Dollar outshines euro, sterling amid European bank jitters

WASHINGTON, March 24 (Reuters) - The euro and sterling fell sharply against a strengthening dollar on Friday amid lingering nervousness over banks.

Banking stocks plunged in Europe with heavyweights Deutsche Bank (DBKGn.DE) and UBS Group (UBSG.S) pummelled by worries that the worst problems to hit the sector since the 2008 financial crisis have not yet been contained.

The dollar index rose 0.536% at 103.140, with the euro down 0.71% to $1.0753.

"Over many, many years, whenever there's perceived or actual problems that look like they might be deep-rooted, people go to the dollar, and I think that's probably all it is right now, said Joseph Trevisani, senior analyst at FXStreet.com.

Risk aversion also sent sterling 0.53% lower to $1.222, despite data showing the British economy was set to grow in the first quarter and confidence was growing.

The pound touched a seven-week high of $1.2341 on Thursday in volatile trading after the Bank of England raised interest rates by 25 bps to 4.25%, but said a surprise resurgence in inflation would probably fade fast, stoking speculation it had ended its run of hikes.

Banking stocks have been battered this month following the sudden failures of two regional U.S. lenders and the emergency sale of embattled Swiss bank Credit Suisse to rival UBS.

SAFE-HAVEN DEMAND

The FX world seemed to suggest a bout of risk aversion with safe-haven proxies, gold and yen outperforming and most other currencies softer, according to Christopher Wong, currency strategist at OCBC.

Still the Japanese yen strengthened just 0.08% versus the greenback at 130.73 per dollar.

"The more puzzling behavior in light of this is the fact that the yen is just a touch stronger -- you can argue it's pretty much unchanged," said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US. "I would have thought in this environment that you would see a stronger yen."

The Fed on Wednesday raised interest rates by 25 basis points, as expected, but took a cautious stance on the outlook because of banking sector turmoil even as Fed Chair Jerome Powell kept the door open on further rate rises if necessary.

U.S. Treasury Secretary Janet Yellen reiterated on Thursday that she was prepared to take further action to ensure Americans' bank deposits stayed safe, to ease investor nerves.

The markets will be closely watching next week's readout of the personal consumption expenditures (PCE) price index, due March 31, for indications as to how the print could influence the Fed's upcoming rate decisions, said Trevisani.

"If you get a as expected or weaker number, I think that gives the Fed reason to pull back, which is what they're doing anyway," he said.

In cryptocurrencies, bitcoin last fell 2.16% to $27,732.00.

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Currency bid prices at 2:30PM (1830 GMT)