Obama May Put Renewable-Energy Plan Ahead of Climate Package

By Daniel Whitten

Nov. 5 (Bloomberg) -- President-elect Barack Obama may pursue legislation early next year to speed a transition to an economy fueled by renewable energy sources and delay a fight on climate change until the economy improves.

With unemployment at a five-year high, an early effort to create jobs by encouraging electricity production from solar and wind will get top priority, energy lobbyists and analysts said. A more far-reaching effort on a climate-change bill may be delayed until late next year or 2010.

``He will put forward an energy bill ahead of a climate bill,'' said Kateri Callahan, president of the Alliance to Save Energy, an energy advocacy group in Washington that represents 3M Co., Areva SA and Dow Chemical Co. ``That bill will stimulate the economy toward development and use of energy efficiency and clean energy sources and technology.''

Obama's advisers won't say which initiative he will push first. He has proposed a $175 billion economic-stimulus package and plans to revamp the energy economy as part of a separate climate bill, campaign adviser Jason Furman said in an interview.

Obama calls the green-jobs and climate plan a ``mid- to long-term solution'' on his campaign Web site. He plans $150 billion in investment over 10 years to create 5 million jobs in the auto and clean-energy industries.

Oil Drilling

Obama may block oil and natural-gas drilling in new offshore areas. He said Aug. 1 he would compromise on offshore drilling if it was necessary to win approval for alternative- energy investments and more fuel-efficient cars.

``That was total lip service,'' said Kevin Book, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia. ``If Congress doesn't block drilling in its appropriations work in March, Obama is very likely to re-withdraw the areas that Bush put back in bounds.''

Jack Gerard, president of the American Petroleum Institute in Washington, said Obama's plan to impose a windfall-profits tax on oil companies would harm one of the few industries that are thriving.

``We certainly hope public officials wouldn't look at this and say, `Gee, let's see what damage we can do to the one bright spot,''' Gerard told reporters Oct. 20 at an industry meeting in Scottsdale, Arizona.

Funding for Obama's windfall-profits tax may have dried up. The plan is to impose the tax when crude prices exceed $80 a barrel. Obama campaign adviser Jason Furman said Oct. 22 that he's now assuming zero revenue from that tax because oil tumbled from a record above $147 a barrel in July to less than $70 last month.

Fuel-Efficient Cars

Obama wants the ailing auto sector to make plug-in hybrid cars and more models that run on ethanol. He proposes a tougher fuel-economy mandate. He plans $4 billion in tax help to retool factories to make advanced cars on top of $25 billion in loans that have been enacted for that purpose. Consumers would get a $7,000 tax credit for purchases of advanced cars.

Obama has ``found a formula that he's been pitching to the American people that I think would get a lot of traction in Congress, which is to get unemployed manual labor allocated to installing solar panels,'' said Friedman Billings analyst Book.

The transition to a low-carbon economy will yield many opportunities to create jobs, said Senator Jeff Bingaman, a New Mexico Democrat who chairs the Senate energy committee.

Bingaman said in an interview he didn't know the order in which Obama would pursue his energy priorities. He said he would develop bipartisan energy legislation early next year and has advocated for longer tax credits for renewable energy and mandates for renewable electricity production, as Obama has.

2025 Goal

Renewables, including hydropower, account for 8 percent of U.S. electricity. Obama has said he wants 10 percent of electricity to come from renewable sources by 2012 and 25 percent by 2025.

A measure to expand use of green power and plug-in hybrid cars could ease the transition to a climate bill, Callahan said. A climate bill will be a ``massive piece of legislation with such far-reaching impacts'' and Obama understands the ``need to take some time with it,'' Callahan said.

As proposed, Obama's climate plan would cut emissions of so-called greenhouse gases linked to global warming by 80 percent by 2050. Emissions credits would be sold in an auction under a cap-and-trade program, not doled out to utilities and others for free. Companies that exceed caps must buy credits on top of those obtained at auction, in Obama's cap-and-trade plan.

``Barack Obama could well put off a costly and regressive surcharge until later in 2009 or 2010, leaving Congress to shoulder the burden,'' Book said. ``On the day that he is elected, cap and trade will fall to No. 10 on his list of top 10 priorities and won't come back until the economy does.''

Higher Costs

Power from renewable energy and cleaner coal-fueled plants is more costly than current U.S. generation sources, said Michael Morris, chief executive officer at American Electric Power Corp., the nation's biggest producer of electricity from coal.

``I do think there are a few things there that a president Obama doesn't have right,'' Morris said in a telephone interview. He objected to Obama's plan to auction all credits and said any climate plan must incorporate a stronger commitment to nuclear power than the president-elect elect has made.

Morris gave Obama high marks for pushing the creation of jobs through expansion of the renewable energy industry, pointing to the proposal to string high-voltage lines to population centers like Chicago from areas high in wind-power potential like the Dakotas.

``He's a big believer in green energy and the jobs that might be created by alternate energy forms, wind and solar,'' Morris said. ``We think that's a good thing.''

To contact the reporter on this story: Daniel Whitten in Washington at dwhitten2@bloomberg.net

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Astmax Commodity Fund Favors Short Bets, Sharpens Oil Focus

By Tomoko Yamazaki, Komaki Ito and Shigeru Sato

Nov. 5 (Bloomberg) -- Astmax Commodity Global Macro Fund, run by former Sumitomo Corp. copper trader Tetsu Emori, will sharpen its focus on oil after making a 12 percent return since May by selling grain, fuel and metals futures in falling markets.

The 1.4 billion yen ($14 million) fund, which takes long and short positions in global commodity markets ranging from corn and coffee to aluminum and oil, rose every month since inception on May 12 through October, according to Emori. It rose 2.6 percent last month, beating an estimated 2.6 percent drop by the Eurekahedge Hedge Fund Index.

``We take a fundamental approach, rather than depend on computerized models,'' Emori, 42, who's studied commodity markets for 19 years, said in an interview in Tokyo yesterday. ``We literally take positions to cut losses and take profits on a daily basis.''

The Cayman Islands-based hedge fund's strategy in November will hinge on oil prices and their affect on the production costs of other commodities. Prices of commodities dropped 34 percent during the past six months, as measured by the Reuters- Jefferies CRB Index, and may keep falling as the global economy falters.

Crude oil futures in New York lost half of their value since reaching a record $147.27 a barrel on July 11 amid concerns that the slowing global economy will cut demand. Oil traded at $69.77 a barrel at 9:27 a.m. in Tokyo.

``Those sorts of moves make it very difficult to read the price direction,'' Emori said.

Chakib Khelil, the president of the Organization of Petroleum Exporting Countries, on Oct. 23 cited speculators exiting from the market as a reason for the price drop.

Commodity Exchanges

Astmax's six-month gain is double that of the 6 percent increase by the Eurekahedge index measuring managers who trade futures, known as commodity trading advisers, or CTAs.

The fund invests in about 30 commodities globally via contracts on exchanges such as the New York Mercantile Exchange and Chicago Board of Trade. It doesn't invest via the over-the- counter market because this would add the risk of dealing with individual companies which could collapse, Emori said.

It aims to raise assets under management to 10 billion yen over the next year by attracting more institutional and high net-worth individuals.

Falling commodity prices provide opportunities for hedge funds such as Astmax that can short, or borrow a security aiming to profit by repurchasing it later at a lower price and returning it to the holder, pocketing the difference.

The $2 billion Merchant Commodity Fund in Singapore, run by former Cargill Inc. traders, gained 12 percent in September as energy and agricultural prices slumped, two people with knowledge of its performance said.

Biggest Risk

The biggest risk for Astmax is if markets move a little, Emori said. He added that price moves unrelated to fundamental factors such as supply and demand, as seen in oil markets recently, make it more difficult for his strategy to work.

Emori was most recently at a unit of Mitsui & Co., working as a commodity strategist before joining Astmax in 2007. Prior to that, he worked for Sumitomo, Japan's third-biggest trading house, for seven years as a copper trader.

At Sumitomo, Emori worked under Yasuo Hamanaka, who was dubbed ``Mr. Copper'' and ``Mr. Five Percent'' because he once bought as much as 5 percent of all the copper traded in the world each year. Hamanaka later served seven years in prison for hiding $2.6 billion in copper trading losses.

Hedge funds, a $1.8 trillion industry, are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net; Shigeru Sato in Tokyo at ssato10@bloomberg.net

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Obama May Bring New Market for Gas Producers Chesapeake, XTO

By Dan Lonkevich

Nov. 5 (Bloomberg) -- Oklahoma oilman Aubrey McClendon figures president-elect Barack Obama, who favors a windfall- profits tax on petroleum producers and resists allowing new drilling on federal lands, will help his business.

Like other energy companies focused on onshore gas wells in the U.S., McClendon's Chesapeake Energy Corp. stands to benefit should Obama and a Democrat-led Congress push for use of compressed natural gas in automobiles.

``The Democrats have been very engaged about compressed natural gas in the last few months,'' McClendon, chief executive officer at Oklahoma City-based Chesapeake, said in an Oct. 28 telephone interview. ``A Democratic administration is more likely to pursue the use of CNG as a fuel.''

McClendon cited a bill that Democrats Rahm Emanuel of Illinois and Dan Boren of Oklahoma introduced in the U.S. House in July. The measure called for incentives to install CNG pumps at filling stations, build CNG-powered cars and induce Americans to buy them, fostering a new market for a fuel now used mostly for heating, power generation and the making of plastics and fertilizer.

Chesapeake is among the largest onshore gas producers in the U.S. Other major independent producers, those that don't also own refineries or chemicals plants, include Devon Energy Corp., XTO Energy Inc., Anadarko Petroleum Corp., EOG Resources Inc., Southwestern Energy Co. and Ultra Petroleum Corp.

Bill to Resurface

Boren said the bill will be reintroduced in January. The goal is to have 10 percent of vehicles in the U.S. converted to CNG by 2015, he said. ``I agree that an Obama victory would make it easier to pass this legislation,'' Boren said in an Oct. 30 telephone interview.

Natural-gas-fueled vehicles displaced about 250 million gallons of gasoline use in the U.S. last year, according to NGVAmerica, which represents companies lobbying for use of CNG as a motor fuel. That's equivalent to about 0.2 percent of U.S. gasoline demand. The industry's goal is to surpass 10 billion gallons by 2020, according to the Washington-based trade group.

Obama plans $150 billion in spending over 10 years to accelerate development of alternative energy sources and plug-in hybrid cars. Such investment will help create ``the fuel- efficient cars of the future,'' he said in an Oct. 28 campaign speech in Chester, Pennsylvania.

Republican candidate John McCain also called for investment in alternative energy sources, along with more drilling for fossil fuels to help reduce reliance on foreign oil.

`Equally Concerned'

Billionaire oilman Boone Pickens met with both candidates in August to discuss his proposals for reducing petroleum imports and said Obama and McCain were ``equally concerned about the problem.''

Pickens is the largest shareholder in Seal Beach, California-based Clean Energy Fuels Corp., a supplier of gas for buses and other vehicles.

``Either way, there's going to be more support for natural gas as a fuel for cars,'' said Richard Kolodziej, president of NGVAmerica.

Any benefits to gas producers from the political push to increase use of CNG will take years to materialize, said Michael Kahn, who helps manage $1.3 billion, including Chesapeake shares, at A.R. Schmeidler & Co. in New York. The companies also produce at least some oil, which could become subject to a proposed windfall-profits tax that would kick in when crude rises above $80 a barrel.

Tax Burden

``I'm concerned about Obama's support of a windfall-profits tax on oil companies because it will hurt the same domestic companies this bill is depending on,'' said Boren, the lawmaker from Oklahoma. ``It's a non-starter for me.''

Chesapeake's McClendon has promoted gas as an alternative to oil that's cheaper than crude and more plentiful in the U.S. Other gas producers have been reluctant to push for legislation to spur use of the fuel in automobiles, a situation that may change if prices drop, McClendon said.

``An extended period of $5 to $6 natural gas may change some minds,'' he said.

Gas futures in New York rose above $13 per million British thermal units in July, the highest since December 2005. The futures tumbled below $7 last month.

To contact the reporter on this story: Dan Lonkevich in New York at dlonkevich@bloomberg.net.

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Asian Interest-Rate Swaps Signal More Rate Cuts Are Coming

By Patricia Lui

Nov. 5 (Bloomberg) -- Asian central banks will lower borrowing costs further to cushion the region's economies from the global slump, trading in interest-rate swaps shows.

South Korea, Indonesia and Thailand reported slower inflation this week, and economists predict the Philippines and Taiwan to follow suit today. Central banks in Australia, China, Hong Kong, India, Japan, South Korea, Taiwan and Vietnam all announced rate cuts since the start of last week. Bank of Korea and Bank Indonesia will announce monetary policy reviews in the next two days.

``Governments will continue to prioritize growth over inflation,'' said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment banking unit of France's Credit Agricole SA. ``Swaps are already starting to price in some of the rate cuts with more to come.''

Asian stocks and currencies plunged in October on concern a global lending squeeze was tipping the world into recession, prompting investors to seek safer bets than assets in export- reliant developing economies. The MSCI Emerging Markets Index of stocks and the Bloomberg-JPMorgan Asia Dollar Index, which tracks the region's 10 most-active currencies excluding the yen, both posted their biggest monthly drops in a decade.

South Korea's one-year interest-rate swap will decline to 3.4 percent by the end of March when the central bank's benchmark rate is likely to have fallen to 3 percent, according to James Lee, an economist with JPMorgan Chase & Co. in Seoul.

Swaps Decline

The swap rate fell to 4.66 percent yesterday, the lowest since December 2006, and the Bank of Korea last week lowered its seven-day repo rate by a record 75 basis points to 4.25 percent at an emergency board meeting. A basis point is 0.01 percentage point.

In an interest-rate swap, two parties agree to exchange fixed payments for variable-rate payments over a set period. Typically, one agrees to pay a fixed rate, while the other pays a rate that fluctuates with a benchmark index or formula defined in the contract.

``The swap market is pricing in expectations about rate cuts and government measures to funnel funds into financial systems,'' JPMorgan's Lee said. ``A thawing in money markets is causing a rally in short-end rates, leaving the door open to further declines in the swap rates.''

The Bank of Korea's monetary board next meets in two days time to review rates and economists surveyed by Bloomberg predict a further 25 basis point reduction in the benchmark rate.

Rate Cuts

``Certainly, the bias is for Asian central banks to cut policy rates to boost their economies,'' said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore.

Six months ago, Asian central bankers were jacking up benchmark borrowing costs as inflation accelerated on surging costs for oil, food and commodities. That changed as the U.S. credit crunch snowballed into a global financial crisis, curbing lending and causing raw-materials prices to tumble.

South Korea's October inflation of 4.8 percent was the slowest in six months. Indonesia's consumer prices increased 11.8 percent from a year earlier, the smallest gain in four months.

``The data will provide room for Bank Indonesia to cut rates this Thursday,'' said Joanna Tan, an economist at Forecast Singapore Pte Ltd. ``We are looking for a 25 basis point cut, if not this Thursday, then definitely at the next meeting. It's hard for Bank Indonesia to ignore the plethora of global interest-rate cuts.''

Indonesia, Thailand

The central bank raised its key interest rate by 150 basis points since May to 9.5 percent to curb inflation, most recently adding a quarter of a percentage point on Oct. 7. Policy makers, who will again review policy tomorrow, may lower the benchmark rate to 8.5 percent over the next six months, Tan forecast.

Indonesia's one-year interest-rate swap was 11.63 percent late yesterday, having reached a two-year high of 12 percent on Oct. 29. The rate stood at just 6.5 percent at the start of the year when the benchmark policy rate was 8 percent.

Thailand's one-year swap rate was 3.39 percent late yesterday, down from 4.75 percent at the end of June, the highest close of the year. The government reported an inflation rate of 3.9 percent for October, the lowest this year.

``Thailand's inflation particularly signals interest-rate cuts ahead,'' Calyon's Barbe said.

The Bank of Thailand ``has room'' to ease monetary policy, Governor Tarisa Watanagase said on Oct. 24. The Thai central bank left its one-day bond repurchase rate at a 16-month high of 3.75 percent at its last policy meeting on Oct. 8, after announcing quarter-point increases at the two previous reviews in July and August.

Philippines, Taiwan

The Philippines and Taiwan may today also report that consumer prices increases are moderating.

Philippine inflation slowed to a four-month low of 11.4 percent in October, according to economists surveyed by Bloomberg ahead of a government announcement at 9 a.m. in Manila. The consumer price index in Taiwan rose 1.3 percent from a year earlier, the smallest gain in more than a year, a separate survey showed. The report is due at 4 p.m. in Taipei.

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net

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Australia, N.Z. Dollars Reach 2-Week Highs on Stocks, Materials

By Candice Zachariahs

Nov. 5 (Bloomberg) -- The Australian and New Zealand dollars advanced to two-week highs as U.S. equities posted their biggest Election Day rally in 24 years, prompting investors to buy higher-yielding assets.

The currencies also rose as prices increased for commodities the two nations export. The Australian dollar dropped yesterday after the central bank cut interest rates to 5.25 percent, reducing appetite for so-called carry trades where low-cost funds are invested in assets generating higher returns.

``Quite clearly the key determinant is stocks,'' said Craig Ferguson, a currency hedge fund manager at Antipodean Capital Management in Melbourne. ``The odds are that stocks may extend their gains and then pause over the next couple of days and that would limit the Aussie and the kiwi upside,'' he said, referring to the currencies by their nicknames.

Australia's currency rose 1.1 percent to 68.94 U.S. cents as of 4:39 p.m. in Sydney from 68.17 cents late in Asia yesterday. The currency earlier touched 70.14 cents, the highest since Oct. 21. The currency advanced as much as 4.2 percent to 70.52 yen, also the most since Oct. 21, before trading at 68.52 yen.

New Zealand's dollar gained 1.1 percent to 60.39 U.S. cents from 59.75 in Asia yesterday. It rose as high as 61.29 cents, the strongest since Oct. 22. It bought 60.03 yen from 59.32.

The currencies pared gains on speculation Barack Obama's victory in the U.S. presidential election and Democrat gains in Congress will accelerate policies aimed at overcoming a recession in the world's biggest economy.

Stocks Advance

The South Pacific nations' currencies advanced as stocks rose on the Standard & Poor's 500 Index and the Dow Jones Industrial Average, led by energy and banking shares. Asian stocks gained as Obama was elected the 44th president of the U.S.

They also strengthened as the UBS Bloomberg Constant Maturity Commodity index of 26 raw materials rose by the most since Oct. 29 led by gold and crude oil, Australia's third- and fourth-most valuable commodity exports. Raw materials account for 60 percent of Australia's exports, and 70 percent of New Zealand's.

The Aussie ``has long forgotten the surprise 0.75 percentage point cut yesterday and the focus remained on increased risk appetite,'' wrote Toronto-based Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``Increased risk appetite benefited equities, commodities and carry trades.''

Benchmark interest rates are 0.3 percent in Japan and 1 percent in the U.S., attracting investors to the South Pacific nations' assets. The interest rate in New Zealand is 6.5 percent.

Economy Slowing

Australian Treasurer Wayne Swan said today the economy will grow at a slower 2 percent pace in the 12 months to June 30, 2009 from a May forecast for 2.75 percent, amid the global financial crisis. Separately, a government report showed that the nation's trade surplus unexpectedly widened in September as exports of coal and iron ore surged.

Australian government bonds fell. The yield on the benchmark 10-year note rose 7 basis points to 5.337 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 declined 0.558, or A$5.58 per A$1,000 face amount, to 99.308. A basis point equals 0.01 percentage point.

New Zealand's two-year swap rate, a fixed payment made to receive floating rates, fell to 6.07 percent today from 6.31 yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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Asian Currencies: Korean Won, Peso Lead Gains as Stocks Rally

By David Yong

Nov. 5 (Bloomberg) -- Asian currencies gained, led by South Korea's won, as a surge in global stocks helped revive demand for riskier investments, including emerging-market assets.

The won jumped 13 percent in the past week as policy makers signed a $30 billion swap deal with the U.S. and unveiled a stimulus plan to quash concerns that the region's fourth-largest economy may be headed for a repeat of the 1997 financial crisis. The Philippine peso and Malaysian ringgit advanced as Asian shares jumped for a third day, tracking a rally in U.S. equities on presidential election day.

``Sentiment is getting a boost from rising stocks,'' said Kim Yule, a currency dealer with BNP Paribas in Seoul. ``Demand and supply of dollars is key to movements and the market is watching how importers and foreign investors are behaving.''

Korea's won strengthened 2.2 percent to 1,260 against the dollar as of 12:09 p.m. local time, according to Seoul Money Brokerage Services Ltd. The peso climbed 0.7 percent to 48.085 and the ringgit gained 0.2 percent to 3.5220.

The Kospi stock index climbed 5.6 percent, helping drive a third day of gains in the MSCI Asia Pacific Index. Global investors bought more Korean shares than they sold today, ending two days of net sales, according to data published by Korea Exchange.

Investors yesterday demanded 5.64 percentage points more than U.S. Treasury yields to buy emerging-market sovereign debt, according to JPMorgan Chase & Co's EMBI+ Index. The risk premium fell for a seventh day to the lowest since Oct. 14.

U.S. Election

The euro fell against the dollar after European Central Bank member Juergen Stark said policy makers are ready to use interest-rate policy to bolster the region's shrinking economy.

The euro fell to $1.2939 from $1.2981 late yesterday in New York. It weakened to 129.07 yen from 129.47 yen. The dollar bought 99.78 yen from 99.70 yen.

All but one of the 10 most-traded currencies in Asia outside Japan gained after U.S. stocks posted their biggest election-day rally since 1984. Democratic presidential candidate Barack Obama led Republican rival John McCain 200 to 124 electoral votes, according to projected results compiled by Bloomberg News. To win, 270 votes are required.

The peso climbed for a third day as slower inflation encouraged manufacturers to maintain lower stockpiles, curbing demand for dollars to buy imported raw materials.

Consumer prices rose 11.2 percent from a year earlier in October, the smallest increase in five months, the government reported today.

``Manufacturers have less reason to build up their inventory because inflation is tapering off and so we're seeing easing demand for dollars,'' next year, said Ricky Cebrero, a treasurer at East West Banking Corp. in Manila. ``Remittances are also coming in and those who held off converting before may be starting to exchange their dollars.''

Stimulus Plan

The ringgit advanced after the government late yesterday announced a 7 billion ringgit ($2 billion) program to boost spending on public projects and put more money into consumer pockets by cutting workers' pension contributions.

``The government realized it can't do much about the export sector, so the market will view with optimism the measures to spur private consumption,'' said Nikhilesh Bhattacharyya, a Sydney-based economist at Moody's Economy.com.

Elsewhere, the Singapore dollar gained 0.4 percent to S$1.4723, Thailand's baht rose 0.1 percent to 34.89 against the U.S. currency and China's yuan was little changed at 6.8337. Taiwan's dollar climbed 0.4 percent to NT$32.725 and Indonesia's rupiah advanced 0.1 percent to 10,885.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.

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U.K. Car Sales Falling at Fastest Rate Since 1991, Times Says

By Andrew MacAskill

Nov. 5 (Bloomberg) -- U.K. car sales in October fell at the fastest rate in 17 years, figures will probably show today, the London-based Times reported, without saying where it got its information.

New car sales fell by as much as 25 percent during the month, the Society of Motor Manufacturers and Traders may say today, the newspaper said. The decline would be the steepest since June 1991, the Times said.

There was a drop in demand for all categories of cars, with premium car brands and sport utility vehicles particularly slow, the Times said.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net

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Brown, Sarkozy Need Obama to Spur Growth After Charting Rescue

By Simon Kennedy

Nov. 5 (Bloomberg) -- Europe took the initiative to create a system to bail out crisis-stricken banks and the U.S. followed. Now British Prime Minister Gordon Brown and French President Nicolas Sarkozy need Barack Obama to lead in repairing the damage to the global economy.

With the recessionary U.S. propelling industrial countries toward their biggest slump since 1982, how fast Obama can deliver a rebound at home will help guide the recovery in Europe and Asia. For all of its woes, the U.S. economy is still larger than that of the 15 euro nations.

``People are dying for economic leadership from the U.S., as no other country is capable of delivering it,'' said Denis MacShane, a U.K. lawmaker in the ruling Labour Party and former foreign office minister.

Brown's plan to buy equity stakes in banks became an international template even in the U.S. Having urged governments to ``reform capitalism,'' Sarkozy pushed President George W. Bush into convening the Nov. 15 summit of world powers in Washington to discuss new financial regulations.

The ultimate solution to the financial crisis, like its genesis, may still need to be American-made. Proof of how much a bellwether the U.S. remains: It is Europe's biggest customer, buying four times more than second-ranked China.

Sarkozy's `Buddy'

``If Obama can seize the moment, he will have the opportunity to set the international landscape for a long time,'' said Nicolas Veron, resident scholar at Bruegel, a Brussels-based research group. ``There is a capacity for new initiative from the U.S. that has been lacking.'

Obama would appear to have a mandate to lead beyond his borders. Three-quarters of 22,500 people surveyed in 22 countries by the British Broadcasting Corp. in September supported his candidacy. Even before yesterday's election, Sarkozy dubbed Obama his ``buddy'' and Brown credited his Democratic party with ``generating the ideas to help people through more difficult times.''

Governments around the world have learned through history that the U.S. sets the global economic agenda. Then-U.S. Treasury Secretary James Baker orchestrated the 1985 Plaza Accord that devalued the dollar after its rise hurt American manufacturers. Toward the end of World War II, U.S. President Franklin Roosevelt told Winston Churchill that free trade was his asking price for U.S. aid. The U.K. prime minister replied that while agreement may end up abolishing the British Empire, the U.S. was still ``our only hope.''

No Escape

European hopes of escaping the U.S. downturn have been dashed this year. JPMorgan Chase & Co. economists predict global gross domestic product will contract in the current and subsequent quarters. The euro area, which contracted in the second quarter, will keep shrinking through the first three months of 2009.

``I never believed in the idea of decoupling,'' said Nouriel Roubini, the New York University professor who predicted the financial crisis two years ago. ``When the U.S. sneezes, the rest of the world catches a cold. This time around the U.S. has a severe case of chronic and persistent pneumonia.''

Emerging markets such as China may also prove unreliable substitutes for U.S. growth. China's per capita income of $5,370 is 8.5 times smaller than that of the U.S. Hungary and Pakistan have joined Belarus and Ukraine in seeking help from the International Monetary Fund and Argentina faces renewed worries it will default.

Ailing Emerging Markets

``We can't delude ourselves to think America is in trouble and China and other emerging markets will fill the void,'' said Stephen Roach, chairman of Morgan Stanley Asia Ltd. in Hong Kong.

Pledging to rejuvenate the economy, Obama proposed on the campaign trail to spend $175 billion, including $25 billion for school repairs, roads and bridges, in addition to $500 checks for consumers to offset a rise in energy costs. He would also seek ways to help homeowners renegotiate mortgages.

``This is not just an American problem,'' Obama said Oct. 10 in Chillicothe, Ohio. ``In this global economy, financial markets have no boundaries. So the current crisis demands a global response.''

U.S. leadership is needed because power is diluted elsewhere. In Europe, 27 governments have their own ideas. Sarkozy needed to convene two weekend summits before leaders agreed to a bank bailout plan. Asia has no umbrella like the European Union or its Brussels-based Commission to coordinate policy.

It is also in the next president's interest to influence the international picture given that the U.S. is ``less dominant'' than when Bush was elected, said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London.

Still, Manu Bhaskaran, the Singapore-based head of economic research at Centennial Group Inc., a strategic advisory firm, said Obama may lack the influence to lead the world even if it welcomes his election.

``The U.S. is partly responsible for the mess that we have and has lost quite a lot of credibility,'' he said. ``It does not have the moral authority to push through solutions.''

To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net

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Pound May Rise 13% Versus Yen as Equities Rally, Says Citigroup

By Candice Zachariahs

Nov. 5 (Bloomberg) -- The pound may rally against the yen and the dollar as an expected Bank of England interest-rate cut will boost growth prospects and technical charts predict a rally, UBS AG and Citigroup Inc. said.

Investors should buy the pound against the yen as the U.K. currency strengthens ``possibly as high as 180,'' wrote New York- based Tom Fitzpatrick and London-based Shyam Devani, technical analysts at Citigroup, in a research note yesterday. The BoE will cut rates 50 basis points to 4 percent tomorrow, according to the median estimate of 60 economists surveyed by Bloomberg News.

The VIX volatility index, reflecting expectations for stock price movements and risk aversion closed at its lowest since Oct. 3 yesterday, falling for a forth day. The measure may continue to decline, wrote the Citigroup analysts in a separate note, pointing to gains in the Standard & Poor's 500 Index.

``We look at the pound-yen chart and believe it can be a big beneficiary here,'' Fitzpatrick and Devani wrote.

Investors should buy the pound at 160.29 yen, targeting an initial advance to between 165 and 166 yen, the Citigroup analysts said. They should exit the trade if it weakens to 157.40.

The pound rose for the second day to 159.50 yen at 7:46 a.m. in Tokyo from 159.11 yesterday. The currency fell 25 percent over the past three months. It bought $1.5986 from $1.5956 yesterday.

The S&P 500 advanced 4.1 percent to 1,005.75 yesterday as U.S. equities posted their biggest Election Day rally in 24 years ahead of the Presidential results today.

Rate Cut

The pound may also gain against the dollar if the BoE announces a larger-than-expected interest rate cut when it meets Nov. 6, wrote London-based UBS analyst Geoff Kendrick.

``In times of economic stress markets may become more concerned by future growth rates as a driver of future returns than movements in cash rates,'' he wrote.

Eight economists polled by Bloomberg forecast a 100 basis point cut, and six expect 75 points.

``With markets already pricing 75 basis points for Thursday, this implies that the pound will sell off on a 50 basis point cut and bounce on a 100 point one,'' Kendrick wrote.

The Australian dollar pared losses against the dollar and yen yesterday after the country's central bank lowered its benchmark rate by a greater-than-anticipated 0.75 percentage point to 5.25 percent.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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Asian Money Costs Fall as Central Banks Lower Interest Rates

By Lilian Karunungan

Nov. 5 (Bloomberg) -- Money-market rates in Asia fell as interest-rate cuts by central banks and as much as $3 trillion in emergency funding from governments improved confidence in credit markets.

Hong Kong's three-month interbank offered rate, or Hibor, dropped 24 basis points to a seven-week low of 2.55 percent. The rate for U.S. dollar loans in Singapore, or Sibor, slid to 2.57 percent, the lowest since March 18.

``The liquidity situation is slowly being rectified,'' said Emmanuel Ng, an economist at Oversea-Chinese Banking Corp., Singapore's third-largest bank. ``This is probably not the end of the bad news. The bigger picture is that the global slowdown story will begin to take precedence even if the liquidity situation is normalized.''

Borrowing costs tumbled worldwide as central banks slashed interest rates and governments offered bailouts and guarantees to kick start lending. Australia's central bank cut its overnight cash target a larger-than-expected 75 basis points to 5.25 percent yesterday, joining policy makers in China, Hong Kong, India, Japan and the U.S. in lowering the price of money in the past week.

Bank of Korea and Bank Indonesia will announce monetary policy reviews in the next two days.

Gradual Return

The difference between the rate Australia's banks charge each other for three-month loans and the overnight indexed swap rate, a measure of funding availability, dropped to 49.2 basis points, the narrowest since Sept. 12, the last working day before Lehman Brothers Holdings Inc. filed for bankruptcy. A basis point is 0.01 percentage point.

Asian stocks gained, lifting the benchmark index to a three- week high, as Barack Obama was elected the 44th president of the U.S. That followed the U.S.'s biggest presidential election day rally in 24 years, which saw financial shares surging after London interbank rates extended declines.

``The cost of borrowing U.S. dollars in the interbank market fell again overnight as money markets continued their gradual return to normality,'' Citigroup Inc.'s Sydney-based analysts wrote today in a note to clients.

Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars. Borrowing among banks, essential to keep financial markets working, froze after Lehman Brothers filed for bankruptcy Sept. 15, shattering lenders' confidence they would be repaid.

Libor Sliding

The London interbank offered rate, or Libor, for three-month U.S. dollar loans, slid 15 basis points yesterday to 2.71 percent, the lowest level since June 9.

The rate is still 171 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007. About 85 percent of U.S. banks tightened lending standards on loans to large and mid- size companies in the past three months, the Fed said on Nov. 3, the highest since the survey began in its current format in 1991.

``Banks are cutting back, the economy is in a deepening recession and in that environment, I don't think banks are going to become a lot more willing to extend credit soon,'' said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world's biggest securities firm.

The Libor-OIS spread, a gauge of cash scarcity among banks, narrowed 13 basis points to 211 basis points yesterday. That compares with 87 basis points on Sept. 12.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the BBA before noon in London.

Rate Cuts Loom

The European Central Bank and Bank of England will cut their key rates by 50 basis points tomorrow, according to Bloomberg News surveys of economists. Three-month dollar Libor slid for a 17th consecutive day today, according to the British Bankers' Association. The rate was at 4.82 percent on Oct. 10, the day before the streak began.

In the U.S., interest rates on the highest-ranked 30-day commercial paper slid 27 basis points to 1.74 percent, the lowest level since September 2004, according to yields offered by companies and compiled by Bloomberg. Yields on 90-day paper fell 6 basis points to a three-month low of 2.62 percent.

The Fed set the rate it's willing to accept for 90-day commercial paper at 2.6 percent, down 1 basis point, including a 1 percentage point unsecured credit surcharge.

The Reserve Bank of Australia pumped A$1.59 billion ($1.11 billion) into money markets today. The central bank had estimated the system would have a deficit of A$2.1 billion, according to the Sydney-based RBA's Web site. The rate Australian banks charge each other for three-month loans fell 8 basis points to 5.54 percent.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

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Libor's Biggest Drop Fails to Match Fed Rates, Spur Bank Loans

By Gavin Finch

Nov. 5 (Bloomberg) -- Credit markets are still creaking even after the biggest decline on record in the rate banks say they charge each other to borrow dollars.

The London interbank offered rate, or Libor, for three-month loans fell to 2.71 percent yesterday, from 4.82 percent on Oct. 10. The rate is still 171 basis points more than the Federal Reserve's target interest rate for overnight bank loans, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.

``Banks are cutting back, the economy is in a deepening recession and in that environment, I don't think banks are going to become a lot more willing to extend credit soon,'' said Jan Hatzius, chief U.S. economist in New York at Goldman Sachs Group Inc., the world's biggest securities firm.

Government bailouts totaling about $3 trillion, interest- rate cuts around the world and unprecedented cash injections by central banks drove money-market rates lower in the past month without convincing financial institutions to lend. About 85 percent of U.S. banks tightened lending standards on loans to large and mid-size companies in the past three months, the Fed said on Nov. 3, the highest since the survey began in its current format in 1991.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said yesterday conditions remain ``highly challenging.'' Mike DiGiovanni, General Motors Corp.'s chief sales analyst, said a day earlier the scarcity of lending led to the automaker's worst month since World War II. The U.S. economy, which contracted 0.3 percent in the third quarter, may stay in a slump through 2009, Fed Bank of Dallas President Richard Fisher said Nov. 3.

Lehman Failure

The credit-market seizure that began after BNP Paribas SA halted withdrawals on three hedge funds last year worsened when Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, driving dollar Libor up 200 basis points, or 2 percentage points, in the next 25 days to the highest level in 2008.

The difference between Libor and the overnight indexed swap rate, a measure former Fed Chairman Alan Greenspan uses to gauge the state of money markets, was at 210 basis points yesterday. That compares with 87 basis points on the last day before Lehman's collapse and an average 11 basis points in the five years before the crisis started.

``We're not out of the woods yet,'' said Jan Misch, a money- market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned lender. ``Libor fixings are improving but it's too early to say that this pattern is being replicated in the actual money markets.''

$360 Trillion

Libor is the benchmark rate for $360 trillion of financial contracts worldwide from mortgages to company loans and derivatives, according to the British Bankers' Association, an unregulated trade group based in London. That equates to about $53,500 for every person in the world.

It's set by a panel of as many as 16 banks in a daily survey where members estimate how much it would cost them to borrow in 10 currencies for terms from a day to a year. The Bank for International Settlements said in March some lenders may have ``manipulated'' rates to keep from appearing like they were in trouble.

Central banks have driven money-market rates lower by offering financial institutions as much dollar funding as they need and acting in concert to slash interest rates. The Reserve Bank of Australia cut its benchmark rate 75 basis points yesterday, joining policy makers in China, Hong Kong, India, Japan and the U.S. in reducing borrowing costs in the past week. The European Central Bank and Bank of England will cut their key rates by 50 basis points tomorrow, according to Bloomberg surveys of economists.

`Novocaine to Markets'

While cutting the U.S. target rate during the past 13 months to 1 percent from 5.25 percent, Fed Chairman Ben S. Bernanke has created six loan programs channeling at least $700 billion in cash and collateral into money markets as of Oct. 22.

``The Fed is trying to give Novocain to the markets,'' said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York. ``It's all about buying time.''

Central bank operations helped the MSCI World Index of stocks rise more than 20 percent since falling to a five-year low on Oct. 27. Company borrowing costs have also declined, with yields on the highest-ranked 30-day commercial paper, or CP, falling yesterday to the lowest level since 2004. The market, used by companies to cover daily expenses, grew last week for the first time since Lehman's collapse.

Limited Impact

Cash injections have had a limited impact because instead of lending the extra money received in auctions, some financial institutions are holding it on deposit with central banks. Banks lodged a record 280 billion euros ($355 billion) overnight with the ECB on Nov. 3. The daily average in the first eight months of the year was 427 million euros.

``The money-market players remain cautious but we're at least seeing an improvement and that's going to continue,'' said Vincent Chaigneau, head of foreign-exchange and interest rate strategy at Societe Generale SA in London. ``Transactions remain limited and we still have a dislocated market, but we're seeing a significant pullback'' in rates, he said.

In its quarterly Senior Loan Officer Survey, the Fed said about 95 percent of U.S. banks raised the costs on credit lines to large firms, and ``nearly all banks'' increased the spread on borrowing rates over the cost of funds on loans to firms from July. About 70 percent of U.S. banks indicated they tightened standards on prime mortgage loans.

Passing on Rates

Banks may not pass all of the benefits of lower interest rates on to consumers and businesses. Banks around the world are re-evaluating the price they put on risk, raising the cost of loans when compared with levels of pervious years, said David Hodgkinson, chief operating officer of HSBC Holdings Plc, Europe's biggest bank.

``Credit has to be priced appropriately to reflect the risk,'' Hodgkinson said in a Nov. 3 interview in Abu Dhabi. ``If interest rates are brought down significantly, then rates for borrowers will come down. But I'm not going to say it's absolutely linear because it depends on the particular transaction and the risk.''

In another sign that lending remains restricted, corporate bond sales in Europe dropped in October to the lowest level this year, with 25.4 billion euros ($32.3 billion) of notes sold, compared with 35.9 billion euros in September, according to data compiled by Bloomberg. U.S. investment-grade offerings fell to $21.6 billion, the least since July 2002.

``No one wants to lend because they are still wary of values of bank balance sheets, and no one wants to borrow from the money market because they can borrow directly from the central banks,'' said Alessandro Tentori, a fixed-income strategist at BNP Paribas SA in London. ``In effect, the measures taken by central banks are not providing incentives to go into the interbank market.''

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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Obama May Not Wait for Inauguration to Put His Stamp on Economy

By Matthew Benjamin and Rich Miller

Nov. 5 (Bloomberg) -- Barack Obama will transform a U.S. economy reeling from the worst financial crisis since the Great Depression -- and he may not wait until Inauguration Day to get started.

He'll get his chance when Congress returns in less than two weeks for a lame-duck session with plans to pass another economic stimulus bill. Such a package would only be a down payment on Obama's economic recovery program if the Republican incumbent, George W. Bush, supports it. The rest will come when Obama is in the White House.

The Democratic president-elect has much more on his agenda, amounting to what may be the broadest overhaul of the U.S. economy since Franklin D. Roosevelt's New Deal. Beyond job creation and big investments in public works, Obama intends to shift the tax burden back toward the wealthy, roll back a quarter-century of deregulation, extend health-care coverage to all Americans and reassess the U.S. government's pursuit of free- trade deals.

``The changes will be far greater than many expect,'' said Andrew Laperriere, managing director at International Strategy & Investment Group, a money management and research firm in Washington. ``From taxes to energy to health care, it's a pretty sweeping agenda.''

In the 2 1/2 months leading up to the Jan. 20 inauguration, the president-elect's challenge will be to work with the Bush administration on a transition that is collegial without being collaborative.

Bush, partly at the behest of European leaders, will convene a summit Nov. 15 to discuss longer-term strategies to prevent another credit crisis. That could put the president-elect in an awkward position, because he'll be pressed to render his views on a meeting at which he has no official standing.

Bush's Show

It ``might not be such a good idea'' for Obama and his team ``to take a prominent role at the Nov. 15 summit,'' said Mickey Kantor, who worked on Bill Clinton's transition team in 1992 and later served as U.S. trade representative and Commerce secretary. ``It's Bush's show, and you don't want any confusion about that.''

The Illinois senator won't be so reticent about putting his imprimatur on stimulus legislation that Democrats in Congress will attempt to pass before Bush leaves office.

One of Obama's first tasks in dealing with Congress will be to decide whether such a short-term stimulus should be tied to longer-term steps to bring the federal budget closer to balance. As it is, Obama will likely become the biggest deficit spender in U.S. history. Analysts forecast the budget shortfall may triple to $1 trillion in 2009 as costs mount for financial-industry bailouts started in Bush's final year in office.

Fiscal Discipline

Former Treasury Secretary Robert Rubin, an adviser to Obama, said the stimulus package ``needs to be married to a commitment to long-term fiscal discipline.'' Otherwise, the U.S. risks ``undermining our bond market and our currency market,'' Rubin, now senior counselor for Citigroup Inc. in New York, said in an Oct. 26 television interview on CNN.

Obama has proposed a $175 billion package that includes checks for consumers, a tax credit for job creation and spending on public works such as school repairs, roads and bridges. ``We face an immediate economic emergency that requires urgent action,'' he said in outlining the plan last month.

Political analysts say the package that emerges from the lame-duck Congress could be closer to $200 billion.

``A big victory makes it more likely that a stimulus package that Obama likes passes in a lame-duck session,'' said Stan Collender, a former analyst for the House and Senate budget committee and now a managing director at Qorvis Communications in Washington.

Bigger Majority

When the new Congress convenes in January, with a bigger Democratic majority and Obama in the White House, another even larger stimulus bill may pass and Obama's focus will shift to longer-term goals.

He proposes investing $150 billion over 10 years in clean energy initiatives that he says would create 5 million new jobs. He'd also push automakers and consumers to get a million fuel- efficient hybrid vehicles on the road by 2015.

Other proposals include a fund to invest in manufacturing research, new job training programs and an infrastructure investment bank that he says will create up to 2 million jobs. He envisions a network of business incubators and a plan to deploy broadband Internet infrastructure to every community in the nation.

To stem rising foreclosures, Obama's advisers say he's looking closely at ways to help homeowners renegotiate mortgages.

Regulatory Overhaul

He wants to overhaul the agencies that oversee the financial industry and give the Fed unprecedented ability to monitor institutions' books. As part of that, Obama would create a financial-market oversight commission responsible for identifying risks before they get out of control.

To deal with the credit crunch, Obama's advisers have called for the Treasury to hasten its recapitalization of banks with the $700 billion Troubled Asset Relief Program.

One reason to expedite efforts to boost the economy and bring an end to the credit crunch is that other campaign promises the Democrat has made may work against the short-term rescue effort.

For example, Obama has promised a departure from the Bush administration policy of pursuing any and all free trade agreements, vowing instead to seek protections for workers and the environment in existing and new pacts. He said he'll ask Mexico and Canada to renegotiate the North American Free Trade Agreement to include such provisions.

Nafta `Hammer'

``We should use the hammer of a potential opt-out'' from Nafta ``as leverage to ensure that we actually get labor and environmental standards that are enforced,'' Obama said in February during the primary race for the nomination.

Since winning the nomination, the Democrat has toned down his criticism of free trade, yet his hand may be forced on the issue by powerful groups within his party, said Claude Barfield, a trade policy expert at the American Enterprise Institute in Washington.

``The labor unions and the environmental groups will pressure him,'' said Barfield. Obama's push for new conditions in trade deals ``would invite retaliation,'' and could slow trade, says Barfield.

Obama also would raise taxes on at least some Americans. He plans an overhaul of the tax code, and he'll likely get one because of stronger Democratic control of Congress and the 2010 expiration of most of the tax cuts passed under Bush.

The Democrat would increase taxes on Americans earning more than $250,000 while expanding tax relief for those with incomes under $200,000 through tax cuts or credits.

Top Tax Rate

The top marginal rate would return to the 1990s level of 39.6 percent from the current 35 percent. The rate on most capital gains would rise to 20 percent from the current 15 percent.

The overall result, according to the nonpartisan Tax Policy Center, would be lower taxes for low and middle-income taxpayers while ``taxpayers with the highest income would see their taxes rise significantly.''

Such policies could worsen the economic slump, critics say.

``History shows us if you raise taxes in a bad economy, you hurt the economy, and there was a president named Herbert Hoover, a Republican, they raised taxes, they practiced protectionism, and we went from a serious recession into a deep depression,'' Obama's Republican opponent John McCain said in an Oct. 28 interview with Fox News.

Others are less worried. Mark Gertler, a New York University economist who has studied the Great Depression, points to Obama advisers Rubin and Larry Summers, both former Treasury secretaries, and Paul Volcker, a former chairman of the Federal Reserve. ``The economists around him are too smart and too experienced to do something that would risk the recovery,'' he said.

To contact the reporters on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net; Rich Miller in Washington rmiller28@bloomberg.net

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Regulators May Curb Currency Derivatives in Asia

By Bob Chen

Nov. 5 (Bloomberg) -- Asian regulators may limit currency derivatives after losses helped push the South Korean won to a decade low, led to lawsuits in India and caused shares of China's Citic Pacific Ltd. to collapse.

South Korea will announce measures by December to restrict company purchases of the contracts to a percentage of overseas earnings, Hyeon Jung Gun, head of Korea's Financial Supervisory Services derivatives market team, said in a Nov. 3 interview. China plans to improve monitoring of performance and compliance while Hong Kong is investigating improper sales of financial products by banks.

``There were companies that went over-hedging and banks that failed to remind options buyers of the embedded risk,'' Hyeon said. ``Under new regulations, companies will have access to derivative products based only on real demand.''

Governments face demands for tougher rules after the collapse of Lehman Brothers Holdings Inc. in September caused credit markets to freeze and emerging-market currencies to plunge.

Korean companies may lose as much as $2.4 billion on derivatives after the won dropped 28 percent this year, Standard & Poor's estimates. Citic Pacific, a unit of China's biggest state-owned investment company, predicted a $2 billion loss because of unauthorized bets on the Australian dollar, which plunged 21 percent against the U.S. dollar in 2008.

Europe, U.S.

Restrictions may slow growth in the market for foreign- exchange over-the-counter derivatives, which swelled 78 percent in the two years ended 2007 to $56 trillion, according to the Bank for International Settlements in Basel, Switzerland.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates. OTC products aren't exchange-traded and can be customized.

European Union regulators may seek to require greater disclosure of derivatives holdings as part of a review of securities laws amid the global financial crisis. U.S. Securities and Exchange Commission Chairman Christopher Cox urged greater disclosure in trading credit swaps and municipal bonds yesterday in a Washington Post article.

``Users of currency derivatives should face regulations regarding their qualifications and exposure,'' said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd., a Hong Kong-based brokerage focused on emerging markets. ``Automakers are allowed to produce fast cars, but drivers must be license holders and required to observe speed limits.''

`Unlimited Losses'

Some 100 South Korean exporters filed a group lawsuit against 13 banks, seeking to nullify contracts bought from lenders including Citigroup Inc., Standard Chartered Plc, Shinhan Bank and Korea Exchange Bank. Spokespeople at the banks had no immediate comment.

``We hope to prevent the recurrence of these incidents and urge regulators to address this issue and more thoroughly supervise on derivatives,'' said Kim Tae Hwan, a general manager at the Korea Federation of Small and Medium Business, which helped organize the action. ``They are extremely speculative products that exposed exporters to unlimited losses.''

The so-called knock-in knock-out options pay companies a fixed exchange rate as long as the dollar trades within a set range against the won. The firms are required to pay twice the amount of the contract if the U.S. currency appreciates beyond the range.

Sundaram Multi Pap Ltd., which makes school note books, is one of 12 Indian companies that filed lawsuits related to KIKO options earlier this year.

The won slumped to 1,495 per dollar on Oct. 28, the lowest in 10 years, from 902 last November. JPMorgan Chase & Co.'s Emerging Market Volatility Index soared to a record close of 32.96 on Oct. 23. It was at 24.12 as of 12:09 p.m. in Hong Kong.

Aussie Versus Dollar

Citic Pacific dropped 73 percent in Hong Kong when its trading blunder was announced last month. The company has contracts that require it to buy as much as A$9.44 billion ($6.5 billion) of Australian dollars, according to an Oct. 20 statement. The trades were supposed to hedge an iron-ore project in Australia that required A$1.6 billion.

The Australian dollar fell to 60.09 U.S. cents on Oct. 27, the weakest since April 2003, from a 25-year high of 98.49 on July 16.

``We want banks to sell appropriate products to clients,'' Li Fuan, head of the banking innovation department at the China Banking Regulatory Commission, said in an Oct. 30 interview. ``Monitoring measures may include reviewing products' legal documents and tracking their performance in real time.''

`Buyer Beware'

Citic Pacific identified HSBC Holdings Plc, BNP Paribas SA and Citigroup as among the sellers of the derivatives. Spokespeople at the banks declined to comment yesterday.

The Hong Kong Monetary Authority is reviewing ``whether the current `buyer beware' policy for the protection of investors remains appropriate,'' Chief Executive Joseph Yam wrote in an Oct. 9 note. An HKMA spokesman referred to that statement when asked about currency derivatives this week and said the review of rules will be completed this year.

``The mantra of `buyer beware' has been taken to extremes, and it's likely regulators will seek to redress the balance,'' said Simon Grose-Hodge, a strategist in Singapore at LGT Group, the bank owned by Liechtenstein's royal family. ``Any product that exposes a client to unlimited downside risk should never be described or sold as a hedge.''

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

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