Both the Euro and Sterling came under strong selling pressure versus the dollar over yesterday’s trading session and continued to fall overnight after strong demand for the U.S. currency to settle funding needs has outweighed recent signs of an easing of conditions within credit markets.
The situation has been exaccerbated overnight due to comments made by Mervyn King, Governor of the Bank of England, that the UK economy is likely to sink into recession in 2009. These economic fears have sent the pound plunging to a five-year low against the dollar.
Yesterday afternoon the dollar gained strength against the Euro & Sterling after reports confirmed that the Federal Reserve will help finance purchases of up to $600 billion in assets from money-market mutual funds oiled by redemptions from investors seeking the safety of government debt.
The new effort is called the Money Market Investor Funding Facility. JPMorgan Chase & Co. will run the five special units that will buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. Each unit will buy paper from up to 10 separate issuers. The Federal Reserve are expected to lend up to $540 billion to the five funds – which are designed to help improve the liquidity position of money market investors.
The Federal Reserve itself is due to meet next week, amid speculation that it is likely to reduce interest rates again in a further bid to shore up the economy.
The London interbank offered rate, (also known as the Libor rate) which banks charge each other for 3-month loans in Euros dropped 3 basis points to 4.96 percent yesterday -as governments stepped up efforts to boost bank balance sheets and policy makers offered cash to revive lending. The Libor rate fell to the lowest level since 12th September, which was the Friday before Lehman Brothers Holdings Inc. failed. The overnight dollar rate slid 23 basis points to 1.28% – which is below the Federal Reserve’s target for the first time since 3rd October 2008.
France are due to purchase subordinated debt from banks including BNP Paribas SA and Societe Generale SA to help shore up capital. European governments have led the U.S. in efforts to recapitalize banks and thaw credit markets. Britain, France, Germany, Spain and the Netherlands are among countries that pledged more than 2 trillion Euros ($2.65 trillion) to guarantee bank loans and take stakes in lenders. U.S. Treasury Secretary, Henry Paulson who at first rejected calls to invest directly in financial companies, now plans to spend $250 billion buying equity in banks.
News released yesterday afternoon confirmed that the Icelandic government is extremely close to securing a rescue deal with the International Monetary Fund which may also include financial help from Nordic neighbors and Japan. The fund is preparing a plan to present to the government. There is speculation that the rescue could amount to $6 billion.
Iceland is seeking aid from the IMF and Nordic countries after the collapse of its banking system had frozen its foreign-exchange market – making it much harder for importers to finance their purchases. Glitnir Bank h.f., Landsbanki Islands h.f. and Kaupthing Bank h.f. imploded with debts totalling $61 billion, (12x the size of their economy)
The yen has risen against the Euro and the Australian dollar on speculation that central banks around the world are likely to reduce interest rates again, spurring investors to sell higher-yielding assets funded in Japan. The yen gained the most against the Australian dollar after the Reserve Bank of Australia confirmed that they had a “strong economic case” for reducing interest rates on 7th October – this has fueled expectations for another interest rate reduction.
The Bank of Canada reduced its main interest rate by a quarter of a point yesterday afternoon, less than economists predicted, stating that it will probably need to reduce interest rates again in the near future. The credit squeeze spurred by the subprime mortgage meltdown is sapping demand for Canadian shipments of automobiles and lumber to the United States (Canada’s main export market).
The Reserve Bank of New Zealand are expected to reduce their benchmark interest rate by 1 percentage point to 6.5% during its next interest rate decision on 23rd October.
Data released 22nd October:
09.30 U.K BoE MPC Minutes (8th October Meeting)