* Dollar gains broadly, euro/dollar at 10-week lows
* E.Europe woes dent euro as Moody's warns of hit to banks
* Euro draws limited support from surprise ZEW improvement
* Recession worries boost dollar as investors seek safety
(Adds quotes, updates prices, changes byline)
By Jessica Mortimer
LONDON, Feb 17 (Reuters) - The euro fell to 10-week lows
against the dollar on Tuesday, shedding more than one percent as
a report by Moody's ratings agency fanned concern that a sharp
downturn in eastern Europe would hit western European banks.
Moody's said the recession in emerging Europe was likely to
be more severe than elsewhere and would put financial strength
ratings of local banks and their Western parents under pressure.
[].
The euro was hardest hard by increasing worries about the
prospect of a deep and prolonged recession in eastern Europe
because banks from the euro zone have some of the heftiest
exposure to the region.
Gloom about the global economic outlook fuelled broad dollar
gains, driving the U.S. currency's trade-weighted index to
two-month highs as investors sought perceived safer assets.
"There is a lot of debt held by western European banks which
is denominated in eastern European currencies and the market is
now beginning to appreciate it," Bank of New York Mellon
currency strategist Neil Mellor said.
"A lot of bad news is already priced in for the dollar and
sterling, but not for the euro," he said, adding that sentiment
on the euro zone is "rock bottom at the moment".
Data showing a surprise pick-up in the German ZEW sentiment
survey in February [] gave the euro only a very
brief lift, with investors remaining pessimistic on the outlook
for Europe's largest economy.
At 1231 GMT, the euro was down 1.3 percent against the
dollar at $1.2616 <EUR=>, according to Reuters data. That was
just shy of an earlier low of $1.2602 hit on trading platform
EBS, its weakest since December 4.
The dollar index <.DXY> was at 87.515. Earlier in the
session, it rose as high as 87.685, its highest in more than two
months.
"The market cannot get to the point where it gets more
confident. That being the case it keeps coming back to the
dollar and I don't see that changing," BNYM's Mellor said.
Markets remained averse to risk, with European stocks
falling 1.4 percent <> to two-week lows.
This helped the Japanese yen gain against most currencies
due to its safe haven status, although it fell against the
dollar after Japan's finance minister said he would resign.
Against the yen, the euro fell 1.1 percent to 115.87 yen
<EURJPY=>, while the dollar edged up 0.2 percent to 91.86 yen
<JPY=>, having earlier risen to a one-month peak of 92.75.
EURO ZONE WOES
The ZEW economic sentiment indicator jumped in February, to
-5.8 in February from -31.0 in January, significantly higher
than the consensus for a much smaller improvement to -28.
The improvement was not reflected in the current conditions
index, however, which worsened to -86.2 from -77.1
[].
"February's sharp rise in the German ZEW index is modestly
encouraging, but does not mean that the economy is about to stop
contracting sharply," Capital Economics European economist
Jennifer McKeown said in a client note.
Meanwhile, growing expectations that the European Central
Bank will ultimately have to play catch up on rate cuts by the
Federal Reserve and Bank of England also weighed on the single
currency.
Figures derived from Eonia rates show the market is
expecting euro zone interest rates will be cut to 1.5 percent in
March and fall below 1.0 percent later this year.
"All other central banks in the G10 have frontloaded cuts
one way or another and are openly discussing aggressively
adopting unconventional measures," said UBS strategist Geoffrey
Kendrick in a note.
"We believe the ECB's refusing to consider other options
will continue to cast the euro zone in a negative light and
sentiment on the euro will suffer accordingly."
(Reporting by Jessica Mortimer; additional reporting Kirsten
Donovan)
