On Thursday, the Federal Reserve, European Central Bank, Swiss National bank and two other central banks promised to lend dollars to cash-strapped European banks, a move that triggered a currency rally in the euro versus the U.S. dollar. The move has alleviated concerns related to a lack of funding for debt payments and loans, and is forecast to provide sufficient liquidity to troubled European banks for the remainder of 2011, according to the European Central Bank (ECB).

According to the ECB’s official Euro vs. Dollar chart, the Euro had plunged nearly six percent in recent weeks amid worries that a Greece default could have negative ramifications for the euro, which encompasses over a dozen countries. However, the currency rebounded close to 1.1 percent from Tuesday through Thursday on the news that the Fed and others will hold three auctions for U.S. dollars – beginning in October – to raise liquidity for the European banks, and the euro was at $1.376 USD at market close on Friday.

Greece Trouble

The euro zone has been struggling in recent months following a German-led bailout of Greece, Ireland and Portugal that did little to settle volatility in European markets. Earlier in the week, Moody’s downgraded French banks SocGen and Credit Agricole, from Aa2 to Aa3, furthering panic that the sovereign debt crisis could extend far beyond Greece. On Friday, the European Union announced it will defer its decision to provide bailout money for Greece until October, creating more uncertainty as to whether the Southern European country will default on its debts.

Analysis

In reaction to this week’s pledge from central banks, Richard Franulovich, senior currency strategist at Westpac Banking Corp. in New York told Bloomberg Magazine, “The euro has come an exceptionally long way. It’s fallen a lot in a short period [and] it had to find a stable level at some point. Lots of little things have come together to support the euro.”

John Taylor, founder and chief executive officer for FX Concepts LLC in New York told Bloomberg that the European Central Bank’s plan to provide liquidity to banks does not address the underlying issue, suggesting that policy makers should coordinate continually.

German Chancellor Angela Merkel and French President Nicolas Sarkozy on Thursday said they were “convinced” that Greece will remain under the euro. Moments after a telephone conversation with Greek Prime Minister George Papandreou, the Sarkozy and Merkel signaled that they would continue to support Greece. As a condition for future bailouts, Papandreou committed to go forward with deficit-reduction measures according to information released jointly by the Greek, German and French governments.

Lauren Rosborough, senior strategist for Westpac Banking Corp. in London remained skeptical on Greece’s ability to repay its sovereign debt, and was quoted by Bloomberg on Friday. “[The bailout pledge] could help to calm markets, but to be honest it doesn’t really resolve the problem. There are a lot of people who aren’t convinced Greece is going to stay as part of the euro zone. Risks to the euro still remain.”

U.S. Treasury Secretary Timothy Geithner flew to Poland to meet with euro zone finance ministers on Friday in an effort to leverage the European Financial Stability Facility (EFSF), the central fund from which the bailout loans will be paid. On Wednesday, Geithner attended the “Delivering Alpha” conference in New York, stating “There is no chance that the major countries of Europe will let their institutions be at risk in the eyes of the market. If you think about the basic lessons of the financial crisis, it takes a number of things to solve it definitely. He added that leaders should use “overwhelming force” and be committed to a solution, according to a Wednesday article in the Wall Street Journal.