Euro Up After Bank Tests

Added: July 23, 2010

The euro improves Friday as investors take in bank stress test data. The details push investors to riskier investments.

Bank Stress Tests

The currency trading session on Friday was heavily influenced by the bank stress test data that was due to be released during the day. The euro was able to post some gains for the day after the results of the tests showed that most of the European banks tested passed the regulatory stress tests. Investors initially were concerned with the results, but as the details emerged, it looked more confident for investors.

The tests, which were administered by the European Banking Supervisors were supposed to help restore trust in the European financial system, something investors have been concerned with over the last few months as euro zone sovereign debt continued to increase. The data released showed that seven banks need to raise new forms of capital in order to improve their finances in order to make it through a larger economic downturn. Those seven banks were smaller banks and therefore, of less consequence to the larger picture. The banks included five Spanish, one Greek and one German bank. The shortfall equated to about EURO 3.5 billion.

Euro

Prior to the release of information about the stress tests, the trading session was highly volatile. The euro fell to as low as US $1.2794 during the day. The euro zone bank test was thought to have been too weak initially, however investors were able to gain more confidence as the details came out about each bank. Investors helped to increase the euro’s value as they gained insight into just how difficult these tests were, which helped to give them more confidence in the banking sector as a whole.

Also helping the euro was data released regarding the German business sentiment numbers. These numbers rose during the last month to better than expected levels.

US Stocks

Also helping to encourage investors to move towards the riskier investment of the euro was the US stock market, which rallied during the afternoon session. US equities advanced. The Down Jones Industrial Average rose by as much as 100 points during the day, which was due in part to the euro’s ability to improve after the bank stress test data was announced.

By the Numbers

By the end of the trading session on Friday, the euro moved from US $1.2892 as of late Thursday to US $1.2918. The euro moved from Y 112.05 to Y 112.98. The US dollar moved from Y 86.93 to Y 87.45. The US dollar moved from CHF 1.0428 to CHF 1.0527. The UK pound moved from US $1.5265 to US $1.5432 for the day. The ICE Dollar Index moved the US dollar from 82.611 to 82.475.

Sterling was up significantly, more than one percent, against the US dollar. This came after the gross domestic product numbers for the second quarter in the UK were better than expected. The economy in the United Kingdom improved by 1.1 percent for the quarter. That is the fastest pace it has improved in the last four years and was significantly higher than the 0.6 percent investors had expected.

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Euro Being Manipulated?

Posted by Mark Harmon at Jul 26, 2010 02:13 AM

There’s more than one way to manipulate currency markets. It’s really upsetting that the European regulators seem to be manipulating the financial markets, including the currency market, by releasing stress test numbers that people know are not telling the truth. Okay, I’ll go ahead and say it – the reports that the stress tests on the European banks were done so that most passed is ridiculous. And we still don’t know how much capital is really needed to keep these banks afloat and that is nothing but manipulation at its worse. What they have managed to do is maintain volatility in the marketplace as investors continue to guess from day to day what new problems are emerging. Apparently the regulators did not learn their lessons well after the financial markets collapsed. As an investor, I resent being treated like this because anyone could read the reports leading up to the stress test results and figure out that a number (more than 7 for sure) of European banks are still in trouble. This is not good. The truth is always better than lies…or in this case…omissions. Doing partial stress tests may be transparency to some people, but not to me.

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Yen the Best Bet?

Posted by John Sparks at Jul 30, 2010 08:44 AM

By not doing full stress testing on the euro-zone banks, it now makes you wonder how problematic the information is that the government is trying to hide. There is a good possibility that they are trying to prop up a euro that would fall precipitously if the truth was known. It reminds me of the Swiss a year ago March. Everyone knew they were manipulating the currency market but they never admitted it publicly. All of these attempts to manipulate currency values through various means is quite concerning. The US dollar is threatened as a safe haven. The euro is riding on incomplete information. The Chinese are busy creating a new currency basket against which they can peg the yuan. There are signs the market is turning to the yen as the safe haven currency in this volatile market. The yen and emerging market currencies are the best bets right now don't you think?

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Watch UK

Posted by Tim Cain at Jul 30, 2010 09:58 AM

It seemed that the UK was on track for a decent pace of recovery, but the news that house prices fell by .5% as opposed to the predicted .3% for July has put some of the risk aversion back into the sterling. The US is sure to be watching the UK closely to see how consumers react to the austerity measures put in place, since the word “austerity” doesn’t seem to be included in the language used across the pond. If they UK consumers quit spending then the recovery is not going to maintain a decent pace. It’s somewhat surprising that quantitative easing policies are still on the table for discussion should deflation rear its ugly head. You have to wonder at what point the economies will be able to function on their own again. Weaning off the dependency on government spending is going to be a painful process. The sterling’s surge against the dollar will probably continue barring any surprise announcements.