Reuters has reported that Bank of China, 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 Societe General, Credit Agricole, and BNP Paribas, the three banks being frozen out of the US money markets. Allegedly, the bank has also stopped trading with 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, euro zone 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 Swiss-Euro exchange rate which the Swiss National Bank will defend with unlimited quantities of liquidity. Just today, rumours 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 USD and the Japanese Yen. CNBC reports below with Mitul Kotecha, Head of Global FX Strategy, at Credit Agricole saying sell the euro on rallies. (He should know!). He’s talking EURUSD at 1.35. Morgan Stanley 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.

This post originally appeared at Credit Writedowns and is reproduced with permission.