Euro, Franc, Dollar, Yen - The Currency Wars Are Back On

by: Edward Harrison

Reuters has reported that the Bank of China (OTCPK:BACHF), a dealer in China's foreign exchange market, has stopped doing foreign exchange forwards and swaps with several European banks. Separately, sources say the European banks involved are Société Général (SCGLF.PK), Credit Agricole (CRARF.PK), and BNP Paribas (OTC:BNOBF), the three banks being frozen out of the US money markets. Allegedly, the bank has also stopped trading with UBS (NYSE:UBS) because of worries about UBS's rogue trading losses.

These banks are being strangled by market panic and the Europeans need to get on top of this before it goes further, and we see a liquidity-induced bank collapse.

Meanwhile, eurozone weakness is having an impact on foreign exchange markets. The Swiss franc has been at the center of this, causing the Swiss to set a floor at 1.20 for the franc-euro exchange rate, which the Swiss National Bank will defend with unlimited quantities of liquidity. Just today, rumors were circulating that this floor was being dropped to 1.25, causing the Franc to plunge. Even so, the impact has already been made on the Swiss economy; a dip in GDP is considered a distinct possibility.

Other places to look for euro weakness are in the US dollar and the Japanese yen. CNBC reports below with Mitul Kotecha, head of global FX strategy, at Credit Agricole, saying to sell the euro on rallies -- and he should know! He's talking euro-US dollar at 1.35. Morgan Stanley (NYSE:MS) is talking about 1.30. Will the Fed ease, though? We will found out more this week. It seems like the currency wars are back on.