The EUR USD went on a wild ride on Tuesday as the market fell sharply on concerns that the banking problems in the Euro Zone will increase. The Euro was weak before the New York opening because France and Belgium were forced to bailout European retail bank Dexia. The weakness continued throughout the day as traders began to believe that more government intervention will be needed to prop up weakening financial institutions across Europe.

Central banks cannot seem to get enough Dollars. Foreign banks are reportedly paying high premiums to borrow Dollars in the swaps markets even after the Fed doubled the amounts of funds available. Stories are circulating that central banks are hoarding Dollars on concerns that more financial institutions will fail. Even as the central banks are receiving funds from the swaps, they are refusing to lend them out. This demand for Dollars is expected to continue over the near term as traders believe the worst is yet to come for European banks. The consensus is that the U.S. banking system is well ahead of the rest of the world in insolating bad banks and bad assets. Look for more weakness in the EUR USD.

The GBP USD fell sharply on Tuesday on concerns that more U.K. financial institutions will fail without help from the government. Traders are beginning to accept the notion that the government is on top of the toxic asset situation in the U.S. while the worst is expected to be uncovered in the U.K. over the near term. Earlier in the week the U.K. government was forced to bailout Bradford & Bingley, a large British mortgage house. This is expected to be the first of many as the U.K. is suffering through a historically weak housing slump. Continue to look for more weakness in the British Pound as more banking related issues are issues are expected to be recovered.

The USD CHF and USD JPY rallied sharply higher as the U.S. stock market had a huge recovery rally following Monday’s massive sell off. Although it is too early to call a bottom, buyers drove stocks higher from the opening and into the last hour as mutual fund managers snapped up cheap stocks in anticipation of a better fourth quarter. The strong buying in the equities markets brought some confidence to stock traders who were encouraged to borrow in Yen and Swiss and buy higher priced assets in the U.S. This buying spree may falter tomorrow because light trading is expected on the Jewish holiday. Buying may even be more subdued on Thursday as traders will once again be allowed to short financial stocks after a 10 day absence. In addition, traders may also be unwilling to commit to large positions ahead of the U.S. House vote on the banking rescue plan. Look for any early rally tomorrow as global equity traders catch up to the move in the U.S., but do not be surprised by a break starting about mid-morning.

Weakness in the commodity markets and talk of the U.S. government reaching a resolution to the banking crisis helped strengthen the USD CAD on Tuesday. The Canadian central bank may have also joined the other major central banks in aggressively acquiring Dollars. Traders were buying Dollars on Tuesday in anticipation of the U.S. passing into law the banking rescue plan. Although the next vote is not expected until Thursday, traders seem to have wanted to get
a jump ahead of the Jewish holiday. Look for the USD CAD to continue to gain strength if crude oil weakens further or if central banks continue to demand Dollars.

The AUD USD and NZD USD fell as the demand for Dollar-denominated assets increased. Traders are anticipating banking and credit issues to spread throughout the world and Australian and New Zealand financial institutions are not immune. Central banks are increasing their demand for Dollars, leading to selling pressure in the AUD USD and NZD USD. A weaker gold market also contributed to the weakness. Continued strength in the U.S. stock market will also attract more foreign assets.
 
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