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Tuesday October 21, 2008 - 21:44:09 GMT
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FOREX NEWS-Dollar soars to 20-month high; euro drops vs yen

Tue Oct 21, 2008 4:56pm EDT

* Dollar index scales 1-1/2-year high, euro slides

* Focus back on global economic outlook

* Yen rises, U.S. stocks fall on profit worries (Recasts, updates prices, changes byline)

By Nick Olivari

NEW YORK, Oct 21 (Reuters) - The dollar climbed to its highest since February 2007 against a basket of currencies on Tuesday as investors bet that interest rates outside the United States will fall sharply to shore up global growth.

Concerns over the global economy's health lured investors away from stocks into the safe havens of the dollar, yen and Swiss franc. The Federal Reserve launched a new facility to provide liquidity to strained financial markets, which analysts said unnerved investors by highlighting continuing problems.

Analysts say aggressive interest-rate cuts by the Fed and a possible stimulus package put the U.S. economy in a better position to recover relative to others around the world.

Sterling fell below $1.6700 for the first time since November 2003, according to Reuters data, after Bank of England Governor Mervyn King said on Tuesday that Britain's economy is probably entering its first recession in 16 years. [nLAG003088].

"Most importantly, the market is starting to shift its focus back to the underlying economic fundamental story, which is a dollar-positive story," said Omer Esiner, senior market analyst at Ruesch International in Washington.

"It suggests that the interest-rate differentials will continue to be in the dollar's favor. The global economy is falling and lending rates abroad have more room to the downside than in the U.S. It suggests that the dollar's relative yield appeal will continue to improve."

The ICE Futures U.S. dollar index climbed as high as 84.460 .DXY, its highest since February 2007, according to Reuters data. The index, which measures the greenback's value against a basket of six currencies, was last up 1.6 percent at 84.320.

The euro dropped to $1.3052, according to Reuters data. It was last down 2.2 percent at $1.3053 <EUR=>.

Against the yen, the euro fell to its lowest since June 2005 at 130.66 yen, according to electronic trading platform EBS. It last traded at 130.70 yen.

The Federal Reserve has slashed its benchmark overnight lending rate by 375 basis points to 1.50 percent, with the last 50 basis points of easing coming early this month as part of a coordinated action with other major central banks.

In contrast, the European Central Bank has only lowered rates by 50 basis points to 3.75 percent and that step was part of a central bank coordinated effort this month.

DOLLAR STILL IN DEMAND

Analysts said despite further declines in interbank rates, there was still a healthy appetite for the dollar, particularly from financial institutions with exposure to the derivatives market.

"The one thing that remains clear is there is still a desire to get U.S. dollars and U.S. assets," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

"Although we have seen the funding situation easing somewhat, especially if we look at the Libor rates, it's still at elevated levels. Financial institutions that have direct exposure to the derivatives market are looking for a safe haven."

The euro's break below some key technical levels against the dollar also added to the U.S. currency's momentum, analysts said, adding that the currency pair could drop as low as $1.3000 before staging a modest rebound likely to be capped around $1.3500 before year end.

"As it breaks lower, short-term players are riding the trend and that in itself is adding to the momentum in the dollar," said Strauss.

Stocks fell due to worries about the outlook for profits, which buoyed the yen and the Swiss franc. Against the yen, the dollar fell 1.6 percent to 100.24 yen <JPY=>.

The pound was last down 2.9 percent at $1.6687 <GBP=> after going as low as $1.6655, according to Reuters data.

The Bank of England's King said the British economic outlook has not worsened as rapidly as it has in the past month for a very long time.

A quarter-point interest-rate cut by the Bank of Canada sent the Canadian dollar tumbling to a three-year low against the greenback. The dollar rose as high as C$1.2208 <CAD=> before settling back at C$1.2136, still up 2 percent for the day.

The high-yielding Australian dollar fell 4.2 percent to US$0.6754 <AUD=> on expectations of further policy easing from the Reserve Bank of Australia. It was the worst-performing currency against the dollar for most of the New York session.

RBA minutes from its meeting earlier this month indicated there was more room for rate cuts, though not as aggressive as this month's 100-basis-point cut. (Reporting by Nick Olivari and Lucia Mutikani; Editing by Jan Paschal)

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