European Banks Still at Risk

Flight to safety sent traders pouring back into US dollars pushing the Euro lower for the second day in a row. German business confidence (the IFO survey) dropped to a 10 month low in August. Although businesses were more optimistic about current conditions, their expectation of business conditions in the months to come continued to deteriorate.

There has been a lot of talk that German banks are practicing the silence policy on subprime related losses. If true, this would be pretty dangerous since the problems will eventually be revealed when earnings are released. ECB member Bini-Smaghi made cryptically convoluted comments today. He said that the markets had correctly interpreted yesterday?s comments by ECB President Trichet. Unfortunately Trichet was completely noncommittal about a September rate hike and simply said that the ECB would decide what to do with interest rates at the monetary policy meeting and not anytime beforehand. Meanwhile the Swiss UBS consumption index dropped to 2.261 from 2.311. This suggests that the KoF index of leading indicators, due out tomorrow could also suffer.

Written by Kathy Lien, Chief Currency Strategist of