* Dollar, yen rise as equity markets turn sharply lower
* Yen surges on yen cross unwinding; euro/yen down 2.2 pct
* Dollar index up 0.8 percent at 85.442 <.DXY>
* Euro extends loss after euro zone Q4 GDP revised down
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By Tamawa Desai
LONDON, April 7 (Reuters) - The dollar and yen rose on
Tuesday as equity markets took a sharp turn lower, fuelled by
concerns about the banking sector that wiped out recent optimism
over the global economy.
The yen rebounded broadly and sharply, as short-term market
players unwound yen crosses, traders said. The dollar was
broadly higher except against the yen.
European shares were down one percent after opening modestly
higher on Tuesday, as financials weakened along with U.S. stock
futures, also down more than one percent.
The DJ Stoxx Banks Index <.SX7P> dropped 3.1 percent after
U.S. stocks fell on Monday as a prominent analyst revived
worries over the health of banks. []
Markets were also jittery ahead of earnings season in the
United States.
"Correlations with the U.S. equity market have been stronger
over the last month for most currencies than with overall risk
appetite," said Daragh Maher, deputy head of global FX strategy
at Calyon.
"It also shows that short-term forex forecasting has largely
become a game of second-guessing equity markets."
By 1108 GMT, the euro was down 2.2 percent against the yen
at 132.32 yen <EURJPY=> while the pound was down 1.8 percent
versus the Japanese currency <GBPJPY=R>. The New Zealand dollar
was down 2.8 percent against the yen <NZDJPY=R>.
The dollar was down 0.9 percent at 100.04 yen <JPY=> after
dipping to 99.88 yen, but the greenback gained broadly
elsewhere. Against a basket of currencies, the dollar rose 0.8
percent to 85.442 <.DXY>.
WORSE GROWTH
The euro fell 1.2 percent at $1.3240 <EUR=> after hitting a
session low of $1.3232 as selling accelerated after data showed
a record contraction in the euro zone economy.
Figures showed euro zone gross domestic product fell by 1.6
percent in the fourth quarter, the deepest ever quarterly fall
and more than the 1.5 percent decline reported previously.
Economists polled by Reuters had not expected a revision.
[].
"Heightened financial sector problems clearly increasingly
impacted through the fourth quarter, adding to the euro zone's
already significant problems," said Howard Archer, chief
European economist at IHS Global Insight.
U.S. bank shares slipped on Monday after veteran analyst
Mike Mayo of Calyon Securities warned of rising loan losses by
the end of 2010. He rated a number of big and regional banks at
"underperform" or "sell."
An unsourced report in The Times newspaper also said the
International Monetary Fund was set to warn that toxic debt
racked up by banks and insurers could hit $4 trillion.
[].
On sterling, investors took little comfort from UK data
showing British manufacturing output fell by less than expected
in February, with a 0.9 percent monthly drop still marking the
12th straight month of declines [].
Meanwhile, the Australian dollar fell 0.8 percent against
its U.S. counterpart to $0.7069 <AUD=> after choppy trade in the
wake of the Australian central bank's 25 basis point rate cut to
a record low 3.0 percent. It said it saw scope for only modest
easing further out. [].
(Additional reporting by Jessica Mortimer; editing by Patrick
Graham)
