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Euro, pound plunge on banking fears

Published on 20/01/2009
TOKYO – The euro dropped to a one-month low against the dollar in Asia Tuesday, while the British pound was the weakest in six years, hit by fresh signs of trouble in the European economy.

Renewed fears about the financial crisis threatened to overshadow the inauguration of US president-elect Barack Obama, who inherits an economy facing its worst crisis in decades, dealers said.

The euro tumbled to 1.3003 dollars in Tokyo morning trade, down from 1.3157 in London late Monday, when US markets were closed. The British pound slid to 1.4264 dollars, the lowest level since April 2002.

The greenback was flat at 90.38 yen while the euro fell to 117.53 yen from 118.93.

Worries grew about the problems of Europe’s banks after Britain’s Royal Bank of Scotland estimated that it had lost up to 28 billion pounds (40 billion dollars) in 2008.

"It’s just very hard to look on this news calmly," said Jun Kato, a senior dealer at Shinkin Central Bank, told Dow Jones Newswires. "This is not just about RBS. Other European banks like ABN Amro are going to take hits too."

Britain’s biggest corporate loss ever came as London expanded its bank rescue program, including an insurance scheme to protect against so-called toxic assets, but the announcement failed to calm investor worries.

"At first sight, Britain’s bailout program may have seemed positive, but the fact that it needed additional measures worried markets," Sumitomo Mitsui Banking Corp. strategist Daisuke Uno said.

Pessimism also grew after the European Commission said it expected the 27-nation economy to contract 1.8 percent this year and the 16-member eurozone by 1.9 percent, with a return to positive growth likely only in 2010.

The gloom in Europe risked dousing market optimism over Obama’s plans to revive the US economy after he takes office on Tuesday, dealers said.

"Renewed concerns over the health of banks threaten to overturn hopes that Tuesday’s inauguration of president Obama might trigger an improvement in sentiment," NAB Capital strategist John Kyriakopoulos wrote in a note.

The new president is expected to push through a massive new stimulus package of up to 825 billion dollars to kick start the US economy.