Interbank Forex Affects Prices

Interbank Forex and lending have far reaching effects. The LIBOR or London Interbank Offered Rate affects lending rates in the wider economy. Both individual and business loans are tied to the LIBOR rate which is currently 1.18%. Interbank Forex involves the buying and selling of large lots of currencies and affects currency values worldwide. Most large banks maintain an interbank Forex trading desk and interbank Forex brokers have access to proprietary information unavailable to retail brokers and day traders.

Competition Ensures Fair Pricing

Like their retail counterparts, interbank Forex brokers research markets, political events, and monetary policies but have the additional advantage of access to information not available to the general public. Competition between banks guarantees fair pricing and tight spreads. Most day traders cannot access the same information available to interbank Forex brokers because clients at interbank forex desks tend to be the world’s largest hedge funds, mutual funds, and multinational corporations who have billions to invest.

Well Capitalized Brokers Have Advantage

A well capitalized retail Forex broker can use that capital to gain access to the interbank Forex market. The more capitalized the retail Forex broker is the more credit relationships they can establish which means they are able to access more competitive pricing for both themselves and their clients. When markets are volatile, as they certainly are now, banks must give their good clients competitive pricing in interbank Forex markets.

Credit Approved System Big Advantage

Another advantage that interbank forex brokers have is that the interbank forex market is a credit approved system where banks trade with each other based on established credit relationships. All banks have access to the best market rates but a bank must have a specific credit relationship with another bank to obtain those same rates. The larger the bank the better pricing they can access. The same holds true for retail Forex brokers; the better capitalized brokers will have better access to interbank forex pricing.

Despite the fact that the average retail forex broker cannot access the same pricing that interbank forex brokers can the interbank market ensures that the forex market maintains its integrity and fair pricing.

Pound Very Troubled

The British Pound has probably suffered the most of any major currency during the ongoing global financial crisis. The Pound has fallen 35% against the US dollar, 51% against the Japanese Yen, and 44% against the Euro on Interbank Forex markets. Interbank Forex brokers report that the troubled Euro has fallen 32% against the Japanese Yen, 19% against the US dollar and

Health of British Banking Sector Questioned

Recent economic data from the UK and interest rate uncertainties are, in large part, responsible for the Pound’s poor performance on interbank Forex markets. Many interbank Forex brokers question the overall health of the British banking sector and data shows the UK in a more severe recession than was previously thought. The Bank of England has been faster and more aggressive than its European counterpart in addressing the Economy and interest rates but is far behind the actions taken by the US Federal Reserve.

Rates To Fall Further

Even though the Bank of England’s rates are at a 300 year low at 1.5% most interbank forex brokers expect rates to fall even further. Gross Domestic Product shrank 1.5% in 2008 the largest fall since 1980. Unemployment is at its highest since 1997 and stands at 6.1%. Manufacturing output shrank to 6.9%, and Industrial output declined 7.4%. It has also been reported that consumer spending and confidence are declining further.

Nationalization Possible

In the UK the financial services industry represents a large part of the overall British economy and this includes the interbank forex market. While the government does not mention bank nationalization recent actions have caused banks to become more dependent on government rescue packages and the government now owns large stakes in the nation’s banks. If and when the recession ends it is thought that a nationalized banking system will not be as profitable as privately run banks and will provide fewer jobs.

Upcoming Elections Could Affect Pound

Another major factor affecting the Pound on interbank forex markets is the upcoming national elections. Prime Minister Gordon Brown’s Labour Party is falling behind in national polls. In western countries the state of the national economy can easily determine election results. It is expected that the Labour government will do everything within its power to stimulate the economy but some of these actions could hurt the Pound on interbank Forex markets.

Currency markets have been volatile resulting in turmoil in currency markets including the interbank forex. As of late interbank forex brokers have had an unenviable job of coping with these constantly changing conditions.

Dollar at 13 Year Low Against Yen

The US dollar hit a 13 year low against the Japanese Yen amid doubts about whether US measures to boost the economy will bring quick relief. At the same time the dollar achieved a 23 year high against the British Pound on interbank Forex markets. Many investors are bracing for the tough times ahead for the British economy.

All Eyes on Obama

The dollar dropped to 88.86 yen in Tokyo trading, down from 89.45 in New York late Wednesday, when it briefly hit 87.10, the lowest since July 1995. The euro slipped to $1.2972 from $1.3022 and to 115.27 yen from 116.49 in interbank forex trading. The dollar is expected to fall further is measures taken by the new Obama administration fail to revive the flagging US economy. Said on interbank Forex trader who wished to remain anonymous, “The power of balance in the currency market has been so unstable recently. So if doubts over Obama’s stance on the economy and markets emerge… players will have no choice but to buy the yen.”

Geithner Apologizes For Tax Transgressions

Markets for some reason are concerned about the appointment of Timothy Geithner after he admitted having failed to pay income taxes. At a hearing before the Senate finance committee Geithner apologized over past tax transgressions while promising to act with “strength, speed and care.”

Bank of England to Cut Rates Further

Markets remain concerned with the state of the British economy and many expect the Bank op England to cut rates further next month. In the last three months of 2008 the British unemployment rate rose to 6.1%, the highest in a decade. The pound fell to $1.3879 from $1.3957 in interbank Forex trading and on Wednesday the Pound hit a 23 year low.

Finance Ministers Call On Britain to Take Action

French and Irish finance ministers are calling on the British government to take action to prop up the Pound. The UK is seen as behind the curve in addressing the dismal state of the British economy and banking sector. Both Interbank and retail Forex traders will be watching the actions of the British government closely.

Dollar Gains Against Pound and Euro

The British Banking industry has been struggling ever since the announcement that the Bank of Scotland has suffered the biggest banking losses in British history. This was quickly reflected in interbank Forex markets when the dollar hit a 7-1/2-year peak against the Pound. The Dollar also rose against the Euro amid concerns about a deepening Euro Zone recession.

Rumors of UK Downgrade

Optimism about newly inaugurated Barack Obama plans for the economy boosted the Dollar but the Dollar pared gains when Obama did not provide details on economic crisis measures in his address. The Pound fell about 3. % against the dollar on Tuesday and was on track to post its biggest daily drop since 1992. Kathy Lien of GFT Forex stated, “The market is afraid that the UK will turn into the next Spain or Greece. Over the past few months, they have been working overtime to inject more stimulus into the economy, but the more that they spend, the worse impact it has on the UK’s fiscal position. Since the UK is a center for global banking it is expected that this will have profound effects on the interbank Forex market.

Standard & Poor’s Downgrades Spain and Greece

On Monday Standard and Poor’s downgraded Spain’s credit rating, following a similar move on Greece last week causing adverse effects on Interbank Forex and lending. Interbank Forex brokers are left wondering what the next move by the British government will be.

EU Economy to Shrink in 2009

A European Commission report on Monday that forecast the euro-zone economy would shrink 1.9% in 2009 and approximately 3.5 million jobs will be lost. Analysts said the European Central Bank may have to cut interest rates further after delivering a half percentage point reduction to 2 percent last week.

Lack of Specifics in Inaugural Address

The expected ‘Obama boost’ did not calm markets. In the interbank Forex market the Dollar trimmed gains within five minutes after President Obama ended his speech and as U.S. stock indexes extended losses. A lack of specifics in Obama’s inauguration was cited as a reason for the lost gains.

All eyes will be on the new administration in Washington. The global economy depends on the smooth functioning of the US economy and interbank Forex brokers will be watching the new administration closely. At present all eyes are on Washington.

European Style Nationalization in US?

The recent action taken by the US government to rescue the ailing Bank of America has many discussing the possibility of a European style nationalization of banks in the US. Because of the global financial crisis what once had been unthinkable is now a distinct possibility. There is already speculation about how this would affect the Dollar and the Interbank Forex markets.

US Government Putting Pressure on Financial Sector

While few see the government nationalizing the entire banking system the US is becoming more willing to put pressure on many of the largest banks. One example is that of IndyMac Bank, a failed California thrift that the government operated for much of last year. Roy Smith, professor at New York University’s Stern School of Business stated, “We’re nationalizing banks one at a time now. The real question is, will the biggest ones need to be nationalized?”

US Banking System in Need of Capital

The US banking system is in dire need of capital and estimates of the shortfall range from $700 billion to more than $2 trillion. Since the losses are all but impossible to estimate it is unlikely that the needed capital will come from the private sector including Interbank Forex markets. Since it is unlikely that private investors will bail out the financial sector the U.S. government will have little option but to step up. The smooth functioning of the financial sector, including interbank Forex trading, is seen as the key to reviving an economy stuck in a recession.

Regulators Tighten Grip After Bear Stearns Fiasco

Last fall at the beginning of the financial crisis the US government tried to penalize investors to the smallest extent possible when it intervened in the financial sector. When Bear Stearns & Co Inc failed, the government brokered a deal that resulted in Bear shareholders getting money, while debt holders lost nothing. After the Bear Stearns deal regulators tightened their grip and allowed Lehman Brothers to fail causing chaos in financial markets.

CitiGroup Faces Government Pressure

When CitiGroup was about to fail the government bought preferred shares and warrants, giving the government exposure similar to owning shares without diluting shareholders. There are signs that Citigroup is facing significant government pressure. The bank supported new bankruptcy legislation that opponents say will give consumers an incentive to file for bankruptcy despite opposition from most of the banking industry. People familiar with the situation said that regulators have been exerting more pressure on the bank since late November, when Citigroup got a second round of funding under the U.S. Treasury’s Troubled Asset Relief Program.

Bank of America Faces Increased Scrutiny

Bank of America, which received more bailout funds from the, government, is facing increased scrutiny from government regulators. The transition team of president-elect Barack Obama, who takes office on Tuesday, has said it will seek more concessions from banks seeking capital than the Bush administration did.

Actions Fall Short of Full Nationalization

Although the US government has so far acted with quiet restraint, its actions fall short of full scale nationalization of banks. Most experts familiar with the industry and several interbank Forex traders question whether full nationalization of the biggest banks is likely any time soon. Nationalizing just one of JPMorgan Chase & Co, Bank of America Corp, or Citigroup, which together have about half the assets in the banking system, would double the Federal Reserve’s balance sheet instantly. This could put pressure on the Dollar in interbank Forex markets. The dollar fallen some 17 percent against the Japanese yen since August 2008.

Political Power Blocks Nationalization

If the government were to nationalize one large bank investors and shareholders would most likely lose confidence in other marginal banks. The banking industry is obviously opposed to nationalization and wields immense political power in Washington. Dean Baker, co-director of the Center for Economic and Policy Research stated, “If it weren’t for the political power of the industry, nationalizing is what you’d want to do. It’s almost a no-brainer.”

It remains to be seen whether US banks will be nationalized. If economic conditions worsen the US government may have little choice. How this will affect the dollar and interbank Forex market is open to speculation.

ECB Announces Cuts

In a move sure to affect global interbank Forex markets the European Central Bank announced its long awaited rate cuts. The central bank cut rates by 50 bps to 2.0%.Stock markets fell sharply mid mounting concerns about the financial health of the global banking system after it was revealed that the Bank of America was seeking further government help.

Further Rate Cuts Expected

Some investors and interbank Forex traders are betting that the ECB will cut rates further despite mixed messages from Jean-Claude Trichet the ECB president. The news that the Bank of America was seeking additional help prompted concerns about the health of the global banking system and triggered a return to risk aversion which benefits the US dollar. Jessica Hoversen, a fixed income and currency analyst at MF Global Ltd. stated, “As problems in the U.S. financial markets elevate we are seeing again risk aversion-mode in currency trading. And in that mode, the dollar benefits. On top of that, there’s no doubt the ECB is behind the curve, which does not help the euro.”

Euro at 5 Week Low

In mid-morning trading in New York, the euro fell to a five-week low of $1.3048. The euro also dropped to a six-week low versus the Yen, which also benefited from rising risk aversion, trading at 116.23 yen. The dollar rose 0.2 percent against the yen to 89.22.

Banks Reveal Losses

The problems facing Bank of America and Citigroup come in a bad week for the banking industry. This has caused concerns that banks around the world will be forced to raise additional billions in capital to offset increasing losses. Earlier in the week Citigroup confirmed it is to merge its Smith Barney brokerage into a joint venture with Morgan Stanley. Germany’s largest bank Deutsche Bank AG revealed a massive 4.8 billion Euro ($6.2 billion) fourth quarter loss citing “exceptional market conditions”. Conditions have driven interbank forex traders to the safe haven offered by the dollar.

Recent news from the Euro Zone has been bleak. Germany’s economy grew at its slowest pace in three years in 2008. Retailers in the UK are reporting the worst Christmas season on record. Credit remains difficult to obtain and the interbank Forex market is static. Many interbank forex traders expect to see the ECB’s rates lowered to 1% by summer. The Euro Zone has entered a severe recession and it is anybody’s guess when it will start to recover.

Risk Aversion Returns

Currency markets including the interbank forex have been volatile for the last few months due to the ongoing global economic crisis. The lack of risk appetite on the part of investors has benefited both the US dollar and the Japanese Yen. When markets are volatile investors seek safe havens for their capital and the US dollar and the Yen are two of the safest currencies.

Yen at One Month High Against Euro

The Yen reached a one month high against the Euro as dismal data from the US intensified global recession fears and tempered demand for higher-risk investments. The Euro was also under pressure because of expectations that the European Central Bank will aggressively cut rates later this week. The Euro retreated on both interbank forex and retail currency markets as investors pondered the latest data from the US which showed the world’s largest economy lost over one million jobs in the final two months of the year.

Increased Demand For Yen

Increased risk aversion increased the demand for the low-yielding yen, as well as the U.S. dollar, as investors and even interbank Forex traders rushed towards safer assets. Currency economist Lee Hardman stated, “The U.S. payrolls numbers were pretty dreadful and helped underline fears that the U.S. labor market is undergoing a severe deterioration, knocking market confidence and helping to fuel yen gains.”

ECB to Cut Rates

The interbank forex market will most likely focus on the expected rate cuts by the ECB later this week. Many analysts expect that rate-setters will opt for a 50 basis point cut in response to recent weak data. Mr. Hardman also stated, “Going into the meeting, the euro will be under pressure as the market expects the ECB will cut by 50 basis points as economic data argues in favor of aggressive easing.”

Although the figures in last weeks US jobs report were not as bad as expected they were still cause for concern and markets, included the interbank forex, reacted accordingly. Many economists believe that it may be quite some time before risk appetite returns and this will benefit both the dollar and the Yen in the near future.

Dollar Surrenders Gains

The dollar fell against the Euro on Wednesday and surrendered recent gains against the European currency. The fall was blamed on low U.S. interest rates and recent economic figures from the US. Currency markets including the interbank Forex have been volatile since the current economic crisis began.

Bleak Euro Zone Data

Despite the Euros slight gains data from the Euro Zone continues to paint a bleak economic picture. News from the Euro Zone reveals a rapidly weakening economy, and inflation easing. The European Central Bank is expected to cut rates again next week which will have ripple effects throughout the Interbank Forex market.

ECB to Ease Monetary Policy

Data released Wednesday showed Euro Zone producer prices fell sharply in November, and a record monthly decline on a sharp drop in energy costs. This followed data released Tuesday that showed a smaller than expected rise in consumer prices prompting speculation that the European Central Bank will be ready to ease monetary policy. Interbank Forex traders will be watching the actions of the ECB closely.

Howard Archer, an economist at IHS Global Insight, stated, “Given widespread evidence of sharply diminishing inflationary pressures and deepening euro zone recession, we believe there is a compelling case for the ECB to cut interest rates appreciably further.”

Japan to Scrap Capital Gains Taxes

The Japanese Yen surrendered some recent gains due to a newspaper report that Japan’s government will seek to scrap capital gains taxes for foreigners investing in Japanese companies through funds, which could prompt capital flows into the country.

The dollar fell 0.5 percent against six major currencies in Wednesday’s trading. Audrey Childe-Freeman, senior currency strategist at Brown-Brothers Harriman in London said, “The dollar rally is showing signs of fatigue. Maybe there is a bit of nervousness ahead of the U.S. non-farm payrolls on Friday. “The depressed state of the economy is something that is priced into the market already, but we’ve seen a remarkable recovery in the dollar and that’s losing momentum. Plus non-farm payrolls will present a pretty ugly picture.”

473,000 Jobs Lost in November

It is expected that the new Plus non-farm payroll report will pain a bleak employment picture for the United States and will also affect global Interbank Forex traders. US data, released on Wednesday include a precursor to the Friday’s job report that is expected to show that 473,000 jobs were lost in December.

Currency markets, including the Interbank Forex have been extremely volatile in 2008 and this volatility is expected to last well into 2009.

Fed Plays Key Role

The recent global financial crisis has put the US Federal Reserve Bank in the spotlight. Its policies have global effects on markets including the Interbank Forex market. The Federal Reserve has played a key role in attempting to revive the economy during the worst recession in decades. Because of the close integration of major world economies the movements and policies of the Federal Reserve are watched closely by interbank Forex traders worldwide.

A Brief History

The Federal Reserve Bank was established in 1913 and is essentially the central bank of the United States. Its role is to monitor and establish a stable and responsive economy for the US. The Federal Reserve also helps to set fiscal and monetary policies and insures that the economy has adequate liquidity. The Federal Reserve affects all aspects of the economy including employment, growth rates, interest rates, money supply, and interbank Forex.

The G17 Report

The Federal Reserve is also charged with issuing the Industrial Production and Capacity Utilization report which is released on the fifteenth of each month by the Board of Governors of the Federal Reserve System. It presents the data on the output of the nation’s manufacturing, mining, and utility sectors. Also known as the G 17 report it organizes this data into industrial production and capacity utilization indices. This report

affects interbank Forex markets globally.

Stability of the Dollar

The Federal Reserve is also responsible for ensuring the stability of the US dollar. The policies of the Fed have ensured that the dollar remained strong during the near collapse of the financial sector of the US economy. The interbank Forex market has seen other currencies falter while the dollar has remained relatively stable.

Bailout Has Favorable Effect

The recent $700 billion dollar bailout, although unpopular, was passed due to the determination of the Federal Reserve Bank. The bailout has had a somewhat favorable effect on the banking sector and has stimulated credit markets. The actions of the Fed can be credited for keeping the dollar strong on interbank Forex markets globally.