AFP - European stock markets retreated Monday, with sentiment dampened by a rise in Chinese interest rates, while the euro edged higher.
The Paris CAC 40 was down 1.34 percent at 3,847.84 in mid-morning trade while in Frankfurt the DAX had lost 1.45 percent to reach 6,955.62 points. The London Stock Exchange was closed for a public holiday.
On the currency market the euro rose to 1.3156 dollars from 1.3116 late Friday.
The dollar was stable at 82.84 yen against 82.90 on Friday.
Investors were digesting a decision Saturday by China's central bank to raise interest rates for the second time in less than three months as part of a campaign to curb borrowing, rein in property prices and tame inflation.
The People's Bank of China said in a brief one-line statement that it will raise the one-year lending and deposit rates by 0.25 points each. The move takes the rates to 5.81 percent and 2.75 percent respectively from Sunday.
In mid-October, policymakers raised rates for the first time in nearly three years to try to slow a flood of liquidity that has been fanning inflation and driving up property prices.
The central bank action prompted concern for the pace of Chinese economic growth, which is seen as critical to the global economy.
But economist Francois Duhen of CM-CIC Securities commented: "This hike is not a surprise to us."
He said six previous increases in obligatory reserve levels for Chinese banks had not resulted in "the desired reduction in lending, nor in a drop in real estate speculation nor in a cooling of inflation."
In Paris bank shares were under pressure, with Societe Generale down 1.48 percent and BNP Paribas 1.33 percent.
On the Frankfurt market it was the automobile sector that led decliners. Volkswagen lost 4.61 percent and BMW 4.44 percent.
Currency traders appeared to take the Chinese rate hike in stride, analysts said, seeing it as part of gradual tightening in monetary policy that should not hamper Chinese economic momentum.
Many players in the currency market had expected Asian share prices to fall after China hiked rates.
But contrary to market expectations, Japan's benchmark Nikkei index on the Tokyo Stock Exchange closed up 0.75 percent and China's Shanghai Composite Index rose 0.38 percent.
These market moves prompted forex investors to buy back risk-sensitive euros sold earlier in the day, dealers said.
"The market is still risk-on," Tsutomu Soma, a senior dealer at Okasan Securities, told Dow Jones Newswires.
Dealers said financial markets had factored in the Chinese rate rise.
"Given China's high inflation rate, everybody knew it was coming," said Jun Kato, a senior dealer at Shinkin Asset Management.
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