Euro slides after Spain central bank takes over lender

The euro fell sharply across the board on Monday, pulling back from a short-covering rally, after the Spanish central bank's takeover of a savings bank underlined structural problems facing fiscally fragile euro zone states.

The Bank of Spain said on Saturday it had taken over the running of CajaSur following the failure of its planned merger with another regional lender.

The move highlighted the weakness of the banking sectors of some euro zone members, which are already suffering from fiscal problems and struggling to bring down their budget deficits.

Spain's largest workers union said on Monday the country was heading for a general strike in protest at the government's austerity measures, although it preferred not to call one.

"Essentially the Bank of Spain news was an excuse for more selling, and the longer-term picture in euro/dollar is lower," said CMC Markets analyst Michael Hewson.

"There are wider concerns that a debt problem can't be solved with more debt and about the effects of austerity measures on growth," he added.

By 1110 GMT, the euro was down 1.4 percent on the day at $1.2394. It fell 1.3 percent versus the yen.

Traders said euro losses accelerated after stop-loss orders were triggered under $1.2480. European banks and Asian central banks were also seen selling the euro in quiet trade, with many European markets on holiday.

Last week, the euro fell to a four-year low of $1.2143. Support is seen around $1.2135, the 50 percent retracement from the euro's all-time low to its all-time high.

A U.S. official said on Sunday Europe's debt crisis should have minimal impact on global growth, but China was more pessimistic, warning on Monday it would hit demand for its exports.

European leaders agreed on May 10 on a $1 trillion package to contain the spread of a debt crisis in Greece.

More Euro Losses

The euro has retreated from $1.2670 hit on Friday. It rallied last week as investors exited extreme short positions in the single currency, in part due to fears of intervention to prop up the euro after its dramatic decline in past weeks.

"The euro's short squeeze isn't sustainable," said Chris Turner, head of currency strategy at ING. "The market is waiting for the next negative news from the euro zone to sell the euro."

Analysts said signs of more cracks in Spain's banking sector might crank up negative sentiment and push the euro down.

"One bank bailout in Spain is not a problem, but if that number was to (grow), we could see renewed pressure on the euro," said Elsa Lignos, currency strategist at RBC.

Commodities Futures Trading Commission data shows IMM speculators had by early last week cut back slightly on record bets the single European currency will weaken.

Those positions have ballooned in past months, pushing the euro lower against the backdrop of Greece's debt crisis, which has threatened to spread to Spain and Portugal and raised concerns about the euro's stability.

Liquidity has dried up, leaving investors scrambling for safe-haven dollars. This helped to boost the dollar roughly 1 percent against a currency basket .DXY to 86.286 on Monday.

[Source: By Naomi Tajitsu, Reuters, London, 24May10]

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