European bank fears send the single currency to fresh lows

The European single currency fell to a 16-month low against the dollar, reaching $1.2783 at one point in trading, while sterling went above €1.21 for the first time since September 2010, spelling bad news for Britain’s exporters.

Financial stocks were sent tumbling as it became clear that European banks, which face heavy losses on government debt, would have difficulty raising extra capital over the coming months.

There were particular fears over Italy’s UniCredit, whose shares suffered a second consecutive day of steep losses after revealing the terms on Wednesday of a heavily discounted €7.5 billion (£6.2bn) fundraising. New shares will be offered at a hefty 69 per cent discount.

The euro also came under pressure following an auction of French debt, which saw the country’s borrowing costs pushed up. France raised €7.96bn but demand was lower than during a similar auction last month.

Hungary, which is the latest country to join the swelling financial crisis, limped through its own bond auction but there is mounting scepticism that it will be able to continue servicing its debts from the money markets, potentially forcing it into seeking a loan from the International Monetary Fund.

Jason Gaywood, consultant at currency specialists HiFX, said he could see sterling pushing towards €1.3 as Europe’s sovereign debt woes persist.

“With little evidence of any tangible improvement in the situation, traders seem set to continue to punish European sovereign and commercial assets and threaten to weaken the unified currency further in the coming weeks – a breach of €1.24 against sterling would open up potential moves towards €1.3,” he said.

Kathleen Brooks, research director at Forex, said fear had reached “fever pitch” in the markets.

Spanish banking stocks also came into sharp focus following a report that they would have to put aside €50 billion more than previously thought to cover bad loans.