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.

LIBOR and Loans

Many are unaware of the LIBOR (London Interbank Offered Rate) and how it affects them in their daily lives. The LIBOR is the average interest rate that banks charge when they make short-term unsecured loans to other banks. This, in turn, affects interest rates for such things as student loans, mortgages, and the value of major currencies and is a major influence on the Interbank Forex market. It is essentially the interest rates of 16 major banks averaged out. Approximately 80% of all sub prime mortgages are tied to the LIBOR.

Mortgages Tied to LIBOR Rate

If a mortgage is obtained chances are that the interest rate is closely tied to the LIBOR or other indexes such as the Cost of Funds Index (COFI). Loans are typically pegged to indexes called the one-month, three-month or six-month LIBOR. The rates reflect the averages of what banks are charging for longer term loans and those with adjustable rate mortgages can be in for a very unpleasant shock if rates rise. It is estimated that 60% of all adjustable loans in the US are tied to the LIBOR. Unfortunately most buyers have no idea what the LIBOR is and how it can affect their lives.

LIBOR and Short Term Corporate Loans

The LIBOR is also the benchmark for short term corporate loans. If the LIBOR goes up it impacts a wide range of borrowers including corporations and small businesses that depend on the availability of credit to finance day to day operations. If credit markets freeze or interest rates rise it can directly affect businesses resulting in layoffs and rising prices for consumer goods. The LIBOR also affects the value of various currencies on Interbank Forex markets.

LIBOR Rate and Student Loans

Almost 50% of all lenders peg the interest rate charged to the LIBOR and student loans are no exception. Rates tied to the LIBOR are typically LIBOR+2.80%. If rates go up the loan becomes more expensive and can significantly increase the cost of a college education. The recent credit crunch has adversely affected the availability of student loans. Many economists are telling those with loans tied to the LIBOR to brace themselves for a rise in interest rates.

LIBOR and Interbank Forex

LIBOR has a profound influence in currency markets including the Interbank Forex. The spread between 90 day T-bill and 90-day LIBOR rates can give investors a sense of confidence in the US dollar. When confidence in the US dollar is high the spread will be very close while conversely, if confidence is low the spread will be higher. While LIBOR is primarily about interbank lending rates it can reflect investor confidence in various currencies on the Interbank Forex market.

LIBOR Affects Confidence in the Dollar

If you have a mortgage, have taken out a student loan, or work for a company that depends on the availability of credit, the LIBOR can have an impact on your financial life. The LIBOR helps to determine the confidence that Interbank Forex investors have in the Dollar and helps to determine the exchange rate. Although located in far away London the LIBOR has a direct impact on the daily lives of Americans.

Greenspan Before Congress

In a statement to the House Oversight Committee former Federal Reserve Chairman Alan Greenspan stated that the current financial crisis is a “once-in-a-century credit tsunami” which will have a severe economic impact on the nation’s economy and will drive unemployment higher. Greenspan also stated that the current financial crisis had “turned out to be much broader than anything that I could have imagined.” The current economic meltdown has affected interbank Forex markets and the rates charged for interbank lending.

Greenspan, John Snow, and Christopher Cox Testify

Greenspan was called to testify by the committee along with former Treasury Secretary John Snow and Securities and Exchange Commission Chairman Christopher Cox. Committee chairman Henry Waxman (D-Calif.) said that the Federal Reserve, the Securities Exchange Commission, and the Treasury Department had all contributed to the current financial crisis. In a strongly worded statement Waxman said, “The list of mistakes is long and the cost to taxpayers is staggering, our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is “infallible.”

Greenspan Places Blame on Subprime Mortgages

In his testimony before the committee Greenspan blamed the crisis on heavy demand for securities backed by subprime mortgages by investors who never thought that the housing market would crash. Greenspan said that for the crisis to end stabilization in home prices is necessary and that it would take many months for this to happen. Greenspan gloomily predicted, “Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment. Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.”

Greenspan and Bush Administration Criticized

Greenspan predicted that when home prices stabilize the credit markets should begin to thaw and renew investor confidence. Greenspan also said that government is correct to aggressively proceed with efforts to support the financial sector of the economy and also thought that the $700 billion dollar bailout is adequate to move markets forward. Some blame Greenspan and the Bush administration for ignoring warning signs and stubbornly believing that the market is always right and regulation is not an appropriate government function. Greenspan served during a period of relative stability and interbank forex markets were profoundly affected by the actions of the Federal Reserve.

Greenspan placed the blame for the current crisis on over eager investors who did not worry that the boom in home prices might come to a crashing halt. Greenspan’s critics believe that earlier in the decade he left interest rates too low spurring an unsustainable housing boom. The hearing got contentious as lawmakers who are already angry about having to vote for the politically unpopular bailout bill searched for answers to what went wrong. Holding hearings close to an election is unusual but chairman Waxman said the crisis was so serious that Congress could not wait until a new administration arrives in January to find out “what went wrong and who should be held accountable.”

Recession, the US Dollar and Interbank Forex

On Forex markets the US dollar has been doing surprisingly well but many analysts believe that if the US enters a recession all bets are off for the dollar. Of course savvy Forex investors and traders will be watching the US economy closely for any signs of trouble and will invest accordingly. The Forex markets will remain the largest in the world and will continue to offer alert investors plenty of opportunities. The actions of the Fed could affect interbank Forex exchanges well into the future.

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.

World Financial Leaders Meet

Last week’s meeting of the International Monetary Fund (IMF) was attended by the world’s financial leaders who are putting aside political differences in order to stave off a global recession. Instead of the bickering that usually takes place at IMF meetings, attendees were desperately seeking solutions to the worse financial crisis in recent history. The crisis has affected all markets including the interbank Forex.

IMF Promises to Take Decisive Action

The IMF’s steering committee said Saturday that all 185 member nations are committed to do whatever it takes to support the financial system, including a promise to “take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.” The IMF statement mirrored commitments made by finance ministers and central bankers from the seven wealthiest industrialized countries. Following the IMF meeting economic leaders from a group of wealthy and developing countries pledged to intensify efforts to unfreeze credit markets and jump start interbank Forex exchanges.

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Crisis of Confidence

Most Americans believe the current financial crisis was caused by subprime mortgages and falling house prices but the root causes are much deeper. Despite the passage of a $700 billion dollar bailout bill there is a crisis of confidence in the US dollar and the US economy. Since World War Two the US has been an economic and industrial powerhouse. The current crisis has sent shockwaves through world financial markets including the interbank Forex and confidence in the stability of the American economic system has been seriously damaged.

The Crisis Spreads to Europe

The crisis quickly spread to Europe causing unheard of disruptions in credit markets, interbank lending, and the banking industry. Access to credit froze, banks ceased selling gold, Forex markets were unpredictable, and European governments were forced to inject unprecedented amounts of money into the financial sector. The credit freeze has deeply affected the banking sectors and the crisis of confidence in the US dollar limits both retail and interbank forex opportunities.

Looking For Someone to Blame

When things go horribly wrong it is human nature to look for something or someone to blame and the current crisis is no exception. Since the crisis started in the United States most European countries are placing the blame directly on the Unites States. Gordon Brown Prime Minister of the UK, our closest ally, has stated openly that his country’s financial problems are an import from the US. He did not explain, however, how the American government somehow forced British banks to write mortgages for more than the value of the homes being purchased.

Blaming the US

Some world leaders are openly taking pleasure in the American crisis. Vladimir Putin stated. “Everything happening now in the economic and financial sphere began in the United States. This is not the irresponsibility of specific individuals but the irresponsibility of the system that claims leadership.” German finance minister Peer Steinbrück said, “The origin and centre of gravity of the problem is clearly in the USA.”

European Perception of the Crisis

Somehow the perception in Europe is that the problems faced by the EU and the UK are actually American imports. Many European leaders such as France’s Nicolas Sarkozy take pleasure in discrediting the American economic model saying that the, “idea of an all-powerful market without any rules and any political intervention is mad . . . [and that] self-regulation is finished. Laissez faire is finished. The all-powerful market which is always right is finished.”It would seem that the European perception is that American markets operate ‘without any rules’ when nothing could be further from the truth.

What most critics fail to realize is that the current financial is global and any solution will have to be a cooperative effort among nations. Playing the blame game in a time of serious crisis only inhibits the search for a permanent solution. Despite the current economic crisis the dollar remains the currency of choice for both retail and interbank Forex exchanges.

A Brief History of AIG

American International Group, Inc. was founded in 1919 in Shanghai, China by Cornelius Vander Starr. Mr. Starr was the first westerner in Shanghai to sell insurance to the Chinese. The firm was successful and expanded it’s operations to other countries in Europe, Latin America, and the Middle East. In 1962 AIG gave control of the unsuccessful US operations to Maurice Greenberg who changed the company’s focus from personal insurance to high margin corporate coverage.

A Shady Past

By 2005 AIG was the subject of a number of fraud investigations by the US Justice Department, the Securities and Exchange Commission, and the New York Attorney General’s office. The investigations resulted in the ousting of Mr. Greenberg, a $1.6 billion dollar fine, and several executives faced criminal charges. After several CEO’s were forced to step down Edward M. Liddy became CEO on September 17, 2008.

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