Euro, Pound Tumble vs Dollar on Banking Woes

The euro and the pound fell sharply against the dollar on Monday as fears about the grim outlook for the global banking sector left investors extremely averse to risk.

The boost to sentiment from the earlier news of a second UK bank rescue deal quickly dissipated, sending European shares tumbling 2.8 percent.

Equity market falls were led by a drop of around 70 percent in the value of Royal Bank of Scotland shares after it announced losses of over 20 billion pounds in 2008, the biggest loss in UK corporate history.

Falling shares and the resulting wariness of risk boosted the low-yielding yen and the dollar as investors sought safer assets.

"We are seeing another splurge of risk aversion after the RBS results and the news of another bank bailout," Bank of Scotland Treasury Services currency analyst Naeem Wahid said.

"The UK measures have not done enough to shift sentiment on the banking sector," he added.

Britain's second bank bailout, unveiled on Monday, offered to guarantee their debt and set up a 50 billion pound fund to buy up assets and get cash flowing again.

The euro fell against the dollar, while the pound slumped as much as 2 percent to hit a two-week low of $1.4452.

The yen gained versus the dollar down and the euro dropped against the yen .

U.S. markets were closed on Monday ahead of the inauguration of Barack Obama as U.S. president.

Ratings Cut

The euro was further dented by a ratings downgrade on Spain and grim economic forecasts from the European Commission.

Standard & Poor's said it cut Spain's debt rating to "AA+", warning of a severe deterioration in public finances, prompting fears that Portugal and Ireland could prove to be next after Greece's downgrade last week.

The European Commission weighed in with a forecast for the euro zone to contract 1.9 percent this year.

"There's a great deal of uncertainty over the health of the euro zone economy and the outlook for euro zone credit fundamentals, which is undermining investor confidence towards the single currency," said Lena Komileva, G7 market economist at Tullett Prebon.

Investors expect further interest rate cuts from the Bank of England, already at a historic low of 1.50 percent, will weigh on sterling.

Further out, there are concerns over whether the government's banking measures will be enough to put the UK's floundering economy back on its feet again.

"These are a radical set of measures which signal the UK authorities' firm intent to prevent the economy choking through a lack of credit," Investec economist Philip Shaw said in a note to clients.

"Even so, we remain uneasy that this might not kick-start interbank lending sufficiently, which could result in the BoE needing to take even more steps address the lack of liquidity," Shaw said.

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