Treasury Secretary Henry Paulson, testifying before the Senate Finance Committee, said the administration has been closely watching capital markets since a severe credit crisis hit in August, roiling markets around the globe.

'While we are in a difficult transition period as markets reassess and re-price risk, I have great confidence in our markets,' Mr Paulson told the committee. 'They have recovered from stressful periods in the past and they will again.'

Mr Paulson and Federal Reserve Chairman Ben Bernanke will be in Tokyo this weekend for a meeting of finance ministers and central bank presidents from the Group of Seven major industrial nations.

Market turmoil top item on discussion agenda
Mr David McCormick, the department's undersecretary for international affairs, said that the market turmoil would be a top item on the discussion agenda at the Saturday meeting among the G-7 countries. Those nations are the United States, Japan, Germany, Britain, France, Italy and Canada.

They will be joined by finance officials from Russia, China, South Korea and Indonesia for a broader discussion over dinner on Saturday night.

Mr McCormick said financial institutions have taken a number of steps to address the 'serious turmoil' that is persisting in financial markets.

'Since August, financial institutions have disclosed and written off more than US$150 billion (S$213 billion) in assets and US financial institutions have raised more than US$95 billion in new capital,' Mr McCormick said at a briefing on the weekend talks.

He said past episodes of market turmoil had demonstrated the need to recognise losses and restore capital as 'important steps toward restoring financial normalcy.' But he stressed that the markets would be buffeted by further turbulence as more information about the extent of the losses is revealed.

'Make no mistake, the current turmoil will continue to challenge policymakers and we can expect to see more financial market volatility as further disclosures and re-pricing of risks take place,' he said.

Preliminary report
The G-7 group will hear a preliminary report from a panel of experts led by Mr Mario Draghi, the head of Italy's central bank, who were asked by the G-7 last fall to study the market turbulence and make recommendations on what should be done.

Last week, Japanese Finance Minister Fukushiro Nukaga, who will host the meetings, said he wanted to search for ways the G-7 countries could work together to deal with the recent market turbulence, but that it was important to understand what each country was doing individually. He said the group would discuss the effort in the United States to deal with its subprime mortgage crisis.

Mr McCormick said Mr Paulson would discuss the economic stimulus plan of around US$150 billion that the administration is urging Congress to quickly pass as a way to bolster consumer spending with tax rebates to individuals.

Mr Paulson was urged by members of the Senate Finance Committee to continue pressing China to move faster to allow its currency, the yuan, to rise in value more quickly against the dollar as a way of narrowing the record trade gap the United States has with China.

Mr Paulson said he would do so, but he warned lawmakers that it would be 'very dangerous' to pass legislation imposing economic penalties on China if it does not meet US demands on its currency.

The administration is concerned such a move would risk a backlash in China that would harm American exports. -- AP