Risk aversion returned to markets as the news broke that Swiss banking giant, UBS, had posted yet another quarterly loss and the UK authorities were putting more money into troubled banks RBS and Lloyds. Equity markets dropped sharply on the news as investors fretted that hopes of a global economic recovery had been premature. In terms of the currency markets, the US dollar and Japanese yen were the main beneficiaries of the news as traders opted for the traditional safe haven assets. Similarly sterling came under pressure as a result of the news, although disappointing Construction PMI numbers were also to blame.

Sterling

The pound dropped to a one-week low versus the dollar but held steady against the euro after the UK Treasury announced a shake-up of British banks and investors braced for a possible increase in quantative easing by the Bank of England.

US dollar

With the Federal Reserve set to conclude its monetary policy meeting and similar policy announcements expected from the Bank of England and the European Central bank, the session was notable for investor caution. This in turn benefitted the greenback, which ended the day higher against both sterling and the euro.

Euro

The euro dropped in early trading after UBS posted another quarter of losses. The European Commission also announced after completing a stress test of other major European banks that losses could reach the €400 billion mark this year which in return created risk aversion as investors moved out of higher yielding currencies.

Japanese yen

The yen remains well-supported across the exchanges with investors cautious ahead of a series of key central bank policy announcements this week.