The euro dropped to a two-month low against the dollar on Tuesday on heightened concerns over eurozone banks’ exposure to the worsening conditions in eastern Europe.

The credit ratings agency Moody’s said Austrian, Swedish and other banks with eastern European subsidiaries might face downgrades as the region’s economies slump.

Eurozone banks have the largest exposure to central and eastern Europe, with about 90 per cent of total foreign bank exposure to the region.

Central and eastern European currencies have come under intense pressure in recent weeks as the credit crisis has raised fears over the region’s ability to finance its current account deficits and as slowing global growth has heightened concerns over the health of its export-dependent economies.

Indeed, the Polish zloty slumped to a five-year low of 4.93 zlotys against the euro on Tuesday, the Czech koruna hit a three-year trough of Kc29.677 against the single currency and the Hungarian forint fell to a record low of Ft309.60.

Antje Praefcke, of Commerzbank, said eastern European currencies were in a self-feeding depreciation spiral that was likely to be a “time-bomb” for the euro.

“The collapse of these currencies is likely to constitute a risk for the euro,” she said. “So far, markets have largely ignored this fact but are unlikely to be able to maintain this approach.”

By midday in New York, the euro fell 1.5 per cent to $1.2599 against the dollar, lost 1.3 per cent to £0.8839 against the pound and dropped 1.2 per cent to Y115.89 against the yen.

The Swedish krona fared even worse, falling 2.7 per cent to SKr8.7815 against the dollar and 1.3 per cent to SKr11.0545 against the euro.

Meanwhile, weakness on global stock markets and continued fears over global growth fuelled safe-haven demand for the dollar.

The dollar rose 1.4 per cent to SFr1.1760 against the Swiss franc and 0.4 per cent to Y92.11 against the yen.

The dollar advanced more strongly against the currencies of commodity producing countries, climbing 2 per cent to $0.6366 against the Australian dollar, 1.8 per cent to $0.5082 against the New Zealand dollar and 1.6 per cent to C$1.2636 against the Canadian dollar.

The pound put in a relatively robust performance as data showed UK consumer price inflation fell by less than expected in January.

Audrey Childe-Freeman, of Brown Brothers Harriman, said the news was welcome relief for the pound. “While this does not alter the medium-term inflation outlook – which remains extremely benign – or the near-term monetary policy outlook, it will cut short UK deflation talk for now,” she said.

The pound was down 0.3 at $1.4244 against the dollar but rose 0.1 per cent to Y131.23 against the yen.

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