LONDON The euro tumbled to a 5-month low against the dollar after the European Central Bank's chief highlighted downside growth risks and oil prices fell, while European stocks halted a global sell-off in equities.
After leaving interest rates on hold at 4.25 percent on Thursday, ECB President Jean-Claude Trichet said he expected euro zone growth to weaken substantially this year even though he saw inflation staying above the central bank's target.
There is growing evidence that economic problems are spreading to other parts of the world from the United States, the epicentre of the 1-year-old credit crisis. Royal Bank of Scotland became the latest to reveal the extent of damage by reporting a first-half loss of 691 million pounds.
"We're seeing a shift away from a focus on the United States to a more global problem," said Sharada Selvanathan, currency strategist at BNP Paribas in Hong Kong. "The dollar is getting a boost by default."
While RBS's loss was one of the biggest in UK corporate history, it was not the catastrophe some had feared, helping to stabilise other banking stocks. This pushed the FTSEurofirst 300 index up 0.3 percent.
The MSCI main world equity index fell 0.5 percent, off earlier lows.
The dollar rose 1 percent against a basket of major currencies while it strengthened as far as $1.5141 per euro, nearly 10 cents above record lows set last month.
The September Bund future rose 4 ticks.
According to interest rate futures, investors are no longer expecting a euro zone interest rate hike this year -- while they predict no lowering in the cost of borrowing, either.
"The ECB doesn't target growth, its sole focus under the mandate is to ensure price stability and Trichet's comments still signal that the Bank remains worried about inflation, with money supply growth, wage increases and second round effects remaining a threat," Calyon said in a note to clients.
Government bonds also rose in Japan, where futures hit a 4-month high as concerns grew about an economic slowdown in Japan and the rest of the world.
Emerging sovereign spreads widened 1 basis point while emerging stocks fell 0.4 percent.
U.S. light crude stood at $118.77 a barrel, down more than 1 percent and nearly $30 below its record peak of July, as supply concerns eased after a report that a fire in an oil pipeline in Turkey may be put out soon.
Gold fell as low as $863.00 an ounce, its weakest in eight weeks.