Forex Investment and Currency Trading

European central banks have stepped up their activities, with the ECB extending the number of banks that can access its overnight liquidity provisions and the Bank of England broadening the range of collateral it accepts at its weekly 3-month cash auctions, to include highly-rated corporate and consumer loans. The focus now is to try to ease end-of-year funding strains. But overnight money market rates have hit a record high for 2008, term rates (3- and 6-month EURIBOR) have risen to new 14-year peak levels and wholesale money markets remain virtually paralysed.

To date, the ECB and Bank of England have separated efforts to calm financial markets from interest rate-setting objectives dealing with price stability (hence rates stayed unchanged at last week‟s ECB meeting). But the real economy impact of the credit squeeze is becoming more apparent across Europe, with the visible collapse in confidence in recent weeks threatening severe and prolonged economic downturns. The question is whether official rate cuts would have much impact in the credit-constrained world. The full impact of any lowering of policy rates is unlikely to be passed on to consumers and businesses initially, but rate cuts would help banks’ balance sheets and would go some way to restoring confidence. ECB is expected to ease next month, and will then continue with a series of rate cuts in 2009. The Bank of England, starting from a more restrictive monetary stance should ease more aggressively, starting this week. Co-ordinated rate cuts with the US Federal Reserve cannot be ruled out. Nevertheless, in both cases there is a severe risk that easing comes too little, too late to prevent a prolonged economic downturn across Europe.