FOREX-Euro falls as European exposure to US credit weighs
(Recasts, changes dateline, byline, updates prices, adds quotes)
By Simon Falush
LONDON, Aug 14 (Reuters) - The euro hit a six-week low versus the dollar and a four-month low against the yen on Tuesday on a Spanish press report that Santander (SAN.MC: Quote, Profile, Research) is facing $2.2 billion euro exposure to high-risk U.S. loans.
Sterling weakened sharply, falling back below the $2.00 level, after British July inflation came in sharply below forecasts and under the Bank of England's 2 percent target rate for the first time in over a year.
The yen rose broadly and high-yielding currencies weakened as investors further trimmed carry trades on persistent jitters about bank and fund losses stemming from problems in the U.S. subprime mortgage and credit sectors.
Spanish daily ABC's report on Santander's exposure to risky U.S. credit sectors euros weighed on the euro and added to investor concerns about the extent to which European banks are exposed to problems in U.S. credit markets.
The European Central Bank, meanwhile, announced on Tuesday another quick tender, its fourth consecutive operation to supply money markets with sufficient funds and soothe investor concerns of a liquidity freeze.
"The problems in the credit market have unsettled global capital markets and the market is now looking out for the next piece of bad news and this has led investors to look at getting out of risky positions," said Geoff Kendrick, currency strategist at Westpac.
At 0845 GMT the euro was down 0.3 percent versus the yen at 160.34 yen after hitting a four-month trough of 159.90 yen, according to Reuters data <EURJPY=>.
The euro was down 0.3 percent versus the dollar at $1.3571 after hitting a six-week low of $1.3564 <EUR=>, while sterling was down 0.6 percent at $2.0005 <GBP=>, having traded as low as $1.9995 <GBP=>, also a six-week low.
Data showing a slowdown in euro zone growth to 0.3 percent in the second quarter from 0.7 percent in the first had little impact on the single currency.
The dollar was also down 0.15 percent verus the yen to 118.09 <JPY=>, while the New Zealand dollar was down 1.25 percent at $0.7297 <NZD=>, after hitting a fresh 2-1/2-month low of $0.7287.
Traders said higher-yielding currencies were likely to stay under pressure against the yen as more investors are likely to cut back on risky positions as nerves run high about the possibility of more negative news from the spreading U.S subprime losses.
Kendrick at Westpac added that carry positions were one of the first ports of call for investors as forex positions tend to be the most liquid. "If they are long carry positions they will look to get out of these to fund other areas."
The low-yielding Japanese currency had been widely used by speculators as a cheap source of funds to buy higher-yielding currencies in carry trades.
A money market squeeze on worries about the exposure of European banks to subprime mortgages has eased as the ECB and the Fed pumped large amounts of cash into the banking sector in the past few sessions.
But the ECB's action to stave off a money market squeeze has led investors to question the chances of the ECB raising interest rates to 4.25 percent next month from the current 4 percent.
"Investors are pretty much doubting a September rate hike by the ECB," said Tsutomu Soma, a senior manager in the foreign securities department at Okasan Securities, adding that a hike would not be consistent with the big fund injections.
Before the fears of a money market crunch, most investors were convinced the ECB would boost rates next month.
In a Reuters survey, 13 of 17 dealers said the ECB would raise interest rates in September. In the same survey, most respondents said they did not foresee any need for another large fund injection into the overnight markets.[ECB/REFI]