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.

Quick Forex Tip: Interbank forex dealers have access to better spreads than the average investor because of the size of the transactions. Small investors who want to trade interbank fx now have access through the use of forex brokers who are able to put together large transactions. Additionally, many very wealthy individuals trade interbank fx hoping to profit from currency fluctuations. Whether you have a lot or a little money to invest, interbank forex trading is a great option because forex markets are almost recession proof.