Although the Nikkei bounced tonight ending up more than 1% on the day, the European bourses were considerably more jittery on fears of further fallout from the liquidity crisis that has gripped global financial markets. In Germany, Landesbank Sachsen Girozentrale, a state-owned bank was in process of obtaining emergency funding as a result of about 3 billion euros ($4 billion) in investments linked to U.S. subprime mortgages

The Leipzig-based lender is the second German bank to receive a bailout in the past two weeks and the news is having a chilling effect on German credit markets where the banking sector is generally renowned for its conservative business practices. The fact that subprime US debt has found its way on the books of European institutions suggests that the problem may not be contained to the US economy alone and may depress economic growth worldwide. Alexander Stuhlmann, chief executive of German banking concern WestLB AG, noted last night that it has become more difficult for German banks to receive credit lines from their international partners.

Credit crunch fears also had an impact on the latest German ZEW data which printed markedly lower than expectations at –6.0 vs. –1.0 consensus call. On the positive side EZ Trade Balance improved to 5.2 Billion from 3.2 Billion projected, but the data was for two months back and likely to deteriorate significantly as consumer demand in US contracts in the wake of turmoil in the financial markets. Despite the series of negative news, the EUR/USD declined only slightly after losing more than 200 points last week. The safe haven theme for the dollar is growing a bit old and traders may be weighing the relative impact of the fallout from the subprime fiasco on US and EZ economic growth. At this point it is far from clear who may suffer the most. While US is the epicenter of the problem, export-dependent European businesses could be badly hurt by the decline in US consumer demand while European financial players may suffer serious losses on their US subprime portfolios. For the time being, markets remain on edge as they warily monitor the news for any additional problems in the finance sector. If there is more bad news, yen will continue to strengthen while the rest of the currency markets attempt to ascertain the damage.

Boris Schlossberg is a Senior Currency Strategist at FXCM.