* Euro falls 0.7 pct vs dlr <EUR=>; S&P downgrades Spain
* EU Commission sees euro zone economy shrinking 1.9 pct in
2009
* Sterling falls as market weighs UK bank bailout, RBS
losses
* Trade subdued as U.S. markets closed on Monday
(Adds quotes, updates prices, changes byline)
By Jessica Mortimer
LONDON, Jan 19 (Reuters) - The euro fell against the dollar
on Monday on worries about the health of the euro zone economy
after a ratings downgrade on Spain and grim economic forecasts
from the European Commission.
Standard & Poor's said it cut Spain's debt rating to "AA+",
warning of a severe deterioration in public finances, prompting
fears that economies such as Portugal and Ireland may suffer the
same fate after Greece's downgrade last week [].
Fears about the euro zone economy were also exacerbated
after the European Commission forecast the region will contract
by 1.9 percent in 2009, further weighing on the single currency.
[].
"There's a great deal of uncertainty over the health of the
euro zone economy and the outlook for euro zone credit
fundamentals which is undermining investor confidence towards
the single currency," said Lena Komileva, G7 market economist at
Tullett Prebon.
Meanwhile, worries about the outlook for the ailing UK
banking sector weighed on sterling as investors digested the UK
government's second massive bank bailout plan.
Britain threw another lifeline to banks, offering guarantees
on their debt and setting up a 50 billion pound fund to buy up
assets and get cash flowing again [].
"There is a lot of confusion in the market as it digests the
ramifications of this bailout deal," IDEAGlobal senior
strategist Maurice Pomery said.
In the short term it is putting downward pressure on
sterling, particularly as many see it as the beginnings of a
quantatitive easing policy in the UK, he added.
The bailout news helped to buoy shares, but the boost to
investor sentiment failed to transfer to currency markets, with
the low-yielding yen gaining as investors remained wary of
taking on risk.
At 1232 GMT the euro was down 0.7 percent to $1.3210 <EUR=>,
while the pound was 0.8 percent lower at $1.4620 <GBP=>.
Against the yen the euro fell 0.9 percent to 119.61 yen
<EURJPY=>, while the dollar eased 0.2 percent against the
Japanese currency <JPY=> to 90.51 yen.
Worries about the outlook for the banking sector also
weighed on the pound as Royal Bank of Scotland <RBS.L> announced
it would post losses of up to 28 billion pounds for 2008, the
biggest in British corporate history, sending its shares
plummeting [].
"There are still heavy losses being announced by the banking
sector and the market fears the government taking major stakes
in banks," said Ian Stannard, senior currency strategist at BNP
Paribas.
IDEAGlobal's Pomery noted, however, that in the longer-term
the UK bank rescue deal may be positive for sterling as it helps
free up jammed credit markets and because "any activity is
viewed as better than non-activity".
Given that the UK has been more proactive than euro zone
countries, while a further stimulus deal is expected to be
announced in the U.S., the euro could therefore come under
further pressure, he said.
Trade was somewhat subdued, however, as financial markets in
the United States were closed on Monday for Martin Luther King
Day.
President-elect Barack Obama is set to take office on
Tuesday and many investors have been hoping he will act
aggressively to help pull the U.S. economy out of recession.
"The Obama effect is likely to help the dollar," Pomery
said.
(Reporting by Jessica Mortimer)
