European stocks fall sharply as euro gains against dollar

LONDON: European stocks, which have performed strongly recently, fell back yesterday, with London banking shares undermined by concern about bad debts and US-exposed companies hit by weakness of the dollar.

In London the FTSE index of 100 leading shares fell 0.29% to 6,122.10 points.

In Frankfurt the DAX index of 30 leading shares shed 0.98% to 6,411.96 and in Paris the CAC 40 slumped by 0.65% to 5,389.46 points.

As European markets closed, the Dow Jones Industrial Average showed a loss of 0.22% at 12,299.24 points in New York while the Nasdaq Composite of mostly high-tech shares was down 0.09% at 2,463.75 points.

The broad Standard & Poor??™s 500 index had given up 0.16% to 1,403.83 points.

The US markets were to shut early yesterday and had been closed Thursday for the Thanksgiving holiday.

In London, banking shares fell in response to brokerage comment from Morgan Stanley expressing concern about recurrent loan problems, saying that the banks were likely to face increased costs in dealing with bad debts.

It singled out particularly Lloyds TSB and the price of stock in the bank fell by 1.25% to 554.50 pence. Stock in Barclays shed 1.07% to 692 pence.

Companies that were exposed to the falling dollar also came under pressure, and the jet-engine maker Rolls-Royce lost 0.90% to 438.75 pence.

In Frankfurt, sentiment was affected by the weakness in Tokyo, and shares in chemical group Bayer fell by 2.72% to 39.0 euros, having risen on Thursday after the group announced the sale of its chemicals subsidiary HC Starck for about 1.2bn euros ($1.56bn).

Allianz fell by 2.10% to 149.05 euros. A trade union said that the banking and insurance group would drop any job cuts until the end of 2009, having said in June that it wanted to shed 5,000 jobs in Germany. Shares in the airline Lufthansa gained 0.63% to 19.22 euros even though it had said it would maintain or slightly increase its dividend.

Shares in Paris were set back by the dollar??™s fall against the euro, which hit $1.31 in mid-day trading, the highest level since April 2005.

Brokers Aurel Leven said that the cautious attitude of investors, particularly in Germany where it contrasted with strong business sentiment, "is driven by gloomy prospects in the US and for world growth".

Shares in airline Air France-KLM fell by 1.06% to 29.82 euros, continuing a decline begun on Thursday in response to news that the company had begun exploratory talks on a link with struggling Italian airline Alitalia.

Shares in the European aerospace group Eads fell by 0.43% to 23.25 euros owing to the weaker dollar and an announced delay in a board meeting on the launch of the A350 series airliner.

Another factor weighing on Eads was an announcement on Thursday that prosecutors have begun a probe into possible insider trading in Eads stock earlier this year.

Shares in auto group PSA Peugeot Citroen fell by 1.09% to 48.0 euros in line with general weakness in the European auto sector.

In Amsterdam, the AEX index fell by 0.69% to 484.91, the Swiss SMI dropped by 1.25% to 8,641.5, in Milan the SP/Mib was off by 0.61% at 40,614, in Madrid the Ibex-35 lost 1.37% to 14,088.1 and in Brussels the Bel-20 closed 0.28% lower at 4,183.36 points.

The dollar fell sharply here against the euro and the yen, hitting a 19-month-low against the single European currency, but analysts were uncertain as to what sparked the plunge.

The euro in late-day trade was at $1.3081 against $1.2948 late on Thursday in New York. The single currency at one point jumped to $1.3109, its best showing since April 21, 2005.

The dollar was meanwhile trading at ??115.59, its lowest reading since early September, after ??116.25 on Thursday. Some analysts suspected technical factors, such as a wave of automatic dollar selling orders when the euro broke through the $1.31 level.

Other cited concerns about prospects for the US economy, which slowed to an annual pace of 1.6% in the third quarter from 2.6% in the second and 5.6% in the first.

There is now a broad assumption on the market that US interest rates have reached their peak, 5.25%, and are not likely to rise any time soon.

At the same time, interest rates appear to be on their way up in the eurozone, where the benchmark level is expected to reach 3.50% in December and could go higher in 2007. The eurozone trend would accentuate the differential with the US rate cycle.

In addition, the deputy governor of the People??™s Bank of China, Wu Xiaoling, appeared to suggest that holding the dollar as a reserve currency might pose risks.

"The exchange rate of the US dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for east Asian reserve assets," he was quoted as saying in an academic paper.

Traders said his remarks contributed to a buying spree in alternative reserve currencies, principally the euro. But Julian Jessop of Capital Economics argued that there appeared to be no clear explanation for what happened to the dollar yesterday.

Meanwhile, other currencies also benefited, with the pound surging to a 23-month high of $1.9336 and the Australian dollar reaching its highest level in over six months at $0.7780.

The US currency also fell to a five-and-a-half month low against the Swiss franc of $1.2100 in intra-day trades.

The pound was being traded at $1.9308 from $1.9154 on Thursday.

On the London Bullion Market, the price of gold rose to $639.50 per ounce from $630.25 late on Thursday. ??“ AFP