Euro, sterling fall sharply amid jitters over European banks

On Friday, banks-related anxiety caused the euro and pound to plunge against a rising dollar, as better-than-expected economic data failed to improve the mood.

European banking stocks dropped on concerns that the largest issues to hit the industry since the 2008 financial crisis have not yet been resolved, with giants Deutsche Bank and UBS Group taking the brunt of the losses.

Better-than-anticipated flash purchasing managers’ index (PMI) data couldn’t save the euro since market mood was unstable and European banks were down more than 5%.

“The data were better than expected, but the mood in the market is risk aversion, which is supporting another move back to the safe haven dollar,” said Jane Foley, Head of FX Strategy at Rabobank London. 

The euro lost more than 1% of its value to $1.0714 before losing 0.9% further to $1.0735.

Despite data showing the British economy was expected to expand in the first quarter and confidence was rising, risk aversion also caused sterling to fall 0.6% to $1.2214.

In choppy trading on Thursday, the pound reached a seven-week high of $1.2341 after the Bank of England raised interest rates by 25 basis points to 4.25%. However, the bank also predicted that a sudden spike in inflation would likely subside quickly, fueling rumours that the bank had stopped raising rates.

With the abrupt collapse of two local U.S. bankers this month and the last-minute sale of troubled Swiss bank Credit Suisse to competitor UBS, the banking sector has suffered.

The Fed on Wednesday raised interest rates by 25 basis points, as expected, but took a cautious stance on the outlook because of banking sector turmoil even as Fed Chair Jerome Powell kept the door open on further rate rises if necessary.

U.S. Treasury Secretary Janet Yellen reiterated on Thursday that she was prepared to take further action to ensur Americans’ bank deposits stayed safe, to ease investor nerves.