Weak dollar dents European shares

European shares hit a two-week low yesterday after a rebound in oil prices revived concerns about slower economic growth and mining stocks like BHP Billiton sank on fears a weak dollar will also hit profits.

The dollar was hovering within half a cent of life lows against the euro, encouraging traders to book profits across all sectors after European indexes hit 28-month highs last week, analysts said.

"The persistent strength in the euro is weighing on markets just at the moment, but that is after a period of very strong run and quite a good out-performance over the US," said Ian Scott, a strategist at Lehman Brothers, adding that the rebound in oil prices was also weighing.

US crude oil rose above $49 a barrel early in the session on worries about heating fuel supplies and production from Iraq, before easing in New York trade.

The FTSEurofirst 300 index of pan-European blue chips closed down 0.5 per cent at 1,023 points, having hit a two-week low of 1,018.3 points during the day. Turnover was modest at around €2.5 billion.

The narrower DJ Euro Stoxx 50 index fell 0.5 per cent to 2,879.6 points, having climbed from a 2004 low of 2,559.9 points in mid-August.

Goldman Sachs cut its weighting on European equities to neutral from a small overweight position yesterday, saying it expected the rebound in stocks from the lows to be limited.

A likely increase in interest rates and slowing growth for profits and margins meant valuations would look stretched if equity prices rose more than ten per cent, Goldman said in a note.

However, others see value in European stocks both compared with rival assets like bonds, and on an historical basis.

"Our price-to-earnings ratio volatility analysis suggests that European stock markets are extremely cheap," said Jean-Luc Buchalet, a strategist at research company JCF in Paris.

Across the broad DJ Stoxx 60, the forward price-to-earnings ratio was now 12.6 compared with a ten-year average of 16.8, and despite some grey areas, forecasts for economic growth and profits appeared quite stable, Mr Buchalet said.

In New York, stocks steadied after a sharp fall at the end of last week. The blue-chip Dow Jones industrial average was 0.2 per cent weaker at 10,437.7 points, and the Nasdaq Composite Index fell 0.5 per cent to 2,061.2 points by 1716 GMT.

Around Europe, London's FTSE 100 closed 0.6 per cent weaker, Paris's CAC-40 gave up 0.7 per cent and Zurich's SMI shed 0.8 per cent. Frankfurt's DAX closed 0.3 per cent lower.

BHP Billiton, which last week warned that high copper prices might not be sustainable, ended 1.5 per cent weaker, while rival Anglo American shed 1.8 per cent.

"A weak dollar means that miners' profits are squeezed because they pay costs in local currencies and revenues are generated in dollars," a market maker said.

The greenback was struggling against a euro at $1.3035 after the weekend G20 meeting of world finance chiefs ended with no agreement to shore up the ailing US currency.

Airline stocks suffered on worries about increased fuel costs, with British Airways fell 2.8 per cent while Germany's Lufthansa and Spain's Iberia both fell more than one per cent.

Karstadtquelle fell 3.7 per cent after the head of the German retailer's supervisory board said one shareholder had filed an objection to the company's planned €500 million cash call. If the move blocked the capital increase, insolvency was possible, supervisory board chief Thomas Middelhoff said.

KBC, Belgium's third biggest bank, and parent company Almanij bucked the weaker trend after saying they were considering restructuring the group. Almanij shares soared 11 per cent, while KBC stock rose 0.4 per cent.