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Euro plunges on Eastern Europe fears

LONDON - Fears about Europe's exposure to financial contagion from emerging markets _ particularly in crisis-stricken Eastern European countries such as Ukraine, Hungary and Russia _ are putting heavy pressure on the euro, which fell Friday to its lowest against the U.S. dollar in two years.

The euro fell to a low of US1.2494 in morning trading London time, a drop of 3 percent on the day, and its lowest level since October, 2006, when it was US$1.2488. It then recovered slightly to US1.2550.

It's a stunning reversal from mid-July, when the 15-country currency hit a lifetime high of US$1.6038 _ to the dismay of politicians across the continent who worried that the high value of the currency would sap exports.

Now it's falling on fears that European banks have lent heavily in countries such as Hungary, Russia, Ukraine and Belarus that may be in serious difficulty or even heading for financial collapse. Even if they don't, the trouble may hurt trade between the EU and its neighbors.

Any damage to the European banking system would worsen the capital losses that have forced governments to put up some Ð1.7 trillion in guarantees and other aid.

‘The financial crisis is intensifying and emerging markets are under severe pressure and we are seeing a crisis developing in currency markets,’ said Neil Mackinnon, chief economist at ECU Group.

The beneficiary of this’meltdown’ has been the dollar and the yen. Both are considered safe haven currencies because of the lack of their banks' exposure to emerging markets. The victims are the the euro and the British pound.