Fresh banking concerns knock shares, dollar

By Natsuko Waki

LONDON (Reuters) - European shares fell, Wall Street braced for a weaker open while the dollar hit a 1-1/2 year low against the yen on Friday as a warning from a major U.S. bank on loan losses fanned concerns about the health of banks.

Renewed worries about financial firms hit by the credit crunch rattled global markets after Wachovia WB.N, the fourth-largest U.S. bank, said on Friday that it expected increased loan losses in the fourth quarter.

The dollar hit a record low against the euro and a 26-year trough against sterling which weighed on European shares as a stronger currency damages export competitiveness.

Weakness in the U.S. currency lifted safe-haven gold towards this week's 28-year peak at $845.40 an ounce.

"There is a flight to quality as risk aversion has come back with write-downs in the U.S. financial sector coming in more than expected," said Antje Praefcke, currency strategist at Commerzbank Corporates and Markets in Frankfurt.

The FTSEurofirst 300 index .FTEU3 was down 1 percent, with Barclays (BARC.L) falling 9 percent at one point on market talk of large credit market losses. Barclays denied rumors it was about to announce a $10 billion writedown.

U.S. stock futures were down 0.7 percent SPc1, indicating a weaker start on Wall Street. MSCI main world equity index .MIWD00000PUS was down 0.4 percent.

DOLLAR ENDGAME?

The dollar has fallen victim to increasing speculation the Federal Reserve will cut interest rates again in December. Rates markets are pricing in a 90 percent chance of a Fed interest rate cut in December to 4.25 percent.

Cementing such expectations, Fed Chairman Ben Bernanke said on Thursday that the U.S. economy might see slower growth going into next year and that credit market strains have persisted.

The dollar fell to around $1.4740 per euro EUR=, to $2.1144 against sterling GBP= and more than 1-1/2 yen to below 111 yen JPY=.

"While the clearest near-term risk to the downtrend in the dollar is risk aversion driven position squaring the real end game may also be beginning to take shape," Bank of Scotland Treasury said in a note to clients.

BOS said the eventual low in the dollar was likely to be marked by sharp weakness against the yen and the Swiss franc as well as a move beyond $1.50 per euro.

"Such a capitulation will tick all the boxes required to galvanize policymakers -- a fast paced move to extreme levels. At this point all parties can agree that further dollar declines against advanced economy currencies are undesirable," it said.

Foreign exchange is set to be on the agenda for policymakers gathering near Cape Town next week for the Group of 20 meeting.