Euro falls to 4-year lows

By Manuela Badawy

NEW YORK (BestGrowthStock) – The euro fell (Read more about the trembling euro. ) to a fresh four-year on low Tuesday after the European Central Bank warned the region’s banks may face a new wave of losses, and U.S. stocks (Read more about the stock market today. ) plunged as the government launched a criminal probe into BP’s massive oil spill in the Gulf of Mexico.

U.S. Treasury bond prices rose as fears of hefty writedowns by European banks sparked new worries about global economic recovery and unleashed demand for safe-haven assets such as government debt and gold.

Risky assets such as the euro and stocks rose earlier in the day following better-than-expected U.S. construction and manufacturing data. They gave up gains on fears the euro zone’s debt crisis would spread into its banking system.

The ECB cautioned on Monday that euro zone banks could face a “second wave” of potential loan losses totaling 195 billion euros ($239 billion) over the next 19 months due to the financial crisis.

U.S. and UK financial markets were closed Monday for national holidays.

“The ECB warning Monday set the stage for euro selling,” said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. “Markets remain jittery and overall risk sentiment is bearish.”

After May marked the most volatile month of trading since the aftermath of Lehman Brothers’ collapse in late 2008, investors focused on concerns euro zone growth would slow as the region struggles to rein in debt. That could, in turn, reduce demand for exports from economies like China and slow production there.

Concerns over another crisis in the banking sector were compounded by data signaling slower manufacturing growth in Europe and China. In the United States, a revival in the factory sector due to overseas demand and inventory restocking has helped lead an economic rebound over the past three quarters.

“Treasuries and the dollar remain the safe haven because the euro zone problem will not go away any time soon,” said Frank Cholly Sr., a senior market strategist at Lind Waldock in Chicago.

BP tumbled 15 percent after its failed attempt to plug to halt the Gulf of Mexico oil spill and news the United States launched a criminal probe against the firm.

The Dow Jones industrial average (.DJI: ) closed down 112.61 points, or 1.11 percent, at 10,024.02. The Standard & Poor’s 500 Index (.SPX: ) fell 18.70 points, or 1.72 percent, at 1,070.71. The Nasdaq Composite Index (.IXIC: ) lost 34.71 points, or 1.54 percent, at 2,222.33.

Federal agencies, including the FBI, are participating in the probe and “if we find evidence of illegal behavior, we will be forceful in our response,” U.S. Attorney General Eric Holder told reporters after meeting with state and federal prosecutors in New Orleans.

The energy sector was the worst performer in Wall Street, with the S&P Energy index (.GSPE: ) down more than 2 percent after BP Plc (BP.L: ) (BP.N: ) failed in its latest attempt to stem the Gulf of Mexico oil spill.

U.S. government bond prices rose with the benchmark 10-year U.S. Treasury note up 11/32, with the yield at 3.261 percent. The 2-year U.S. Treasury note rose 1/32, with the yield at 0.7698 percent. The 30-year U.S. Treasury bond was up 20/32, with the yield at 4.18 percent.

Earlier in the day the Institute for Supply Management said the U.S. manufacturing sector expanded for a tenth straight month but at a slower pace than in April, which was the highest in almost six years. Meanwhile employment rose to its best level in six years, according to an industry report.

The Commerce Department said construction spending rose 2.7 percent, and investment in private construction surged 2.9 percent, the largest increase since July 2004. Also, the Institute for Supply Management’s manufacturing index expanded more than expected in May.

The MSCI world equity index fell 1.28 percent. The index has lost nearly 10 percent since April, putting it on track for its biggest quarterly loss since March 2009.

The euro was down 0.51 percent at $1.2242, after having fallen to a four-year low against the dollar at $1.2112, its lowest since April 2006 as signs the euro zone’s debt crisis is spreading to its banking system. The dollar rose to its highest in 15 months against a basket of major currencies.

Oil fell $1.81 or 2.35 percent to $72.16 a barrel and spot gold rose $9.29, or 0.76 percent, to $1225.00 an ounce.

Stock Market

(Additional reporting by Vivianne Rodrigues and Richard Leong; Editing by Andrew Hay)

Euro falls to 4-year lows