Euro and Pound Strengthen As European Governments Take Measures To Bailout Banks

DailyFX.com · October 13, 2008, 4:58pm

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Written by John Rivera, Currency Analyst

The Pound has pushed back above 1.7200 after hitting a five year low of 1.6779 on the news that the U.K. government will bailout RBS, HBOS and Lloyds with 37 billion pounds. The continued nationalization of the country�s largest lenders comes after the G7 meeting this past Friday where leaders of the world�s richest nations vowed to do whatever it takes to stem the current crisis.

Talking Points
� Japanese Yen: USDJPY Back Above 100.00
� Pound: U.K. Banks Nationalization Continues
� Euro: Governments Take Measures To Bailout Banks
� US Dollar: U.S. Government Expected To Guarantee Interbank Lending

Euro and Pound Strengthen As European Governments Take Measures To Bailout Banks

The Pound has pushed back above 1.7200 after hitting a five year low of 1.6779 on the news that the U.K. government will bailout RBS, HBOS and Lloyds with 37 billion pounds. The continued nationalization of the country�s largest lenders comes after the G7 meeting this past Friday where leaders of the world�s richest nations vowed to do whatever it takes to stem the current crisis. Meanwhile, producer prices in the country continued to ease for a second month, falling 0.3% in September following Augusts� 0.7% drop on lower oil prices, leaving the door open for more rate cuts from the BoE which may cap the Sterling gains going forward.

The Euro rallied nearly 200 bps as European nations are in the process of rolling out their own packages to help struggling banks. The Euro-Zone has agreed on a coordinated effort that will include unlimited funds for banks in an effort to generate interbank lending. Germany has been the first to release details of their package which will include 400 billion Euros in liquidity and another 70 billion in direct investment in banks. France and Italy are expected to announce similar plans shortly as world leaders are following up on the commitment to end the current crisis. The Euro�s momentum has stalled as traders await the details of the plans, but the fact the Europe has finally shown the sense of urgency that has been exhibited in the U.S. may continue to support the Euro. However, speculation is growing that the ECB will need to continue cutting rates.

The USDJPY has also found support as the actions from the worlds� finance ministers and central bank leaders, has raised the levels of risk appetite. European stock markets were all trading more than 5% higher in early trading. However, the pair has begun to ease a bit as traders start to realize that the dire circumstances that warranted the worldwide reactions are cause to proceed with caution. Therefore, although we may see a small retracement in the Yen crosses, the overall global outlook should remain supportive for the Yen in the medium term.

The U.S. is expected to respond to the actions from Europe and Friday�s G7 meeting. Speculation is that we will see U.S. Treasury Secretary announce that as part of the TARP plan a direct investment will be made in U.S. banks. Also, expectations are that the actions of Europe to guarantee interbank lending will be mimicked in the U.S., as failure to follow would lead to cash flows fleeing overseas. Therefore, If risk appetite continues to gain, we could see dollar weakness continue as flows leave the safe heaven of U.S. treasuries for riskier assets. However, further action from the U.S. government could continue the dollar�s current strength, as speculation has increased that a new stimulus plan is forthcoming. Expectations are that it will include the extension of unemployment benefits and additional tax rebates.

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