Dollar, global stocks spiral lower on subprime woes

By Natsuko Waki

LONDON (Reuters) - The dollar hit a 12-year low against major currencies and stocks fell broadly on Wednesday as concerns grew that a fallout from the high-risk U.S. mortgage sector could deal a blow to the broader economy.

Credit spreads burst wider and investors rushed to safe-haven government bonds after Bear Stearns BSC.N said on Tuesday that their two troubled hedge funds which bet heavily on U.S. subprime mortgages, targeting poor credit borrowers, now had "very little value".

Investors worry that a fallout in subprimes, which represent around a fifth of total U.S. annual mortgage lending, could threaten banks with bad debts, raise borrowing costs and hurt corporate earnings, which would also retrench consumer spending.

Credit market volatility from subprime jitters is prompting some firms to cancel their multi-billion bond or loan financing plans, fanning concern that this could dry up the stream of M&A deals which have fuelled a stock market boom.

"We've had such strong liquidity flows across all financial markets, and that's been the functioning of low long-term interest rates and low spreads. Funding M&A has been easy," said Ian Williams, strategist at Blue Oar Securities.

"But if you get riskier paper starting to look more dangerous, it will become less easy to access financing. You've already seen financing by some of the high-yield papers being choked off."

The dollar index .DXY, which charts the currency's level against other major peers, hit a 12-year low. The euro EUR= set a lifetime high and sterling vaulted to a 26-year peak against the dollar.

The dollar is also under pressure on expectations the Federal Reserve would leave interest rates on hold when other major central banks are tightening -- a damaging prospect in a market which has rewarded currencies with higher interest rates.

Fed chairman Ben Bernanke, testifying before Congress later in the session, is expected to maintain his stance of vigilance on inflation. U.S. June consumer prices data are also due later.

FINANCING WORRIES

The iTraxx Crossover index, a barometer for European credit market sentiment, widened to 312 basis points, its highest level in a year.

The pan-European FTSEurofirst 300 index .FTEU3 fell 0.8 percent, edging further away from last week's 6-1/2 year high. The index is still up more than 8 percent since January after booming corporate takeover activity drove shares higher.

Both Asian and European shares failed to follow the Dow Jones Industrial Average, which rose above 14,000 for the first time after a wave of strong earnings.

This week features key quarterly earnings reports from both European and U.S. firms. Intel (INTC.O) fell almost 5 percent in after-hours trading after it posted a rise in second-quarter earnings but missed its gross margin goal. Yahoo (YHOO.O) reported a dip in quarterly profit.

"(Bear Stearns) is the tip of the iceberg. We need more news and also frankly the disappointing results from Intel and Yahoo ... say the U.S. economy is not rallying as we hoped," said David Buik of Cantor Index.