EU bail out Banks
11/Oct/2011 • Currency Updates•
Yesterday saw the euro strengthen after a weekend of exciting news that it’s only a matter of time until both German and France announce their rescue plan to throwing a safety ring around the drowning European countries which will be sent out towards the end of the month.
The outlook for the Eurozone bailout looked positive as German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged on Sunday to back the banks and aid Greek debt to maintain and protect growth throughout Europe. The importance is pivotal to prevent Greece from defaulting as it would have a huge knock on effect not only across Europe, spreading to the U.K, but also to the U.S pushing global economies towards a second, much deeper recession than in 2008 according to economists.
Today sees a key vote resting on the shoulders of Slovakia as measures to increase the bailout fund is still yet to be agreed. Slovakian Prime Minister Iveta Radicova remains confident that the result will be positive yet there still remains doubt as to whether the outcome of the vote, with coalition partners unable to agree a compromise deal.
The announcement from Germany and France yesterday to sure up debt and support the beleaguered Euro led to a spike in risk appetite leading to a weakening of the dollar.
However, lead forecasters believe that the dollar’s best quarterly rally since 2008 will not be able to continue to the end of the year as a slow economy spurs the Fed to flood the world with more U.S. currency.
The US may be in jeopardy of slipping back into recession as growth reports look like they will be forcing the Fed to print more money for the third time in three years to inject into the financial system through bond purchases. This would debase the dollar further.
Three years of near-zero interest rates from the Fed and $2.35 trillion of bond purchases helped pull the economy out of a recession; concern is rising that GDP may soon start to shrink. This may mean the Fed conducts a third round of QE. After cutting rates to a record low, the Fed twice bought bonds to inject cash into the economy.
For now it is looking likely that the dollar will continue to strengthen on the safe-haven demand benefitting from the fact that the U.S. economy is still in better shape than most other major economies.
The pound headed towards last Thursday’s lows against the euro, hit after the Bank of England announced sooner than expected that it would restart its asset purchase scheme to try and stimulate demand in Britain’s ailing economy. Sterling fell sharply against a broadly firmer euro on Monday after Germany and France promised a new plan to recapitalise Europe’s banks, but it rose versus the dollar as a rally in riskier assets pressured the U.S. currency.