Euro falls vs dollar, yen on debt fears; Korea eyed

By Gertrude Chavez-Dreyfuss

NEW YORK (BestGrowthStock) – The euro plunged to an 8-1/2-year low against the yen and fell to a near four-year trough against the dollar on Tuesday, as Spain’s takeover of a small bank fueled fears of systemic risks within the banking system that could hurt global growth prospects.

The single euro zone currency, however, recouped some losses in afternoon trading as Wall Street shares recovered from an early plunge. Traders said small buy orders have pushed the euro higher in thin volume, triggering stops above $1.23.

A slide in global stock prices and escalating tensions in the Korean peninsula also drove investors to flock to the yen and dollar for safety, attracted by the generally stable financial systems of the United States and Japan and the high liquidity of their respective currencies.

“The general fear is that developments in Europe would have a much broader global impact. Increasingly, market participants are getting scared and fearful that we may have a repeat of late 2008,” said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.

The Bank of Spain on Saturday said it had taken over a small savings bank, CajaSur. Analysts said the bailout highlighted weakness in the European banking sector and spurred worries that more banks may need to be bailed out at a time when European countries are trying to repair their public finances.

In late afternoon New York trading, the euro was down 0.1 percent at $1.2338, coming off session lows at $1.2177. The euro last week touched a four-year low of $1.2143 on electronic trading platform EBS.

The ICE Futures U.S. dollar index (Read more about the global trade. ) (.DXY: ), which tracks the greenback against a basket of six currencies, rose 0.4 percent to 86.571.

Against the yen, the dollar fell 0.3 percent to 89.93. Sterling was down 0.3 percent at $1.4381.

“We had some short-covering in the euro this afternoon, which led to some stop-losses,” said Brian Dolan, chief currency strategist, at Forex.com in Bedminster, New Jersey.

Technically, he added, that there may be a reversal in trend in the next few days, suggesting that U.S. stocks (Read more about the stock market today. ) may have notched a key low and the U.S. dollar a crucial high.

EURO TREND STILL LOWER

The euro has lost 7.2 percent against the dollar so far this month and is heading for its biggest monthly fall since January 2009 at current prices.

Scotia’s Sutton said she expects the euro to breach that four-year low at $1.2143, with $1.18 as the next key level.

Against the yen, the euro fell (Read more about the trembling euro. ) to around 108.85 yen — its lowest since late November 2001 — according to EBS. It last traded at 111.28, slightly down on the day.

Tensions on the Korea peninsula also buoyed the dollar and yen after South Korea’s Yonhap news agency said North Korean leader Kim Jong-il had told his troops to prepare for combat. The South Korean won at one point fell nearly 5 percent.

Investors were also on edge after three-month dollar Libor rates soared to 10-month highs as banks became more cautious about lending to European institutions after the Spanish bailout over the weekend. U.S. two-year swap spreads, a key gauge of financial system stress, also widened to one-year highs on Tuesday.

Growth-linked currencies such as the Australian and New Zealand dollars initially retreated, but recovered late in the session. The Aussie dollar was flat on the day at 74.51 yen after trading lower for most of the session.

The Australian currency also rallied from 10-month lows against the U.S. dollar to move 0.3 percent higher at US$0.8266.

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Euro falls vs dollar, yen on debt fears; Korea eyed