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.

Dollar Lending Rates Rise

Dollar lending rates rose on the interbank forex market despite the announcement of plans for the US government to bailout the failing Citigroup bank. The LIBOR (London Interbank Offered Rate) rate for three month loans in dollars rose slightly from 2.16% Friday to 2.17 on Monday, Nov, 24th, 2008.

Increase in LIBOR Rate

The increase in the LIBOR rate is important for the interbank forex, the financial sector, and the wider economy. The LIBOR determines rates for loans to households, and businesses. Many mortgages and student loans are tied to the LIBOR rate and can have wide ranging effects on the day to day economy. The rate increase suggests that banks are worried that other financial institutions could collapse in a chaotic global economy.

Credit Markets Frozen Despite Citigroup Bailout

Despite the US government’s agreement to inject $20 billion dollars into Citigroup and take on hundreds of billions in toxic assets credit markets remain all but frozen. While the move to rescue Citigroup boosted stock markets it did little to thaw credit markets in Europe and the US.

Euribor Rates Decrease

European Interbank Offered Rate or Euribor managed to decrease from 4.02% Friday to 3.97% on Monday. Both US and European rates remain well above the benchmarks set by central banks, 1% in the US and 3.25% in the Eurozone.

Citigroup to Give Government 8% Return

In exchange for the government’s $20 billion dollar injection Citigroup will offer an 8% dividend on preferred stock. In addition Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program. Citigroup lost 60% of its value last week as investors worried that toxic debt would turn into losses for the beleaguered bank.

Partial Nationalization

Citigroup is a major player in the interbank forex market and the failure of Citigroup would be catastrophic for markets in the US and abroad. Citigroup now joins other banks that have been essentially partially nationalized, a move that a year ago would have been unthinkable. It is hoped that the move by the US government will bring stability to Interbank Forex markets and provide investors with Forex opportunities.

USD Currency of Choice

While the performance of the US dollar has baffled some experts the question remains: how long will this strong performance in currency markets last? At present, the US dollar seems to be the currency of choice despite the negative performance of the US economy. The fundamentals of the US economy are deteriorating, housing markets, stock markets, productivity, the recent collapse of several venerable Wall Street firms, and a lack of investor and consumer confidence all spell trouble in the near future. At present there are several factors that contribute to the dollar’s success. The dollar at present is the world’s reserve currency and is essential to the performance of interbank Forex markets.

Fast Action By US Government Calms Investors

The quick reaction of the US government and its institutions and the cooperation between the two major parties had a calming effect on investors and probably prevented a total market collapse. In the United States the problems are transparent and the willingness of government to try several approaches to reach a solution may inspire confidence in some. Credit markets remain a concern and most realize that it will be quite some time before the effect of the $700 billion dollar bailout will be felt. The infusion of cash has been slow to affect interbank Forex markets.

European Economy Deteriorates

The European economy is deteriorating rapidly despite the efforts of central banks to stimulate liquidity in credit markets. The UK is experiencing its own mortgage meltdown complete with collapsing banks and lowered real estate values. Many European financial institutions invested heavily in mortgage backed securities which are now worth a fraction of their original value. The French and German economies are experiencing accelerated economic slowdowns. Despite the actions of the central banks and governments credit markets remain frozen to the detriment of the European economy and has severely affected interbank Forex exchanges. The Euro has been declining against the US dollar.

Fallout Affects Asia

The fallout from the American economic crisis has affected Asian markets and economies. In Singapore, economists are predicting a downturn lasting several quarters and China is experiencing a significant slowdown. The declining demand for commodities has adversely affected both the Australian and Canadian dollars. The Japanese economy is expected to be affected by the crisis in the US. Japanese automakers expect to see a decline in US sales, the US being the largest market for Japanese automobiles.

Forex Markets

In the short term the economic troubles in the US are actually helping the dollar to retain its value. Whether the US enters a recession will determine the future of the US dollar in the medium and long term. At present the dollar continues to offer opportunities in Forex markets although it remains a mystery just how long it will last. The dollar continues to be the currency of choice on interbank Forex markets.

US Faces Debt and Job Losses

In addition to the recent financial and banking crisis in the US the country faces unprecedented debt and massive job losses. The US economy has been shedding jobs at an alarming rate. Because of losses in the stock markets many have seen their retirement savings dissipate and their children’s college funds shrink to a fraction of their former value. The fact that the US faces a presidential election only adds to the uncertainty felt by millions. Interbank Forex markets have been slow to react to the massive US bailout package and credit markets remain frozen.

Economy Bad News For Incumbents

For the incumbent administration and members of their party bad news is simply bad news. For the challengers bad news is good news and recently there has been no shortage of bad news. Historically during economic downturns US voters have traditionally punished the incumbents blaming them for current economic conditions.

Lack Of Confidence in the Economy

Despite the $700 billion dollar bailout and the $250 billion dollar plan to recapitalize banks many are not confident that the economy will fully recover. Unemployment is still only 6.1%, but everyone expects it to rise. Some economists feel the US is entering a recession and many voters feel it has already entered a recession. Massive home foreclosures, slumping house prices, massive job losses have most voters on edge. Recent actions by the Fed have contributed greatly to the strong performance of the dollar on interbank Forex markets and is still the currency of choice for risk adverse investors.

Economy Good News For Challengers

Few voters truly understand why the economy is in crisis but many blame the Bush administration. John McCain although a competent candidate is saddled with being from the same party as Bush and many voters see his candidacy as a continuation of the policies of the last eight years. Mr. Obama, due to the fact that his party does not occupy the current white house has a hefty advantage among the disgruntled. Barring a sudden economic turnaround, Mr. Obama’s prospects look good.

The candidates differ on economic issues with McCain sticking to relatively conservative positions and Obama promising tax reform and many social programs. Obama’s tax cuts would favor the middle class while McCain’s tax policies would be a continuation of the Bush policies. McCain favors corporate tax cuts in an attempt to stimulate business growth but opponents characterize these as ‘tax cuts for the wealthy.’ The truth probably lies somewhere in between.

Problems Unprecedented

No matter which candidate wins the election, he will face economic problems of historic proportions. On Wednesday, the International Monetary Fund — a cornerstone of the Breton Woods system — warned that the world economy faces “the most dangerous financial shock in mature markets since the 1930s.” Obama must offer voters a coherent plan for the economy if he expects to win in November. The problem is no one really knows what to do about current economic conditions, not Obama, not McCain, not Ben Bernanke or Paul Krugman or Larry Summers or Hank Paulson. The country is facing problems for which there are no clear solutions.

US Dollar and Economy at Stake

A lot can happen between now and November and it will be January when the new administration actually takes office. The future of the US economy and its currency are at stake. At present the US dollar is holding its own in interbankForex markets and the recent rise of the Euro is seen as an indicator that the global bailout is starting to work. The US faces unprecedented economic challenges and whoever wins in November will face challenges not faced by a US president since Franklin D. Roosevelt took office in 1933.

AIG Executives Hold Bailout Party

In an astonishing display of hubris, executives at insurance AIG headed to a $440.000 retreat at one of the nations most luxurious resorts. The retreat was held less than a week after the Federal Government offered an $85 billion dollar bailout to the insurance giant. Executives had no qualms about tapping into the $85 billion dollar loan sending executives to the St. Regis resort south of Los Angeles. Executives received royal treatment including golf and $28,380 worth of spa treatments. Angered congressmen expressed outrage at the frivolous spending of taxpayer dollars meant to shore up the troubled company’s finances. Because of the irresponsible actions of executives like the ones at Lehman Brothers world markets are in turmoil and interbank forex markets have been impacted.

Congress Outraged

Democrat Henry Waxman expressed the feelings of many when he said in an opening statement, “Average Americans are suffering economically. They’re losing their jobs, their homes and their health insurance. Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation.”

Lehman Brothers CEO Defends Compensation Package

In another amazing display of arrogance the CEO of the recently bankrupt Lehman Brothers investment bank defended executive pay of himself and other executives responsible for Lehman Brother’s woes. Former Lehman Bros. CEO Richard Fuld attempted unsuccessfully to defend the $484 million he has received in salary, bonuses and stock options. In an attempt to shed blame Fuld blamed the failure of Lehman Brothers on short selling and market ‘manipulation’ and conceded no errors in judgment.

$20 Million in ‘Special Payments’ to Execs

The congressional hearings finally put a face-Fuld’s- on their outrage at corporate CEO’s who took home millions while betting on risky mortgage backed investments that brought the world’s financial markets to a grinding halt. Internal company documents and emails revealed that despite financial troubles executives “continued to squander millions on executive compensation” in the words of California Representative Henry Waxman. Waxman also cited another company document that showed that four days before filing for bankruptcy, the compensation committee recommended that three departing executives receive more than $20 million dollars in ‘special payments.’

Fuld also nixed a suggestion from Neuberger Berman, the company’s money management subsidiary, that Lehman management should forgo yearly bonuses. The suggestion was designed to “send a strong message to both employees and investors that management is not shirking accountability for recent performance.” In a time when many Americans are losing their homes to foreclosure congress was less than receptive to excuses given by executives who received millions for poor performance.

Forex Market Still Performing

Because of executives like Fuld, world credit markets, stock markets, Interbank Forex, and financial institutions are currently in dire straits. The bailout remains politically unpopular in the US and investigations by congress are bound to reveal sordid financial dealings by executives of failed financial institutions. The only markets that have produced any positive results have been retail and interbank Forex markets where the dollar is trading high against several currencies including the Euro. The Euro is currently at a 14 month low against the dollar. At present it would seem that Forex markets are the only place where investors can hope to come out on top.

Buffett Steps In

In a move reminiscent of J.P. Morgan’s attempt to salvage Wall Street in 1929, billionaire investor Warren Buffett invested 5 billion dollars in Goldman Sachs Group Inc. Berkshire Hathaway Inc., owned by Buffet announced it was purchasing 5 billion in preferred stock and indicated a future purchase of 5 billion in common stock. Stocks stabilized following Buffett’s investment but credit markets are still awaiting more news about the US government’s plan to bailout banks. Interbank forex lending has all but ceased and central banks are hoarding the dollars and gold in their possession.

Goldman Sachs also announced it will offer 5 billion in common stock to the public. Goldman Sachs and Morgan Stanley were granted approval to become bank holding companies and it is hoped that this will allow them to strengthen their balance sheets.

Although Buffett’s move calmed skittish investors, the financial world is awaiting today’s appearance of Treasury Secretary Paulson, former CEO of Goldman Sachs, and Federal Reserve Chairman Ben Bernanke. Although there is significant opposition to the bailout from Democrats and conservative Republicans it is hoped that the bailout will proceed quickly.

The Effect On Interbank Forex Markets

All these events have created uncertainty in the Interbank Forex markets despite the efforts of several central banks around the world. The Federal Reserve acting with Australia and Scandinavia moved to provide liquidity while Europe, Britain, Japan and Australia pumped billions of dollars into their respective banking systems. Once a bastion of liquidity, the short term lending markets where banks lend to each other has come to a grinding halt due to concerns of the creditworthiness of borrowers.

The Struggling Dollar

The dollar continues to struggle on Interbank Forex markets due to uncertainty about the financial position of the US and the perceived political opposition to the bailout of financial institutions by the government. The dollar has fallen against the Euro but is rising against the Japanese Yen.

Interbank Forex Conditions Remain Uncertain

Until the terms and conditions of the US bailout become clear, markets, including the Interbank Forex, are facing uncertain conditions. Investors around the world are hoping for a quick and solid solution to the volatility of this weeks markets.