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FOREX-Battered euro sinks, yen soars as crisis bites

Mon, Oct 6 2008, 11:34 GMT
http://www.afxnews.com

LONDON, Oct 6 (Reuters) - The euro was pummelled against major currencies on Monday as concerns for European financial sector health increased without signs of a coordinated policy response, while the yen spiked as investors cut risk exposure.

Sentiment soured further against the euro after leaders of Europe's four biggest economies decided against a coordinated bailout plan at a weekend summit.

European banks have been hit hard by the fallout from a crisis that began in the United States when the housing market collapsed and bad mortgage debts multiplied.

With banking shares leading European share prices down a massive 5 percent on the day, Sweden became the latest country to act against the deepening crisis, with the government saying it would expand bank deposit guarantees and the central bank raising the amount of loans offered to banks.

It followed Germany's pledge on Sunday to guarantee private deposit accounts, a move which spurred similar action by Austria and Denmark. Ireland issued the first such guarantee last week, prompting criticism of a fragmented European Union response.

"Foreign investors had a love affair with the euro zone up until late last year. If you have an uncoordinated policy response it gives even less reason to invest in the euro zone and that is helping encourage these flows," said Chris Turner, head of FX strategy at ING in London.

"At the same time the scramble for dollar funding is still going on and that's giving the dollar a strong bid," he added.

At 1038 GMT, the euro was down 1.3 percent at $1.3583 after sliding to its lowest since late August 2007 at $1.3542 in early European trade -- leaving major technical support of $1.3667 far behind.

Against the yen, the euro was down 3.5 percent at 139.82 yen -- a 2-1/2-year low according to Reuters data. The dollar was down 2 percent 103.10 yen.

European stock futures were down 5.2 percent at 1031.85, led by the banking sector, while the UK FTSE 100 index was down 5.4 percent at 4710.0.

PARALYSIS

The moves in Europe were in contrast to situation in the United States, where the government's $700 billion bank rescue plan was finally passed through congress on Friday.

"The Paulson plan may be flawed, but it at least underlined that the drive for a solution to the problem is coming from the United States, and that is where the capital is likely to flow as a result, favouring the dollar," Daragh Maher, deputy head of global FX strategy at Calyon, said in a research note.

The dollar was also helped by strong dollar demand as global money markets remain frozen.

"The market is in an extreme state of paralysis," said BTM-UFJ currency strategist Lee Hardman. "Global financial institutions are increasingly forced to procure dollar in the spot market and the dollar is rallying on the back of that."

More worries about the troubles plaguing the global financial system prompted heavy selling of riskier positions in carry trades and stocks.

The Australian dollar plunged more than 5 percent against the yen at one point to a four-year low as investors were forced to dump long-standing carry trades favouring higher-yielding currencies.

The bellwether of emerging market stress however was Iceland, with the crown currency falling more than 7 percent to a record low against the euro as the country scrambled to avoid full-blown financial meltdown after failing to produce a stability plan at the weekend.

(Additional reporting by Tamawa Kadoya; Editing by Victoria Main)

(Reporting by Veronica Brown) Keywords: MARKETS FOREX

tf.TFN-Europe_newsdesk@thomson.com

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