LONDON, May 26 (Reuters) - The euro fell across the board, closing in on a four-year low against the dollar after Federal Reserve Chairman Ben Bernanke highlighted the possibility that its dollar funding facility would not last forever.
Speaking in Tokyo, Bernanke said dollar swap lines, which were reinstated as the Greek debt crisis escalated, played an important role in stabilising markets, but that the Fed did not want to provide a permanent service. [ID:nTOE64P01H] While many in the market already acknowledge the funding cushion will not last forever, analysts said Bernanke's comments were keeping risk aversion high and helping to drive the euro lower. "There seems to be scepticism in the market about how long or how large swap facilities will continue to be," said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt. "The possibility of a test of the downside level in euro/dollar is more strong than a test of the upside," he added.
Signs of tighter funding, with costs for banks to borrow dollars in the interbank market soaring to 10-month highs, are driving investors to the relative safety of the U.S. dollar and away from riskier assets and currencies.
This stampede has been driven by uncertainty about how debt problems in Greece and other euro zone countries will impact the wider global economy.
By 0748 GMT, the euro EUR= had fallen 0.6 percent on the day to $1.2290 by 0727 GMT, hovering near the day's low around $1.2263. A fall below the $1.2143 level touched last week would mark its weakest since April 2006.
Against the yen, it was down 0.7 percent at 110.80 yen EURJPY=R. On Tuesday, it tumbled to 08.83 yen on trading platform EBS, its lowest since November 2001.
Also keeping the euro under selling pressure were comments from OECD chief economist Pier Carlo Padoan, who on Wednesday said a drop in the currency's value should help offset the toll that austerity measures take on euro zone economic growth.
"The weak euro, in the short- to medium-term, is a welcome development," he told Reuters in an interview. [ID:nLDE64O1OG]
Higher-risk currencies including sterling and the Australian and New Zealand dollars each fell more than half a percent against the U.S. currency, helping to prod the dollar 0.1 percent higher versus a currency basket .DXY.
Currency traders brushed off a rally in European shares .FTEU3, and analysts said higher equities were being driven by short covering after recent losses, rather than a return of risk appetite.
Highlighting the tight funding situation, U.S. two-year swap spreads USD2YTS=RR, a key gauge of financial system stress, expanded to their widest in a year on Tuesday. They eased somewhat on Wednesday, but are still about 6 basis points wider for the week. [ID:nLDE64O1MP]
Market participants acknowledge that credit tightness has been much less severe than was seen after the Lehman shock in 2008.
But fresh memories of the global credit crunch are making financial institutions cautious about lending to those who may have big exposure to debt-ridden countries or banks in the euro zone, traders say.
The Bank of Spain's takeover of struggling regional savings bank CajaSur at the weekend kept investors determined to cut risky trades as it underlined weakness in the euro zone and fanned fears that more banks may need to be bailed out by euro zone members. (Additional reporting by Tokyo Forex team, editing by Jason Webb)
