Euro Resumes Slide

By NICHOLAS HASTINGS

LONDON—The euro fell Monday after the Spanish government came to the rescue of a small savings bank over the weekend, refocusing market attention on the risks associated with euro-zone lenders.

The euro was down at $1.2371 from $1.2583 late on Friday in New York, according to EBS. The single currency was also down at ¥112.11 from ¥112.80. The dollar was up at ¥90.14 from ¥89.64 and at 1.1570 Swiss francs from 1.1480 francs. The pound was down at $1.4439 compared with $1.4445.

However, as the failed bank, CajaSur, represents only 0.6% of Spanish banking assets, the impact on investment flows should be minimal, analysts said.


If anything, global sentiment has been helped by positive talks between the U.S. and China, which lowers the risk of a trade war, and by news that Germany plans to launch an austerity program next year.

Good news on deficits came from the U.K. as well, as the new U.K. government started to unveil its proposals for more than £6 billion of spending cuts. The volatility in market sentiment was illustrated by the performance of the Australian dollar, which initially came under heavy selling pressure as investors pulled out of risky markets, but then rebounded to trade back up over $0.83 where it had begun.

The failure of CajaSur hurt market sentiment at first given the ongoing concerns about the euro-zone banking system. But, as strategists at BNP Paribas said, it is too small an event "to interrupt the move back into risk appetite" which was apparent at the end of last week.

Concern about euro-zone banks was compounded by a report that some major U.S. banks remain at risk from a credit downgrade, a move that would seriously increase their funding costs.

On the plus side, deficit fears diminished a little as Germany appeared set to lead by example with its plans for austerity measures next year.

The speed with which the new U.K. government under Prime Minister David Cameron is unveiling its deficit reduction plans is also providing some cheer for financial markets. There had been fears that the cuts would be watered down because of the coalition government that Cameron was forced to form with the Liberal Democrats.

Another factor helping to keep market sentiment from deteriorating too much is the unusually cordial talks being held between U.S. Treasury Secretary Timothy Geithner and his Chinese counterparts in Beijing.

The talks have increased speculation of an imminent revaluation of the Chinese yuan as well as reduced the risks of a trade war.

In China, the Shanghai Composite Index posted a strong 3.5% gain but sentiment in European stock markets at the opening was very mixed.

Write to Nicholas Hastings at nick.hastings@dowjones.com