Rate fears, weak dollar spark European stock sell-off

European shares experienced their biggest one-day percentage fall in nearly two years yesterday, pounded by fresh inflation and interest rate fears, while mining and car shares dived as a weakened dollar hit the region's exporters.

Miners Anglo American and Rio Tinto, which price their products in dollars, and car giant DaimlerChrysler, which makes a large part of its revenues in the US, were among the market's biggest fallers as the sterling and the euro firmed against the dollar.

The FTSEurofirst 300 index of top European shares shed 2.1 per cent to close at 1,363 points, its biggest one-day percentage loss since August 2004, closing the week 2.6 per cent lower.

Equity markets fell sharply across Europe after a batch of US economic reports showed that runaway crude oil prices were taking a toll on consumer optimism in the world's largest economy, while at the same time pushing import prices higher.

This raised concern that the Federal Reserve may need to press on with a two-year monetary tightening cycle to quell inflationary pressures just at a time when the economy might be showing signs of weakening.

In London, the FTSE 100 index, with a large number of mining stocks, fell 2.2 per cent to its lowest level since mid-March. Paris's CAC 40 and Frankfurt's DAX slid 2.1 per cent and 2.3 per cent respectively.

Spain's blue chip stock market index also registered its biggest one-day fall in two years, dropping 2.5 per cent.

But observers such as Yves Maillot, head of equity investment at Robeco Gestions, said the sell-off was a long-awaited consolidation move rather than a sign that European equity markets were turning around after an almost uninterrupted six-month rally of nearly 20 per cent.

"Market players have the knack to pick one factual element and forget about all other factors underpinning the market," Mr Maillot said. "It is understandable that markets are growing nervous after such a long period of rise and with elements such as Iran or higher rates clouding the outlook."

"Things look a little trickier than a year ago but the fact is that corporate profits are still way above expectations, and that higher rates or a stronger euro are for now not showing any signs of hurting the economy," he added.

Mr Maillot also said that European exporters could accommodate much more strengthening of the euro before exchange rates really start taking a toll on their balance sheet.

But for now, investors rushed out of stocks such as German auto makers BMW, Porsche, Volkswagen and DaimlerChrysler, which all slipped over three per cent as traders worried that the weak dollar would hit US consumers' lust for imported goods.

The impact of the sliding dollar and of high commodity prices was demonstrated by Michelin as the tyre maker blamed them when warned it would be more difficult to achieve its financial target for the year, sending its shares eight per cent lower.

Other stock fallers included French insurer CNP, off 8.9 per cent after the company's first-quarter sales fell short of the consensus forecast.

Stocks which avoided the sell-off included German steel firm ThyssenKrupp, which rose two per cent after raising its full-year forecasts following a strong quarterly profit.