Central Banks Inject cash

Tom Tong07/Oct/2011Currency Updates

EUR
The euro was set for its first five-day gain against the dollar in three weeks on prospects that a capital backstop for European lenders will help stem the region’s debt crisis.

The 17-nation euro held yesterday’s advance versus the yen after the European Central Bank reintroduced yearlong loans for banks and before a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy. The Australian and New Zealand dollars were set to complete weekly gains as Asian stocks rose.

The ECB said yesterday it will reintroduce yearlong loans, giving banks access to unlimited cash through January 2013, and it will resume purchases of covered bonds to encourage lending. At the same time, the European Commission is pushing for a coordinated capital injection into banks, and the German chancellor said policy makers “shouldn’t hesitate” if it turns out financial institutions are undercapitalized. As expected the European Central Bank left rates on hold.

USD

Following an intense week of market volatility with the BoE unexpectedly injecting quantitative easing to the sum of 75 billion GBP back into the economy and ECB boosting further liquidity with a further 40 billion EUR bond buy-up, all eyes are today on the key data coming out of the U.S. Today’s unemployment rate figures and non-farm payroll are again expecting to move the market for the final day of trading this week as the outlook of unemployment benefits rose less than forecasted last week showing early inductors that short-term U.S growth is positive.

Despite this projected gain in U.S. data over September the positive news of the unemployment rate decreasing is however too small to make significant impact on the long term growth of the American economy but the direction of growth is moving in the right direction. With this news and the negative outlook over Europe, the world’s largest economy and fears the double a dip is upon us and it being a question of when and not if, the Fed and Obama have prompted further measures to sustain expansion over the remainder of 2011 and the future.

GBP

The pound slumped against the dollar; euro and yen after the Bank of England reactivated its bond- purchase program and kept its benchmark interest rate at a record low to help revive the U.K.’s faltering economy. The central bank has faced pressure to embark on further quantitative easing to help revive an economy battling the steepest government spending cuts since World War II and the worsening euro-area debt crisis.

Sterling declined against all of its 16 major peers as Britain’s monetary policy makers boosted the central bank’s quantitative-easing program by 75 billion pounds ($115 billion) to 275 billion pounds.

Elsewhere, Moody’s Investors Service cut the senior debt and deposit ratings of 12 U.K. financial institutions, concluding the government would be less likely to provide support for them if they became financially troubled.

Lloyds TSB Bank Plc, Santander UK Plc and Co-Operative Bank Plc had their ratings lowered one step by Moody’s, while RBS Plc and Nationwide Building Society were cut two levels. Seven smaller building societies were cut from one to five levels, the rating company said in a statement today. Clydesdale Bank was confirmed at A2, with a negative outlook. This could cause further woes for Sterling today.

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Written by Tom Tong

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