Financial crisis: Euro and pound tumble as Europe’s banks falter

The euro and the pound fell heavily against the dollar today after another weekend of turmoil which exposed further weakness in the European banking system and lack of co-ordinated action from its governments.

The euro tumbled 1.8 cents to $1.3590, while the pound was down 1.7 cents at $1.7543 after the German Chancellor Angela Merkel followed similar moves by Ireland and Greece last week and said the government would guarantee all private German bank deposits.

Europe’s biggest economy acted as the German Finance Ministry was renegotiating a €35bn (£25bn) rescue package for the country’s second largest commercial property lender, Hypo Real Estate bank, which has increased market fears about the extent of the banking crisis in Europe.

“The market probably hadn’t priced in enough bad news, ” said Adarsh Sinha, currency strategist at Barclays, explaining the euro’s sharp fall.

The euro and pound were also hit after a crisis summit of European leaders in Paris failed to produce a co-ordinated solution to the meltdown of the European banking sector.

“It seems certainly in Continental Europe that there was more a focus on rescuing banks than putting together a coherent plan to solve the problem,” said Steve Barrow, currency strategist at Standard Bank.

The Icelandic krona was also down against the dollar after the government there failed to comment on an anticipated €10bn (£7.7bn) rescue package from the Nordic central banks. The currency fell 0.9pc against the dollar following big falls last week after the government in Iceland said it would buy a 75pc stake in the country’s Glitnir Bank, and Standard & Poor’s and Fitch lowered Iceland’s rating.

While the dollar was strong against European currencies, it fell heavily against the yen, down 2 cents at 103.30. “The yen will be the big gainer from all of this,” said Mr Sinha.

Telegraph | Angela Monaghan | Monday, October 6, 2008