Pound and euro regain earlier losses as US bank bailout delays

02-09-2009 13:43

When the US delayed the declaration of its bank bailout the European currency would drop to a 1.2880 level as risk aversion dominated markets. The euro would regain its losses although fundamental data indicate a deeper recession. The demand for export dropped for the third consecutive month which resulted in a diminution of the German trade surplus from 9.9 billion to 6.9 billion in December. Economist believed that the Euro-Zone Sentix investor confidence would show an enhancement to –31.5 but actually it dropped to –36.1 from –34.1

The region continues to indicate a deterioration which results in risk aversion among European investors despite the rigorous ECB easing recently. The central bank will audit the growth and inflation forecast at their March meeting and it is to be expected that hereinafter rates will be lowered again. The central bank does not consider deflation as a problem and president Trichet believes that lower rate near to zero isn’t necessary. Still, the central bank will face more pressure to take measures as the cost of loaning for numerous EU countries, such as Spain, Greece and Portugal, increases.

Investor sentiment will be affected by the details of the US fiscal stimulus and by the bank bailout plan. According to US Treasury Secretary Timothy Geithner, the banking plan would be delayed as a result of the new government trying and approving it, which remains uncertain. Although there still are some unsolved problems, it is likely that the aide package will be approved this week, which may stimulate risk appetite and affect the dollar. Still, traders doubt if the stimulus on the economy will be sufficient to fight the recession. According to speculations, GM and Chrysler may be forced into bankruptcy to guarantee payment of the received government loans and this could counteract much of the aide package impact. For that reason traders may remain cautious while the dollar could find more support.