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Thursday September 11, 2008 - 11:04:12 GMT
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FOREX NEWS-Dollar rallies broadly, hits 1-yr high vs euro

Thu Sep 11, 2008 6:57am EDT

* Risk aversion pushes dlr index to 1-year high, euro sinks

* Dollar rallies after New Zealand dollar hits 2-year low

* RBNZ surprises market with hefty 50 basis point rate cut

(Adds comment, updates prices)

By Naomi Tajitsu

LONDON, Sept 11 (Reuters) - The dollar hit a one-year high against the euro and a basket of currencies on Thursday due to a wave of risk aversion, while the New Zealand dollar fell to a two-year low after a large central bank interest rate cut.

The dollar's rally kicked off earlier in the day, after a 50 basis point rate cut by the Reserve Bank of New Zealand to 7.5 percent wrong-footed many in the market who had been anticipating a smaller, 25 basis point easing [ID:nWEL000746].

Risk aversion stung the euro, and broadly boosted the low-risk, low-yielding yen, which hit a two-year high against the single European currency. The Japanese currency also gained on high-yielders such as the New Zealand and Australian dollars.

The dollar extended its rally after a pause earlier in the week, when the U.S. Treasury's move to take over mortgage agency giants Freddie Mac and Fannie Mae underlined weakness in the U.S. financial sector.

Dollar appetite has since returned, particularly after the European Commission on Wednesday forecast that regional growth will halve in 2008 from 2007, suggesting the euro zone is highly vulnerable to U.S. economic weakness [ID:nLA155886].

"The euro zone economy outlook is looking increasingly gloomy," said David Tinsley, economist at nabCapital.

"The source of volatility is coming from the risky side of the equation, it's coming more from the euro zone economy rather than the U.S. economy, although there's still a substantial amount of risk there as well."

The euro <EUR=> tumbled more that half a percent to $1.3894, its lowest level since September 2007.

Against a basket of currencies belonging to major U.S. trading partners, the dollar rallied as high as 80.375, a level not seen since September last year.


Triggering the dollar's rally was a 1.1 percent spill in the New Zealand dollar to $0.6439, its weakest level since September 2006, after the RBNZ's second consecutive rate cut decreased the high-yielding currency's rate advantage.

"It's part of a longer-term theme we've been seeing, where one of the G10 currencies gives way and it just cascades through the other currencies and before you know it, it's generalised dollar strength," said Adam Cole, global head of currency strategy at RBC Global Markets.

The New Zealand unit dropped nearly 2 percent to 68.83 yen <NZDJPY=>, its weakest in more two years, and analysts say the view for more monetary loosening will keep the currency under selling pressure.

The yen rallied across the board, sending the dollar <JPY=> down more than half a percent to 106.75 yen. The euro <EURJPY=> fell more than one percent to 148.38 yen, its lowest level since October 2006.

Broad weakness in global shares has helped to cool demand for risky trades, which has benefited the yen after the low-yielding currency for years had been used to pick up assets in higher-yielding currencies in "carry" trades.

The euro struggled in the aftermath of the European Commission's report, which also forecast inflation will be much higher because of financial turmoil, soaring commodity prices and housing market shocks.

The commission slashed its gross domestic product growth prediction for the euro zone to 1.3 percent from the 1.7 percent predicted in April.

The shift in the market's focus toward weakening growth outside of the United States enabled the greenback to brush aside news on Wednesday that Lehman Brothers posted third-quarter losses and failed to announce concrete plans to raise capital.

(Editing by Chris Pizzey)

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