Euro weakens against the dollar as equity markets fall

The euro finished down against the dollar yesterday, losing 0.94 cents on the day as concerns about the US stimulus package caused stock markets to plummet, which in turn undermined the euro and supported the dollar. A "stress test" for the largest US financial institutions included in the plan sparked a slump in the banking sector, as investors worried about which banks are strong enough financially to make the grade.

All banks with more than $100 billion in assets will be required to submit to the stress test. That level encompasses such institutions as J.P. Morgan Chase, Citigroup, Bank of America and Wells Fargo; shares of those banks dropped by between 10% and 19% following the announcement. Some other banks that will likely face the test fell even more steeply - shares of SunTrust Banks, which has more than $150 billion in assets, slumped 27%, while Regions Financial with more than $140 billion, lost 30.

The euro has recovered a little lost ground this morning following the release of German CPI data, which showed annual inflation had slowed to 0.9% in January from 1.1% in December, as expected. However, the euro is still trading below the $1.30 level as risk aversion continues to support the dollar.

Dollar strengthens against the pound

The dollar strengthened against the pound yesterday in anticipation of Senate approval of the US bailout plan. Traders gave a tepid response to the Senate finally approving the delayed stimulus bill, as concerns arose that the bill would not be sufficient to revive the US economy. The dollar strengthened rapidly against the pound as risk aversion returned.

Data released in the UK was mixed as a BRC report showed fairly positive retail sales whilst a housing report showed falling home sales.

There are several significant announcements taking place in the US today including Trade Balance at 13.30 GMT. In the UK, the ILO Uenemployment Rate at 09.30 GMT will be of particular significance.

Sterling reverses gains against the euro

The pound reversed many of the gains seen over the past week against the euro yesterday, as markets snubbed the new US bailout plan. Global equity markets fell after the plan was announced, over fears that the rescue plan is too vague and may not go far enough to rejuvenate the world’s largest economy. Investors favoured safe haven currencies such as the dollar and the yen, and dumped the relatively higher risk pound as risk aversion took hold. Indeed, sterling could not be saved by better than expected trade balance figures released in the morning, which showed that the UK’s trade gap narrowed to levels not seen since June 2007.

There are no major announcements due in the eurozone today, whilst investors will take a keen look at the Bank of England’s quarterly inflation report and unemployment figures released this morning.

Australian dollar slightly weaker against sterling

The Australian dollar was slightly weaker against the pound yesterday, after investors were uninspired by the announcement of the US bank rescue package. This caused a downturn in stock markets, triggering an upturn in risk aversion. Economic data was mixed out of the UK as the pace of falls in house prices quickened, while retail figures were better than expected and Britain's trade deficit narrowed. Later today investors will focus on key UK unemployment data and the BoE quarterly inflation report. The bank report on inflation may give further clues as to the size and timing of future rate cuts. Markets are expecting inflation levels to undershoot the target levels, paving the way for further rate cuts.

Kiwi dollar may remain vulnerable

The New Zealand dollar remained in relatively narrow ranges yesterday as investors digest the US bank rescue package. The kiwi may remain vulnerable as many in the market are of the view that the rescue plan is only a band aid solution and will not help solve the banking crisis. Continuing concerns over global financial markets is likely to see investors remain relatively risk averse. Until retail sales figures are released on Friday the kiwi’s direction will continue to be driven by broader market movements.