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Euro Falls on Credit Worries; Dollar Gains on Data

The euro touched a six-week low against a broadly firmer dollar Tuesday as investors shunned the single currency on renewed concerns European banks may face losses related to the U.S. subprime mortgage market.

The dollar also drew some support from government data showing the U.S. trade balance unexpectedly narrowed in June, while July producer prices rose more than expected.

"We have a change in perception about Europe, with investors now realizing the region is not immune to the credit crunch coming from the U.S., and that is putting a lot of pressure on the euro," said Matthew Strauss, a senior currency strategist at at RBC Capital in Toronto.

"At the same time, U.S. markets seen to be stabilizing and the data today was not negative, which gives the dollar a bit of support."

The euro started to fall after reports that Spanish bank Santander is facing 2.2 billion euro exposure to high-risk U.S. loans.

In late morning trading in New York, the euro was down against the dollar.

The single European currency also faced pressure as expectations of a rate hike in the euro zone were offset by weaker-than-expected growth data and further European Central Bank action to calm short-dated money markets.

Against the yen, the euro was down, as was the dollar , after gaining earlier. The dollar's advance versus the Japanese currency was limited as U.S. stocks turned lower after a higher opening.

The U.S. trade deficit narrowed in June due to strong exports. Other data showed U.S. producer prices rose more than expected in July, but stripping out food and energy costs, prices rose less than expected.

"The dollar is definitely having a good day," said Boris Schlossberg, senior currency analyst at DailyFX.com. "The main theme of the day is that the Fed will stay -- not lower -- interest rates. But the chance for a rate hike in Europe and U.K. has gone down."

Federal Reserve officials have said inflation remains their main concern and analysts said signs of accelerating inflation would prevent the central bank from cutting interest rates.

Sterling dipped below the $2.00 level after U.K. July inflation came in below the Bank of England's 2% target rate for the first time in over a year. It last traded at $1.9994 versus the dollar.

The Canadian dollar extended declines versus the greenback after two Canadian trusts said Tuesday that they were unable to place asset-backed deals.

The loonie fell on Monday after niche investment bank Coventree said the credit problems caused by losses in the U.S. subprime mortgage sector had left it unable to replace maturing debt.

"We got a bit of news out that there might be more trouble up here in the asset-backed subprime sector," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

"There might be enough momentum here for real money to take profits on long Canadian dollar positions."

In Europe, Spanish daily ABC's report on Santander's exposure to risky U.S. credit sectors added to investor concerns about the extent to which European banks are exposed to problems in U.S. credit markets.

The ECB injected 7.7 billion euros of overnight cash in its fourth money market operation, draining almost 40 billion euros from euro-zone money markets on Tuesday.

"What you are seeing today is a very serious shift in psychological perception about who is the stronger party," said Schlossberg at DailyFX.com.

"The euro's rally was driven by better growth prospects, but if those prospects decline, then so will the euro. The European economy seems to have hit a serious wall."

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