* Euro resumes downtrend as short-covering bounce wanes
* Worries about banking sector lead to safety bids
* Aussie/yen falls more than 1 pct as investors cut risks
By Rika Otsuka
TOKYO, May 25 (Reuters) - The euro slid on Tuesday as
concerns about broader contagion in the banking sector from the
sovereign debt crisis in the euro zone drove investors to sell
the single currency.
The Australian dollar extended its fall, dropping more than
1 percent against the yen and nearly 1 percent against the U.S.
dollar as hedge funds and investors took profits on the
higher-yielding currency's rally this year.
The euro appeared to have lost most of its gains made last
week when it posted its first weekly rise against the greenback
in six weeks. It rose as high as $1.2673 late last week.
Weighing on sentiment towards the euro was news that Spain's
central bank took over savings bank CajaSur on Saturday following
the failure of its planned merger with another regional lender.
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Although CajaSur is relatively small, the bailout highlighted
weakness in the European banking sector and fanned fears that
more banks may need to be bailed out by some euro zone members
that are already saddled with heavy debt, traders said.
"Investors have started to sell the euro, believing there
will be more banks in trouble, particularly in Southern Europe,"
said an FX trader at a European bank. "The euro's fall has not
run its course."
Worries about a fresh financial crisis prompted investors to
reduce holdings of riskier assets such as shares while seeking
the safety of the U.S. and Japanese currencies and government
bonds.
Tokyo's Nikkei average <> hit its lowest in more than
five months, while the MSCI index of Asia-Pacific shares
<.MIAPJ0000PUS> outside Japan slid 3.7 percent.
The euro stood at $1.2312 <EUR=>, down 0.5 percent from late
U.S. trade on Monday.
On the back of deepening concerns over Europe's debt woes,
the euro has lost more than 7 percent against the dollar so far
this month, heading for its biggest monthly fall since January
2009.
The euro's downside targets are a four-year low of $1.2143
hit last week and $1.2133, a 50 percent retracement of a rally
from its all-time low of around $0.8225 in October 2000 to its
record peak of $1.6040 touched in July 2008, traders said.
If it falls below that level the next support would be the
psychologically important level of $1.2000, where many stops are
believed to be set, they said.
The euro fell 1 percent to 110.53 yen <EURJPY=R>, sliding
towards an eight-year low of 109.47 yen struck on trading
platform EBS last week.
Funding conditions for banks have also been tightening, with
firms in the United States increasingly reluctant to deal with
firms with large exposure to Europe, a move analysts say reflects
growing risk aversion.
"Investors are selling into every rally in the euro," said
Jonathan Cavenagh, a currency strategist at Westpac.
"Worries about the euro debt crisis are showing signs of
spilling over to the banking sector with funding costs rising,
albeit from very low levels. All this will only see more demand
for U.S. dollars."
The dollar and the yen <JPY=> tend to gain when there is a
spike in volatility and a loss in risk appetite. The dollar index
rose 0.6 percent to 86.71 <.DXY>. The greenback dipped 0.3
percent to 90.02 yen <JPY=>.
Traders said with liquidity in the forex market showing signs
of drying up, investors are likely to scramble for safe-haven
dollars. That is likely to keep downward pressure on
growth-linked currencies such as the Australian dollar.
The Aussie fell 0.5 percent to $0.8210 <AUD=D4>, after
sliding as low as $0.8172, according to Reuters data.
It has been hit hard as investors take profits on
higher-yielding currencies, plunging over 11 percent so far this
month, on the way to posting its biggest decline since October
2008.
Against the yen, the Australian dollar was down 0.6 percent
at 73.87 yen <AUDJPY=R> after earlier dropping as low as around
73.50 yen.
Traders said the slide in the Aussie against the yen is
expected to slow in the near term as there are a number of bids
waiting below 73 yen.
(Additional reporting by Anirban Nag in Sydney and Kaori Kaneko
in Tokyo; Editing by Michael Watson)
