US Gov’t Injects Capital into Banks

The greenback recovered earlier losses, edging off its session lows against the euro at 1.3768 and sterling at 1.7628. Treasury Secretary Paulson announced today the government would inject $250 billion into US banks in exchange for senior preferred shares. The move effectively translates into a partial nationalization of these banks in an effort to recapitalize the ailing financial system. Although Treasury Secretary Paulson said nationalizing any private US company was objectionable, “the alternative of leaving businesses and consumers without access to financing is totally unacceptable”. Fed Chairman Ben Bernanke chimed in to assure markets of the move to stabilize the financial system, saying “Americans can be confident that every resource is being brought to bear, historical understanding, technical expertise, economic analysis and political leadership”.
Euro Pares Gains

The euro gave back earlier gains versus the yen and dollar as the initial excitement over the Treasury’s move to pump $250 billion into US financial institutions was tempered, with US equity bourses paring back from its initial rally. Although the recent capital injections have quelled fears over the solvency of global banks and may have staved off a meltdown in the financial system, the likelihood for a severe global economic slowdown remains.

Germany’s ZEW sentiment survey reflected the rapid deterioration in confidence at the height of the financial crisis, as the economic sentiment collapsed in September to -63.0 – far exceeding estimates for a decline to -51.1 from -41.1 in August. The current conditions indicator plunged to -35.9 from -1.0 a month earlier. The ZEW said that perspectives for economic development have significantly deteriorated due to the financial crisis but a separate analysis following the bank rescue package reveals a less pronounced decline in expectations.

In the coming session, Eurozone reports include Germany September CPI, HICP and Eurozone September inflation figures.

EURUSD holds steady near 1.3670, with support seen at 1.3640, followed by 1.36 and 1.3550. Subsequent floors are eyed at 1.3520, backed by 1.35 and 1.3470. On the upside, gains will encounter ceilings at 1.37, followed by 1.3740 and 1.3770. Additional ceilings will emerge at 1.38, followed by 1.3840 and 1.3870.