Sterling Higher As UK Government Supports Banks

The euro hit its highest level in almost three weeks against the dollar on Monday after European governments joined forces to support the ailing banking sector. Leaders of the 15 countries that use the euro supported assisting 'systematically' critical banks in distress. Sterling also pushed higher as the UK government announced more details of its own banking rescue package. Over the weekend, Governments in Europe agreed to provide capital for banks short of funds due to a freeze up in money markets. Meanwhile the UK treasury announced they were likely to pump 45 million pounds into four struggling banks. At 8.20am GMT EUR/USD was trading at 1.3642.

However the pound was down against the euro on the back of speculation that Britain's economy will continue to deteriorate and force more interest rate cuts by the Bank of England. Royal Bank of Scotland Group, the second largest UK bank removed its chief executive and relinquished control to the UK government in return for $34 billion of support. There is an expectation for 62,000 redundancies in the banking sector by the end of the year. That would potentially take employees in the industry to their lowest levels for 10 years. At 8.20am GMT GBP/USD was trading at 1.7153.

Leaders from the Group of Severn industrialised nations meeting over the weekend hammered out plans to keep European banks afloat and prevent further crumbling of stock markets. The FTSE 100 fell 21 per cent last week. Not since the 1987 crash had there been such a drop. The second biggest bank in the UK, Barclays Plc, announced Monday a plan to raise $11 billion selling shares to investors. In addition, HBOS and Lloyds TSB will get around $28 billion jointly from the government.

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