Exchange traded funds tied to the euro’s fortunes have been volatile with markets hanging on every headline coming out of Europe on the debt crisis and the troubled banking sector.

CurrencyShares Euro Trust (NYSEArca: FXE) lost more than 1% on Wednesday on speculation about the health of French banks. The currency ETF, which tracks the euro versus the dollar, was down fractionally in Thursday’s premarket.

European lenders are turning to the foreign exchange market for dollar funding amid concerns about banks’ short-term debt, report Richard Leong and Karen Brettell for Reuters.

“It is the biggest sign that significant stress has emerged in the dollar funding market in Europe,” said Amrut Nashikkar, analyst at Barclays Capital in New York, in the report.

Yet factors such as bank swap lines and bank reserves with the U.S. Federal Reserve should prevent the situation from escalating to a full-blown credit crisis.

“The big difference between now and ’08 is that the banks do have a lot of liquidity. I think there will be some tension, but I don’t think there will be a blow up like what happened in ’08,” said Frederic Gourtay, head of U.S. dollar swaps trading at RBC Capital Market, in the Reuters story.

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