Euro Under Pressure Due to Problems of European Banks

The American dollar is likely to continue strengthening this week against European currencies, which are under pressure due to the spread of the credit crisis from the U.S. to Europe and new reports about problems in European banks.

Last week, the euro weakened against the dollar by more than 6 percent, bringing its exchange rate down to 1.37 dollars, the lowest level in 13 months. On the other hand, the American currency depreciated against the Japanese yen by 0.8 percent, with the dollar’s exchange rate falling to 105.25 yen. The theme of liquidity in the interbank money market will dominate the global currency markets again this week. Although the U.S. Congress passed a $700 billion bank bailout bill on Friday, there are still no signs that confidence between banks has returned. Therefore, interest rates in the money market for both the dollar and euro rose again on Friday.

After Congress passed the bailout bill on Friday, the dollar slightly weakened. However, the dollar index, which shows the value of the American dollar against six major world currencies, rose by 3.8 percent last week to 80.532 .DXY, the highest level in 13 months. The implementation of the bank bailout law does not guarantee that the credit crisis will end soon, and thus tensions in the financial markets will not dissipate, which favors the dollar, analysts say.

On the other hand, the euro is under strong pressure due to a series of indicators that the credit crisis has spilled over from the U.S. to Europe. Last week, European authorities rescued the British mortgage bank Bradford & Bingley from bankruptcy, then the Dutch-Belgian financial group Fortis, and then the Belgian-British financial group Dexia. Throughout last weekend, German authorities sought a solution to prevent the collapse of the mortgage lender Hypo Real Estate. Problems are emerging in Italy’s second-largest bank, UniCredito, which announced plans to raise fresh capital.

Additionally, the eurozone economy is threatened by recession, which will prompt the European Central Bank to lower interest rates. Last week, ECB leaders kept the key interest rate unchanged at 4.25 percent. However, while they had previously constantly warned of inflationary threats, which signaled that rates would remain unchanged or even increase, last week they warned of a weakening economy, which heralds a reduction in the cost of money. All of this is putting pressure on the euro, whose exchange rate fell by 0.9 percent this morning in Asian currency markets to 1.3640 dollars. In relation to the yen, the euro’s price plummeted by 1.8 percent to 142.2 yen, the lowest level since May 2006. (H)