The Sterling and Euro in quicksand

Article source: Chikako Mogi, Rika Otsuka and Michael Watson - www.guardian.co.uk

The Sterling and Euro in quicksand

Last Monday witnessed a slump in both the euro and the sterling currencies on escalating worries about the financial system as the recent credit crisis adversely spreads across the European stock markets. The fact that U.S lawmakers were preparing to vote on a $700 billion rescue fund to lessen the affliction caused by the credit crunch brought relief and a boost to the presently dying dollar. The European Central Bank President, Jean-Claude Trichet, held emergency talks with Dutch, Belgian and Luxembourg senior heads in a bid to establish a rescue package for the troubled Belgian-Dutch financial group Fortis in a Government backed buy-out. This however affected the euro which subsequently fell against the dollar.

Those with first hand information said that the sterling currency was affected as authorities prepared to nationalise the troubled bank, the Bradford & Bingley; they were also contemplating the sale of its savings and deposits business and its branch network.

The senior market economist at Mizuho Corporate Bank, Masaki Fukui, said that news about the troubled banks highlighted that Europe was in a very similar predicament to the United Sates of America. Mr Fukui added that European currencies including the euro are likely to be under pressure.

On the international markets, the euro saw a 1.1% drop against the dollar to $1.4457, while the pound also tumbled by 1.1% against the dollar to stand at $1.8246. The dollar however soared to 106.35 yen by a 0.4% margin.

According to a senior Japanese trader, the euro was likely to be very vulnerable to more news of troubled European banks and mortgage lenders. Additionally, he spoke of the market being too caught up in the unravelling credit crisis in the United States, and that any financial issues taking their toll on European financial institutions would be new news for the market.

There were preparations by the US House of Representativces to vote on Monday on creating the $700 billion Troubled Assets Relief Programme (TARP) government fund.

Leaders from both the democratic and republican parties said they had reached a tentative agreement on Sunday, but doubts were raised on whether the rescue plan would restore the lost confidence in the financial markets. The Troubled Assets Relief Programme (TARP) is to be used to purchase bad mortgage assets from troubled lenders in order to help stabilise the mortgage market. The mortgage assets may then be sold back to the markets at a later stage once they recover.

Deputy General Manager of the Forex section at Nomura Trust and Banking, Hideki Amikura said:

“After failure to agree as initially expected last week, the prospect for a vote on the fund does pave the way for the dollar's recovery in the near term.”

“But there will be no dramatic comeback for the dollar given many uncertainties over the fund's details, and with the market still expecting more bad news on the financial system”

According to sources familiar with the recent activity, Wachovia Corp is in talks with rivals to be taken over. The American bank’s shares tumbled 27 percent on Friday due to rising fears concerning its hefty mortgage assets. Amikura commented that market players were also wary of economic data including monthly U.S payrolls due on Friday, with weak figures likely to put a cap on the dollar. In addition, he said, “The market’s next focus is Friday’s jobs data on the housing market and consumption to gauge the state of the U.S economy.

 

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