Financial sector woes batter dollar, global stocks

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Fears about the world banking system overwhelmed any lingering support from the U.S. plan to rescue Fannie Mae and Freddie Mac on Tuesday, battering equities and sending the dollar to a record low against the euro.

The U.S. currency fell to $1.6038 to the euro, its lowest ever level, European shares slid more than 2.5 percent and futures for the three top Wall Street stock indexes pointed to falls of around 1 percent.

The euro's rally was only very briefly dented by a bigger than forecast slump in the German ZEW investor expectations index to a series low of -63.9 in July. The euro dipped but quickly regained its poise to surge above April's record high.

Any lingering sentiment boost investors managed to take from the U.S. Federal Reserve and Treasury Department plan to lend money and buy equity in mortgage giants Freddie and Fannie Mae was soon dissipated in a sea of worry about other financial institutions.

"Sentiment is really fragile," said Louis Wong, research director with Phillip Securities in Hong Kong. "Investors are worried that there might be more bank failures, especially small banks in the United States."

MSCI's main world stock index .MIWD00000PUS was at a 21-month low and on track for an 11th consecutive daily loss. Emerging market counterpart .MSCIEF lost more than 2 percent while Asia stocks .MIAS00000PUS fell to a two-year low.

The pan-European FTSEurofirst 300 .FTEU3 was down 2.5 percent and Japan's benchmark Nikkei average .N225 closed down just shy of 2 percent.

"Right now though it's still a how weak can the dollar go as opposed to the European story. Weak German growth probably pales in comparison to the serious problems with Fannie Mae and Freddie Mac," said UBS currency strategist Geoffrey Yu.