Euro drops against dollar on European bank fears

The euro fell further against the dollar on Tuesday as fears grow about the health of European banks amid global turmoil after the failure of a U.S. financial rescue plan, dealers said.

The European single currency slipped to 1.4376 dollars from 1.4432 in New York late on Monday.

Against the Japanese currency, the dollar rose to 105.06 yen from 104.03.

The euro slid after U.S. lawmakers rejected the 700-billion-dollar financial rescue plan touted by Washington as vital to avert economic collapse.

"Credit worries are deepening over the European financial system... after the U.S. bailout plan was rejected," said Saburo Matsumoto, chief foreign exchange strategist at Sumitomo Trust Bank.

The British pound meanwhile eased against the dollar, one day after banking-sector chaos saw it suffer the heaviest drop in 16 years against the U.S. currency.

Dexia became on Tuesday the latest European bank to need a state bailout with Belgium, France and Luxembourg pumping 6.4 billion euros into the group so that the financial crisis would not claim another victim.

"One aspect of support for the dollar has been the evidence that the financial market turmoil that has so far been mostly contained to the US is now spreading," said analyst Derek Halpenny at the Bank of Tokyo-Mitsubishi UFJ.

"The latest evidence that this is no longer the case was the government injection of capital in Dexia," he added.

Belgian-Dutch banking and insurance group Fortis, the Icelandic bank Glitnir and the British mortgage lender Bradford & Bingley all had to be rescued in government bailouts on Monday.

Matsumoto said market players were worried that the global financial crisis was worsening.

"The euro may fall further," he said. "We fear the credit worries may spread into emerging economies."

The single currency was also dampened after official data showed easing inflation across the eurozone, stoking analysts hopes of an interest rate cut from the European Central Bank (ECB).

Inflation in the 15 nations sharing the euro dipped in September to 3.6 percent from 3.8 percent in August, according to a first estimate from the European Unions Eurostat data agency on Tuesday.

"Septembers fall in eurozone consumer price inflation shows that price pressures in the region are finally receding, supporting our view that the ECB will be able to cut interest rates pretty aggressively next year," said Jennifer McKeown, economist at the Capital Economics consultancy in London.

In London morning trade on Tuesday, the euro changed hands at 1.4376 dollars against 1.4432 late Monday, at 151.06 yen (150.13), 0.7948 pounds (0.7986) and 1.5788 Swiss francs (1.5719).

The dollar stood at 105.06 yen (104.03) and 1.0985 Swiss francs

(1.0891).

The pound was at 1.8061 dollars (1.8068).

On the London Bullion Market, the price of gold eased to 895.56 dollars an ounce from 905 dollars late Monday.