutes before the market session ends and suggest which side of a trade will have greater demand.

Knowing the imbalance gives an edge that "works a lot of the time," Bright said. "Experienced traders at our firm dream of days like this," he added. "They make more in a week than they do in a month, normally."

But the recent price action can be too much of a good thing, even for traders who thrive on fast swings.

"I love volatility, But I don't think we wanted to get to this level of volatility every day," said Tony Battista, who co-anchors Chicago-based Tasty Trade's how-to show on trading techniques and was a market maker for 25 years.

"You don't like for the market to have this type of percentage move in a day," he added. "That's something nobody wants to see, even volatility buyers."

Battista's solution to trading losses was simple -- do something to change his luck. "I changed my pen this morning," he joked. "I had a $2 pen. I went to a 15-cent pen. It's back to basics now."

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Asia stocks down but fall limited by U.S. futures

(Reuters) - Asian stocks fell 1-2 percent on Thursday as the fallout from Wall Street's 4 percent drop overnight limited by a rise in U.S. stock futures, while gold climbed above $1,800 an ounce to a new record, reflecting fears over Europe's worsening financial crisis.

The Australian dollar, often a measure of investors' willingness to take risks, rose toward $1.02 as Asian equities pulled back from their lows, suggesting traders and investors were being nimble rather than selling with blinders on.

Fast-moving rumors about a sovereign debt downgrade of France as well as talk doubting the health of French bank swirled in Europe, causing the biggest widening in the benchmark index of European credit default swaps since the credit crunch in 2008.

"The market is in a bit of heat-seeking missile mode looking for vulnerabilities around the world, and Europe is obviously in its sights at this point in time," said Grant Turley, senior strategist at ANZ in Sydney.

Japan's Nikkei share average rose 1.5 percent in early trade, still not far from the five-month low hit on Tuesday.

The benchmark MSCI Asia Pacific ex-Japan stocks index fell 1.2 percent, with commodity-related stocks hit hardest. The index has fallen 13 percent so far in August, in line with the all-country world index, suggesting investors are not being so discriminating in the equity sell-down.

The euro was still vulnerable, especially against the yen and Swiss franc, but recovered some ground as Asian equities edged up from their lows.

The euro was at $1.4175, largely unchanged on the day and locked within a tight trading range by a debt crisis in Europe and a U.S. slowdown.

The Australian dollar was up 0.3 percent to $1.0190, holding above Tuesday's drop to below parity but well off from $1.10 where the currency started the month.

Spot gold prices were up 0.5 percent to $1,802.89 an ounce after earlier hitting an all-time high of $1,813.79.

The undisputed safe haven has risen 11 percent so far this month and is up 27 percent in 2011.

Wall Street slumps on worries over French banks

(Reuters) - Wall Street stocks fell sharply on Wednesday on fears over possible trouble in the French banking sector that has large exposure to shaky peripheral European debt.

U.S. financial stocks led the decline as the KBW bank index slid 6.2 percent. Large financial institutions fell sharply, with Bank of America Corp down 12.2 percent to $6.93.

French banks were hit hard in Paris trading. Societe General, where U.S. traders have focused their attention, fell 16 percent. BNP Paribas fell 13.2 percent.

"France owns $350 billion worth of Italy's debt on their banks' books," Dave Rovelli managing director of U.S. equity trading at Canaccord Adams, who said fears of a failure in the sector were hitting U.S. markets.

The Dow Jones industrial average dropped 342.96 points, or 3.05 percent, to 10,896.81. The Standard & Poor's 500 Index fell 33.66 points, or 2.87 percent, to 1,138.87. The Nasdaq Composite Index shed 72.56 points, or 2.92 percent, to 2,409.96.

Indexes gave up much of Tuesday's snap-back rally. The S&P 500 is down nearly 18 percent since a peak at the start of May. Worries about the U.S. economy and high levels of public debt in Europe have sent stock cascading over the last two weeks.

World shares rebound after Fed pledge to keep rates low

(Reuters) - World shares bounced back strongly from recent losses on Wednesday as investors took comfort from the Federal Reserve's pledge to keep interest rates near zero for two more years.

European equities gained at the open, with the FTSEurofirst 300 up 1 percent, adding to a 1.2 percent rise from Tuesday.

The MSCI all-country world index, which has fallen as much as 20 percent from a May high, was up 1.1 percent. Emerging market shares were up more than 2.3 percent.

Investor sentiment was boosted by the Fed's unprecedented announcement that it was likely to keep interest rates at extraordinary low levels through to mid-2013.

They also took comfort from data showing China's export growth accelerating in July, calming fears that weak demand from Europe and the United States would hit the world's second-biggest economy.

"Selling by short-term investors seems to have run its course," said Kenichi Hirano, a strategist at Tachibana Securities in Japan.

Goldman Sachs said a third round of asset-buying quantitative easing from the Federal Reserve was likely following Tuesday's statement.

"We now see a greater-than-even chance that (it) will resume quantitative easing later this year or in early 2012. We have changed our call because (the) statement suggests that the committee's reaction function to incoming economic news is more dovish than we had previously thought," Jan Hatzius, chief economist at the firm, said in a note.

DOLLAR STEADY AFTER FALL

The dollar fell three-quarters of a percent against major currencies, as prospects for minimal dollar-interest rates sent buyers elsewhere.

The Swiss National Bank said it was expanding measures to fight against the Swiss franc's strength. Investors have been pouring into the currency as a safe haven during recent market and economic weakness.

German government bonds opened higher, tracking moves in U.S. Treasuries.

Yields on shorter-dated U.S. debt plunged overnight with two-, three- and five-year notes all setting new lows and analysts speculated that the central bank would ultimately need to implement new stimulus measures.

"There's a fear that the outlook is very bad if they're committing until 2013," said a trader.

Japan on watch as yen rises and stocks plunge

(Reuters) - Japanese policymakers voiced growing alarm on Tuesday as the yen inched back to highs scaled prior to last week's intervention and global stock markets crumbled under mounting fears of a new financial crisis.

Finance Minister Yoshihiko Noda said he would watch markets with a sense of urgency because they are in a severe state, while Bank of Japan Governor Masaaki Shirakawa said he needs to be particularly mindful of the risks that a strong yen poses to the Japanese economy.

The yen approached its highest level versus the dollar since Tokyo's intervention on August 4, while Asian shares went into a nosedive after a 6 percent decline on Wall Street as the U.S. government's loss of its top credit rating and a piecemeal response to Europe's sovereign debt woes frayed investors' nerves.

"I will pay close attention to market movements with a sense of urgency today," Noda told reporters when asked about the stock market falls and a persistently strong yen despite Japan's solo intervention last week to stem its rise.

The Japanese currency was trading at around 77.13 yen against the dollar, up about 0.8 percent on the day and close to a four-month high of 76.29 yen hit last week before Tokyo intervened and way off post-intervention levels beyond 80 yen to the dollar.

Japan sold a record of more than 4 trillion yen last Thursday to prevent the yen's climb from derailing the economy's recovery from the damage wrought in March by the triple-blow of a massive earthquake and tsunami and a radiation crisis at a damaged nuclear power plant.

The central bank also stepped in, loosening monetary policy by boosting its asset buying scheme by half to 15 trillion yen in a move aimed both at making the intervention more effective and shoring up market confidence.

The effects of the joint effort, Japan's third foray into currency markets in less than a year, have worn off quickly as fears that twin debt crises in the United States and Europe could tip the world economy back into recession drove investors into low-risk assets such as the yen, gold and the Swiss franc.

Additional solo intervention could also meet with limited success as Japan is unlikely to get the necessary cooperation from the Group of 20 and Group of Seven countries.

"For Japan, there aren't really any policy alternatives left to stop yen strength," said Junya Tanase, chief foreign exchange strategist at JPMorgan Bank in Tokyo.

"It is difficult for G20 to coordinate on policy because the group is so big. The G7 can coordinate to provide liquidity, but their basic stance is one that is critical of intervention."

BOJ Governor Shirakawa told parliament he still expects Japan's economy to return to moderate growth, but highlighted growing discomfort with a strong yen and increased overseas risks to the economy.

"It's happening against the backdrop of weakness in the global economic recovery, and uncertainty over U.S. and European fiscal problems," Shirakawa said, referring to the rising yen.

"These factors, coupled with the short-term downside effect from yen rises, hurt (Japan's business) sentiment."

Minutes of the central bank's meeting in July showed that its board was increasingly worried about the global economic outlook and two of its members were already advocating further monetary easing.

Despite Japan's own troubles with public debt twice the size of the $5 trillion economy, the post-quake recession and a political stalemate, its deep bond market is seen as one of the relatively few safe investments both by Japanese and foreign investors.

Global stock markets plunged on Monday as the G7 finance ministers' and central bankers pledge over the weekend to help smooth markets if needed provided little reassurance.

The European Central Bank swept into the bond market to buy up Italian and Spanish debt and sling a safety net under the euro zone's third- and fourth-largest economies. But bickering persisted in Europe over a longer-term rescue plan.

Noda said Monday's G7 statement helped to ease market uneasiness and he would keep in close contact with his G7 partners in the coming weeks.

Noda also told lawmakers he does not intend to resign his post, rejecting a report in the Sankei newspaper that he will give up the role of finance minister in a bid to replace the prime minister.

Asia shares nosedive; gold scales another peak

(Reuters) - Stock markets plunged on Tuesday and the Swiss franc held near a record high as investors dumped riskier assets in a global rout triggered by fears that political leaders are failing to tackle debt crises in Europe and the United States.

Major indexes across Asia tumbled between 2 and 7 percent, following a drop of more than 6 percent on Wall Street on Monday in the first trading session since the historic downgrade of the United States' AAA credit rating by Standard & Poor's.

S&P futures fell more than 3 percent at one point on fears that the fallout from the downgrade could help push the U.S. economy back into recession. By midday futures were down 2.1 percent ahead of the European market opening. .N

The panicked flight-to-safety lifted gold to the latest in a string of record highs, boosted the Swiss franc and the yen and lifted Japanese government bonds and, ironically, U.S. Treasuries -- the asset directly affected by the downgrade.

"We have been cautious about the unfolding events in Europe for some time and are concerned about China slowing more than what is priced into the market," said Alex Hill, co-founder of Singapore-based hedge fund Tantallon Capital, which manages more than $300 million in assets.

"The macroeconomic picture outside of Asia is bleak and Asia's ability to remain immune is doubtful in the extreme."

MSCI's All-Country World Index .MIWD00000PUS has fallen about 14 percent so far this month, wiping around $3.8 trillion off company values.

The worsening market turmoil puts significant pressure on the U.S. Federal Reserve at its regular policy meeting on Tuesday to announce some fresh measures of support for a damaged U.S. economy.

While the U.S. downgrade late on Friday was the most obvious blow to confidence, investors have also been spooked by data suggesting the U.S. economy was stalling and Europe's ever-worsening sovereign debt crisis.

There are also concerns about China's inflation rate, which analysts fear could curb Beijing's ability to stimulate demand to offset a global slowdown.

Chinese data on Tuesday failed to offer respite, showing consumer price inflation hugging three-year highs in July.

"This is the type of data that should have prompted the PBoC to hike interest rates, but given the current turmoil in financial markets, we expect them to delay it," said Wei Yao, an economist with Societe Generale in Hong Kong.

EMOTIVE TRADING

Japan's Nikkei share average .N225 was down 3.6 percent and MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS shed 4 percent by midday, but both were off early lows.

Australia's benchmark .AXJO fell 1 percent, Hong Kong's Hang Seng finance/markets/index?symbol=hk%21hsi">.HSI tumbled 5.6 percent and South Korea's KOSPI .KS11 slid 6.4 percent, also clawing back some initial losses.

Seoul shares slid more than 9 percent at one point but were supported by buying by state pension funds and other public funds. A stock exchange official said it may ban short selling of shares to stabilize markets.

"It's very emotive trading," said Simon Burge, chief investment officer at ATI Asset Management in Australia. "Fundamentals would have to deteriorate quite significantly to catch up with where share prices are."

Whilst traders in Asian markets such as South Korea and Japan reported foreign money fleeing stocks, many asset managers maintained that the region still offers the best prospects.

"From a macro, top-down perspective, we expect the relative strength of the region's fundamentals to continue to attract incremental foreign capital," said RBS Asia Pacific equity strategists in a note.

"From a sector standpoint, it still appears that the one sector standing above any other for the delicate trade-off between risk and reward is telecoms. Valuations or expectations cannot be said to be anywhere near excessive levels."

Telecoms was the least-hit .MIAPJTC00PUS sector in the MSCI Asia ex-Japan index, falling less than 3 percent as investors looked to defensive plays.

Financial stocks have been amongst the hardest hit globally, with some investors fearing that in a worst case scenario the debt crises on both sides of the Atlantic could prompt a repeat of the money market seizure that followed the collapse of Lehman Brothers in 2008.

"Market players are seeking emergency refuge and fleeing to safe assets," said a customer trader at a major Japanese bank in Tokyo. "In the money market, where there is heightened demand for dollars, dollar lenders are running away."

THIS TIME IT'S DIFFERENT

But while the steepling falls in equities reminded many of the shockwaves that swept through markets in the wake of Lehman's collapse, money and corporate credit markets are not yet seeing a repeat of the strains witnessed three years ago.

"The Lehman moment was based on a systemic risk to the banking sector," said Olivier d'Assier , managing director for Europe and Asia at Axioma, which provides risk models and portfolio construction tools for investors and fund managers.

"This isn't related to bad assets that the banking sector has on its books, it's related to the fact that the economic growth isn't there to support the kind of national debt levels and benefits payout that politicians have promised."

The dollar was down 0.7 percent at 0.7494 Swiss franc, near an all-time low around 0.7483 reached the previous day. The euro plunged to a record low of 1.0605 francs, then traded down 0.5 percent at 1.0651.

"The yen and the Swiss franc are drawing extremely strong demand as plunges in global shares are having a major psychological impact, forcing investors to refrain from holding risk assets," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.

The dollar was down 0.8 percent at 77.15 after falling to an intraday low of 77.05, not far off the record low of 76.25 yen reached in mid-March.

Gold, a traditional refuge from financial storms, hit a record above $1,753 an ounce.

JP Morgan (JPM.N) said on Monday it expected spot gold to climb to $2,500 an ounce or higher by year-end, following the downgrade of U.S. debt. The U.S. bank said its previous estimate of $1,800 was "too conservative".

U.S. crude oil futures fell nearly $4, or around 4.5 percent, to trade around $77.60 a barrel.

But as many traders hit the sell button, Anthony Bolton, one of Britain's best known equity fund managers who now runs the firm's China Special Situations Fund (FCSS.L), saw a buying opportunity.

"History shows that normally extreme equity market volatility as we are now experiencing should be seen as a time of opportunity rather than a time to become more defensive," he said in a statement.

Oil falls more than 3 percent after U.S. downgrade

(Reuters) - Oil dropped more than 3 percent on Monday, as worry about an economic slowdown spread after Standard & Poor's cut the United States' top-tier credit rating late on Friday.

Fear gripped financial markets as the fallout from the historic downgrade of the U.S. debt rating by S&P drowned out pledges of assistance from Europe's central bank and soothing words from the Group of Seven.

U.S. stocks tumbled early, tracking a sharp drop in global equity markets following S&P's move. .N

Brent crude fell $3.60 to $105.77 a barrel by 10:34 a.m. EDT, after earlier falling as low as $105.45. U.S. crude fell $3.42 to $83.46 after sliding to its lowest intraday level since November at $82.52 a barrel in early trade.

"In the tumultuous aftermath of the U.S. downgrade from S&P, the world also is downgrading the oil market," said Phil Flynn, analyst at PFGBest Research in Chicago.

Goldman Sachs said on Monday it maintained overweight recommendation on commodities and oil relative to other assets, although it added that risk to its constructive commodity views had risen.

ECB buying steadies Europe, U.S. downgrade weighs

(Reuters) - Italy and Spain's borrowing costs fell on Monday as reports filtered in that the European Central Bank was buying their bonds, lifting European shares and partly overcoming jitters about a rating downgrade for U.S. debt.

Five-year yields in Italy and Spain fell more than 80 basis points. Spreads with German debt narrowed and the cost of insuring against default dropped.

Gold nonetheless soared to a new record above $1,700 an ounce on safe-haven buying and the dollar weakened against a basket of major currencies.

Investors were digesting a weekend of talks between industrialized countries aimed at ensuring the smooth functioning of financial markets following agency S&P's cut in its U.S. rating late on Friday to AA-plus from AAA.

Focusing on the euro zone crisis, the ECB agreed to intervene in the Italian and Spanish debt markets to reduce borrowing costs that are close to prohibitive.

"The downgrade to the U.S. is not great. These markets are going to remain unsettled for a while, we had recommended investors to raise cash in anticipation of this volatility," said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin.

"If the ECB is going to provide some support to the bond markets that could create some sort of relief, buying opportunities could emerge in the sold off cyclical areas, but we are looking for more stability first."

MSCI's all-country world index was down slightly, recovering as Europe gained. Last week's heavy bout of risk aversion chopped around $2.5 trillion off the value of the index.

Emerging market stocks were still being hit, losing around 2 percent on Monday.

European shares, as measured by the FTSEUrofirst 300 index shrugged off opening losses and moved into positive territory, rising a quarter of a percent as news filtered in that the ECB was buying Italian and Spanish bonds.

EASING PAIN

The ECB moves followed criticism last week that the bank had not addressed pressure on Spain and Italy when they bought Portuguese and Irish debt last week.

Traders said Monday's buying was focused on the 5-year sector of the curve, where Italian yields dropped to around 4.6 percent, while the Spanish equivalent was around 4.5 percent.

"They're doing 20 to 25 million (euro) clips and they're spreading it around the market," said a trader. "We expect them to do billions today."

The euro rose against the dollar and trimmed losses against other currencies.

The U.S. currency fell across the board after the S&P downgrade, struggling around record lows against the Swiss franc and the yen.

But the euro's gains were limited, and some analysts expected it would struggle to gain significantly, as bond purchases, while adding temporary liquidity to stressed bond markets, would do little to improve the fiscal problems in the region.

"(ECB bond buying) will have a short term effect. It won't have any lasting positive impact on the euro," said Richard Falkenhall, currency strategist at SEB in Stockholm.

"Even if the ECB buys Italian bonds, private investors will just sell and off-load their Italian risk ... The ECB will have to buy those bonds constantly just to keep yields stable," he said.

G7 gives first sign ready to battle crisis

(Reuters) - Political and financial leaders gave their first sign of readiness to battle a debt crisis gone global when the European Central Bank signaled on Sunday it would start buying Italian and Spanish debt, a critical move to quell a bond rout that has rocked financial markets.

The European Central Bank decision would be aimed at calming markets grown increasingly doubtful about Europe's ability to deal with its debt issues, a strikingly parallel concern to that which led ratings agency Standard & Poor's to knock U.S. debt down from "risk free" AAA status to AA-plus.

Meanwhile, finance chiefs from Group of Seven industrial nations were to confer by telephone late on Sunday-- and possibly issue a statement afterward -- to try to soothe anxious investors after a week in which $2.5 trillion of market value was wiped out.

Any statement would be timed to precede the opening of trading in Tokyo, the first major market to open on Monday, at 9 a.m. local time (0000 GMT/8:00 p.m. EDT Sunday).

ECB President Jean-Claude Trichet said in a statement after discussions with his Governing Council on Sunday that the central bank welcomes new steps taken by Italy and Spain on fiscal and structural reforms, and hence it would "actively implement" its bond-buying program. A monetary source said this means it is ready to start buying up the debt of these two countries.

"The Euro system will intervene very significantly on markets and respond in a significant and cohesive way," the source said.

Political leaders are under searing pressure to reassure investors that Western governments have both the will and ability to reduce their huge and growing public debt loads.

ECB President Jean-Claude Trichet wanted the policy-setting Governing Council to take a final decision on buying Italian paper after Prime Minister Silvio Berlusconi announced new measures on Friday to speed up deficit reduction and hasten economic reforms, one ECB source said.

LOOKING FOR A BOUNCE

Buying Italian bonds would likely prompt a sizable relief rally on global markets.

On Sunday afternoon, German Chancellor Angela Merkel and French President Nichola Sarkozy weighed in with a joint statement praising both Italy and Spain for their pledges to impose budget austerity.

They stressed that "complete and speedy implementation of the announced measures is key to restor(ing) market confidence."

The back-and-forth between Standard & Poor's and the Obama administration over whether the downgrade of Washington's rating was justified continued on U.S. Sunday-morning talk shows where a senior official from the ratings agency said its concerns about political impasse in Washington were valid.

John Chambers, an S&P managing director, said on ABC's "This Week" that years may be needed to regain AAA status and even them "it would take, I think, more ability to reach consensus in Washington than what we're observing now."

White House economic adviser Gene Sperling blasted the S&P ruling on Saturday night, saying it "smacked of an institution starting with a conclusion and shaping any arguments to fit it."

U.S. Treasury Secretary Timothy Geithner, who had indicated he might leave the administration once an increase in the debt ceiling was agreed, announced on Sunday that he was not doing so and would stay on.

That relieves President Barack Obama of the difficult prospect of finding a replacement who could win Senate confirmation in Washington's bitterly partisan atmosphere.

Treasury says that S&P's debt calculations were off by $2 trillion but the agency said that did not change the fact that the United States' longer-term debt prospects were worsening.

Twin debt crises in the United States and Europe had policy makers scrambling to keep financial markets from panic.

The ECB reactivated its sovereign bond-buying program on Thursday but purchased only small quantities of Irish and Portuguese bonds, seeking tougher austerity measures from Italy. That did nothing to stem market attacks on Italian assets.

Berlusconi's plans entail moving up a balancing of the budget by one year to 2013, enshrining a balanced budget rule in the constitution and pushing through welfare and labor market reforms after talks with trade unions and employers.

He gave little detail about how that would be achieved and the measures will take some time to enact.

G-20, G-7 CRISIS CONTACTS

South Korea said finance deputies from the Group of 20 big economies addressed the European crisis and U.S. sovereign rating downgrade in an emergency conference call on Sunday morning Asian time.

French President Nicolas Sarkozy, who chairs the G7 and G20 forums this year, conferred with Britain's Prime Minister David Cameron on Saturday.

"Both agreed the importance of working together, monitoring the situation closely and keeping in contact over the coming days," a spokesman for Cameron said.

Over time, S&P's move could ripple through markets by pushing up borrowing costs and making it more difficult to secure a lasting recovery.

S&P chief David Beers told "Fox News Sunday" that the Treasury Department's criticism of the credit rating agency's analysis was a "complete misrepresentation." Even with the debt limit agreement passed by the U.S. Congress, he said, "the underlying debt burden of the U.S. is rising and will continue to rise over the next decade."

Asked about prospects for a further lowering of the U.S. rating, Beers said the agency's negative outlook meant that "risks are on the downside."

ALARM IN GERMAN, FRENCH MEDIA

Newspapers in Germany, the euro zone's reluctant bankroller, were both incredulous and gloomy on Sunday about the financial upheaval.

Welt am Sonntag dedicated an entire section to global economic uncertainties, entitled "Der Crash" and wrote: "No one could have foreseen this dramatic crash and now the situation can only be endured with gallows humor."

French newspapers carried grim headlines with Le Journal du Dimanche trumpeting "The world on the edge of collapse" with a sub-headline saying: "The week starting should be crucial. Markets from now on are living in fear of a crash."

Washington's Asian allies rallied round the battered superpower, with Japan and South Korea both saying their trust in U.S. Treasuries remained unshaken and urging investors not to panic.

"I expressed our country's position on the (G20 conference) call that there will be no sudden change in our reserve management policy," South Korean Deputy Finance Minister Choi Jong-ku told Reuters by telephone, referring to Seoul's heavy ownership of U.S. bonds.

"There's no alternative that provides such stability and liquidity," added Choi.

SPLITS IN ECB

In some quarters including in the German government, there are doubts that Italy can be rescued by the European emergency fund, even if the fund were tripled in size, according to newsmagazine Der Spiegel.

Italy's financial needs are so huge that it would overwhelm resources, according to government experts, Der Spiegel said in its online edition. Italy's public debt is about 1.8 trillion euros, or 120 percent of its national output.

Germany has consistently said troubled euro-zone governments should focus on spending cuts and internal reforms, not bailouts. The European Financial Stability Fund currently has 440 billion euros ($632.5 billion) and would need to be expanded to cater for the likes of Italy and Spain.

China, the largest foreign holder of U.S. debt, took the world's economic superpower to task for allowing its fiscal house to get into such disarray.

On Sunday, a commentary in the People's Daily, the main newspaper of the ruling Communist Party, said Asian exporters, who depend on demand from the United States, could be among the biggest victims of the mounting U.S. economic woes.

"The lowering of the United States' long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the U.S. dollar," said economist Sun Lijian, writing in the paper.

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ECB to intervene decisively on markets: source

(Reuters) - The Euro system of central banks has decided to intervene decisively on markets to respond to the escalating debt crisis, a euro zone monetary source said after a European Central Bank conference call on Sunday.

Officials on the conference call carefully considered the situation in Italy and Spain, and took note of a statement by France and Germany which stressed their commitment to European financial reforms, the source said.

"The Euro system will intervene very significantly on markets and respond in a significant and cohesive way," the euro zone monetary source said, adding a statement by the ECB will be issued shortly.

Dollar to drop on S&P, flows seen to safe assets

(Reuters) - The U.S. dollar is likely to take a further beating against the Swiss franc and Japanese yen on Monday, while global stocks could tumble after the United States lost its top-tier credit rating from Standard & Poor's.

Losses against the euro, however, could be tempered by the euro zone's escalating debt crisis as officials there discuss ways to reduce borrowing costs for large euro zone economies Spain and Italy.

The dollar's fall against the safe-haven Swiss franc and yen could be limited by possible intervention by the Bank of Japan and Swiss National Bank to stem their surging currencies.

Stocks in Tel Aviv, one of the first global equity markets to open since the downgrade, dropped over 6 percent on Sunday in response to S&P's action late on Friday to cut the U.S. long-term credit rating by a notch to "AA-plus" from "AAA."

The move by S&P drew criticism from some of the world's largest investors.

"Obviously, we're going to get freaked out a little bit and the dollar will get hit, but it's only going to be for a couple of days," said John Taylor, chairman and chief executive officer of FX Concepts, the world's largest currency hedge fund.

Over the past month, the dollar shed 6 percent against the Swiss franc and about 4 percent against the yen.

"This downgrade is not that important and if you ask me, too silly. The U.S. is in a much better position than any, I repeat, any European country," Taylor added.

It was not yet clear whether European policymakers would be able to come up with measures to allay concerns about their own region's fiscal crisis, though all the signs were that they were keenly aware of the importance of reassuring markets.

Sources said the European Central Bank will hold a conference call at 1700 GMT to decide whether to buy Italian government bonds in the secondary market.

One ECB source said that if the ECB council opted to intervene on Italy, the ECB and national central banks would start buying Italian bonds when markets open on Monday.

The ECB last week resumed its purchases of government bonds in the secondary market after an 18-week hiatus, but its decision to restrict such purchases to Irish and Portuguese bonds led to sharp declines in Italian and Spanish bond prices, and borrowing costs soared to 14-year highs.

"There is no reason why the ECB cannot simply go ahead and imply that they are going to support the Italians and the Spanish," said Mike Lenhoff, chief strategist at Brewin Dolphin in London. "It is better that they don't say anything, but go in and show there is another side to the market."

Any ECB buying would offer relief to beaten-down Italian and Spanish bonds, although the extent of any rally in these bonds will depend on the size and persistence of the bank's bond purchases.

U.S. RECESSION FEARS

Worries of another U.S. recession and concern about the euro zone crisis have sparked a global stock market slump that wiped $2.5 trillion off companies' values in the past week.

The fall in global share prices, as measured by the MSCI All-Country World Index, was the biggest weekly decline since early October 2008, according to Thomson Reuters Datastream.

Consumer discretionary shares of firms dependent on external demand are likely to be singled out for more punishment.

Still, some investors believed the expected sell-off in stocks on the U.S. credit downgrade had been largely priced in and may not last long. Some expressed doubts about the S&P decision as they are well aware of questions on the S&P's calculations of the projected U.S. fiscal deficits.

"The U.S. track record -- over the past 200 years -- on its ability and willingness to fully service its debt is impeccable and the debt statistics should be interpreted not in isolation but in conjunction with the flawless track record of the U.S.," said Stephen Jen, managing director of SLJ Macro Partners in London, a global macro hedge fund.

"This will have no lasting effects on financial asset prices," he added.

U.S. Treasury debt yields are also expected to rise on Monday. Yields on benchmark U.S. 10-year Treasury notes rebounded to 2.56 percent on Friday, but were not very far from a record low of near 2 percent hit during the throes of the 2007-09 global financial crisis.

The sharp swings in financial markets have piled pressure on policymakers.

Finance ministers from the Group of Seven most developed economies are on Monday to discuss the U.S. sovereign rating downgrade and Europe's debt woes, Japanese news agency Kyodo reported on Sunday.

"Be wary (Monday) of irrational depression as markets take flight," said Justin Urquhart Stewart, a director at Seven Investment Management in London. "We are dealing with the knowns and not the unknowns, but what we have a shortage of at the moment is political leadership."

Goldman Sachs strategists said there was a one-in-three probability of a U.S. recession due to the worsening European crisis, the possible failure to extend payroll tax cuts and elevated levels of joblessness, despite a slight dip in the U.S. unemployment rate in July.

That would bode ill for the benchmark MSCI all-country index, which last week hit its lowest since September 2010 and has accumulated losses of more than 12 percent since late July.

"Market sentiment appears acutely vulnerable given the build-up of concern on a sharper U.S. slowdown and speculation on the appropriate policy response and lingering fears stemming from the sovereign debt crisis in Europe," Citigroup strategists said in a note.

ECB eyes decision on Italy bond buys to ease debt

(Reuters) - The European Central Bank will decide later on Sunday whether to buy Italian bonds to try and prevent the euro zone debt crisis from widening, while global policymakers conferred on the twin financial crises in Europe and the United States.

After a week that saw $2.5 trillion wiped off world stock markets, political leaders are under searing pressure to reassure investors that Western governments have both the will and ability to reduce their huge and growing public debt loads.

ECB President Jean-Claude Trichet wants the policy-setting Governing Council to take a final decision on buying Italian paper after Prime Minister Silvio Berlusconi announced new measures on Friday to speed up deficit reduction and hasten economic reforms, one ECB source said.

The source said that if the ECB council opted to intervene on Italy at a crucial conference call starting at 1700 GMT (1 p.m. EDT), the ECB and national central banks would start buying Italian bonds when markets open on Monday.

That would likely prompt a sizeable relief rally on global markets. If it does not act, the reverse would be true.

Another source said the council would look too at possible emergency liquidity measures to prevent money markets freezing. The fourth anniversary of the global credit crunch which ushered in the financial crisis looms this week.

A third ECB source said the teleconference had been put back into the evening to see what measures the United States was ready to take to calm markets after credit ratings agency Standard & Poor's downgraded Washington's AAA rating to AA+.

The ECB reactivated its sovereign bond-buying program last Thursday but purchased only small quantities of Irish and Portuguese bonds, seeking tougher austerity measures from Italy. That did nothing to stem market attacks on Italian assets.

Berlusconi's plans entail moving up a balancing of the budget by one year to 2013, enshrining a balanced budget rule in the constitution and pushing through welfare and labor market reforms after talks with trade unions and employers.

He gave little detail about how that would be achieved and the measures will take some time to enact.

The debt crises on either side of the Atlantic, with the latest shock coming from Friday's U.S. downgrade, are whipping up market turmoil and stoking fears of the affluent world sliding back into recession.

Markets in the Gulf region and in Israel, among the first to trade since the U.S. credit downgrading, tumbled on Sunday on worries the U.S. ratings downgrade and European debt woes may trigger another global downturn.

G-20, G-7 CRISIS CONTACTS

South Korea said finance deputies from the Group of 20 big economies addressed the European crisis and U.S. sovereign rating downgrade in an emergency conference call on Sunday morning Asian time.

A Japanese government source said finance leaders from the Group of Seven big developed economies would also discuss the crisis and might issue a statement afterwards. The timing of a planned conference call was unclear, but was likely to be held before Asian markets reopen on Monday.

French President Nicolas Sarkozy, who chairs the G7 and G20 forums this year, conferred with Britain's Prime Minister David Cameron on Saturday.

"Both agreed the importance of working together, monitoring the situation closely and keeping in contact over the coming days," a spokesman for Cameron said.

A White House economic adviser castigated ratings agency Standard and Poor's for cutting the U.S. credit rating to AA-plus from AAA. The U.S. Treasury said the rating agency's debt calculations were wrong by some $2 trillion.

Over time, S&P's move could ripple through markets by pushing up borrowing costs and making it more difficult to secure a lasting recovery.

S&P chief David Beers told "Fox News Sunday" that the Treasury Department's criticism of the credit rating agency's analysis was a "complete misrepresentation." Even with the debt limit agreement passed by the U.S. Congress, he said, "the underlying debt burden of the U.S. is rising and will continue to rise over the next decade."

Asked about prospects for a further lowering of the U.S. rating, Beers said the agency's negative outlook meant that "risks are on the downside."

ALARM IN GERMAN, FRENCH MEDIA

Newspapers in Germany, the euro zone's reluctant bankroller, were both incredulous and gloomy on Sunday about the financial upheaval.

Welt am Sonntag dedicated an entire section to global economic uncertainties, entitled "Der Crash" and wrote: "No one could have foreseen this dramatic crash and now the situation can only be endured with gallows humor."

Der Spiegel magazine's front page featured euro and dollar banknotes going up in flames, with the headline "U.S. indebtedness, euro crisis, stock market chaos: Is the world going bankrupt?"

French newspapers carried grim headlines with Le Journal du Dimanche trumpeting "The world on the edge of collapse" with a sub-headline saying: "The week starting should be crucial. Markets from now on are living in fear of a crash."

Washington's Asian allies rallied round the battered superpower, with Japan and South Korea both saying their trust in U.S. Treasuries remained unshaken and urging investors not to panic.

"I expressed our country's position on the (G20 conference) call that there will be no sudden change in our reserve management policy," South Korean Deputy Finance Minister Choi Jong-ku told Reuters by telephone, referring to Seoul's heavy ownership of U.S. bonds.

"There's no alternative that provides such stability and liquidity," added Choi.

The most immediate concern for financial markets was the debt crunch in the euro zone, where yields on Italian and Spanish debt have leaped to 14-year highs on political wrangling and doubts over the vigor of budget cuts.

"The ECB has got to confront the speculators who are out to test the policymakers," said Mike Lenhoff, chief strategist at Brewin Dolphin in London. "(The U.S. downgrade) might cause some upheaval temporarily. The big issue is the euro zone and its implications for the banking system."

SPLITS IN ECB

The ECB remains divided over whether to buy bonds at all, with four German, Dutch and Luxembourg members of the 23-member council opposed, ECB sources said. Even some of those in favor say Italy should do more to front-load its reforms.

The danger is that further pressure on Italian and Spanish bonds could further undermine a damaged European banking system and lock Italy, the world's No. 8 economy, out of the market.

Indeed, doubts are growing in the German government that Italy could be rescued by the European emergency fund, even if the fund were tripled in size, according to Der Spiegel.

Italy's financial needs are so huge that it would overwhelm resources, according to government experts, Der Spiegel said in its online edition. Italy's public debt is about 1.8 trillion euros, or 120 percent of its national output.

Germany has consistently said troubled euro-zone governments should focus on spending cuts and internal reforms, not bailouts. The European Financial Stability Fund currently has 440 billion euros and would need to be expanded to cater for the likes of Italy and Spain.

China, the largest foreign holder of U.S. debt, took the world's economic superpower to task for allowing its fiscal house to get into such disarray.

On Sunday, a commentary in the People's Daily, the main newspaper of the ruling Communist Party, said Asian exporters, who depend on demand from the United States, could be among the biggest victims of the mounting U.S. economic woes.

"The lowering of the United States' long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the U.S. dollar," said economist Sun Lijian, writing in the paper.