IMF Chief Scandal Adds to Euro Debt Woes

The arrest of IMF chief Dominique Strauss-Kahn on charges of attempted rape added to existing uncertainty about the euro zone debt crisis on Monday, helping keep the euro near seven-week lows and knocking European stocks.

Wall Street also looked set to open lower, following two consecutive weeks of losses.

While there was little sign that the International Monetary Fund's overall activities would be curtailed by its managing director's arrest, it comes almost on the eve of a series of new talks on how to handle the euro zone crisis.

Strauss-Kahn -- also a potential French presidential candidate -- had been due to meet German Chancellor Angela Merkel on Sunday and join euro zone finance ministers on Monday to discuss the bloc's debt crisis.

Greece, for one, is struggling to meet the terms of a 110 billion euro European Union/IMF bailout last year.

"This came at a really bad time for the euro as it could delay efforts to put together a rescue package for Greece. It's adding salt to their wounds," said Tsutomu Soma, manager of foreign bonds at Okasan Securities.

Financial markets have been jittery for months over the debt crisis, which comes down to fears that indebted peripheral economies will be unable to meet their obligations.

"The peripheral euro zone problems continue to be somewhat of an albatross for the euro and they will keep the euro bulls at bay," said Paul Mackel, director of currency strategy at HSBC."These problems have been there all along but recently they've put more of a risk premium into the euro than was the case a few months ago."

The euro fell as far as $1.4048, its lowest since March 30, having dropped 6 percent from a 17-month peak of $1.4940 hit less than two weeks ago.

It later recovered to stand flat at $1.4110.


The Strauss-Kahn affair also fed into a general mood of risk aversion, weighing on stocks.European shares hit their lowest in more than a week with an eye on the euro zone finance ministers meeting.

As well as discussing Greece, the ministers were likely to back a bailout package for Portugal, with new conditions set by Finland.

The FTSEurofirst 300 index of top European shares was down 0.9 percent, dragged down by shares in banks, which could suffer if any peripheral country defaults or restructures debt.

"We are seeing the signs of nervousness perhaps in trying to establish a very decisive policy framework to get the euro zone settled," said Mike Lenhoff, chief strategist at Brewin Dolphin.World stocks as measured by MSCI were three quarters of a percent lower.

Earlier, Japan's benchmark Nikkei average ended down for a third straight day, losing 0.9 percent to 9,558.30, while the broader Topix shed 1.2 percent to 829.55.

Euro zone bonds were generally steady as traders focused on the euro zone ministers' meeting.