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Friday October 24, 2008 - 21:03:28 GMT
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FOREX NEWS-Drop in stocks worldwide buoys U.S. dollar and yen

Fri Oct 24, 2008 4:26pm EDT

* Dollar hits fresh two-year high vs basket of currencies

* Sterling sees biggest one-day drop vs dollar since 1992

* Grim European data reinforces global recession fears (Adds details, updates prices, changes byline)

By Nick Olivari

NEW YORK, Oct 24 (Reuters) - The U.S. dollar surged to two-year peaks versus a basket of currencies on Friday as dismal economic data from Europe reinforced fears of a global recession, adding to a selling frenzy on world stock markets.

The yen soared to multiyear highs versus the dollar and euro on the ensuing risk aversion, while at the low the British pound suffered its biggest one-day percentage drop against the U.S. currency since September 1992, according to Reuters data.

Playing into investors' recession fears, data on Friday showed the euro zone's private sector economy shrank this month at its fastest pace since the monetary union, while the British economy contracted in the third quarter for the first time in 16 years. For more see [ID:nLO103381].

"The market is afraid. There are massive, massive redemptions and liquidations going on. As asset values move lower, more margin calls occur and more assets need to be liquidated for cash," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

"The dollar is benefiting as global investors are looking for safer investments. The yen clearly is the safest right now. We are seeing the Swiss franc benefit somewhat and we are seeing the dollar benefiting against Europe."

The ICE Futures U.S. dollar index, a gauge of its value against a basket of six other major currencies, touched a two-year high at 86.965 .DXY, according to Reuters data. It was last up 2.2 percent at 86.628.

The euro dropped to a two-year low at $1.2498 <EUR=>, according to Reuters data. It was last down 3.2 percent at $1.2567. Sterling sank to a six-year low around $1.5270 <GBP=> and was last down 2.6 percent at $1.5893.

FULL-FLEDGED PANIC

"You are seeing the currencies move as they would in any sort of full-fledged panic. There is complete collapse of carry trade and you are seeing a flight to quality in U.S. agencies and Treasuries," said Firas Askari, head currency trader at BMO Capital Markets in Toronto.

"It's a little disconcerting to say the least. Everyone needs to take a deep breath. I think we have to be close to the end of this awful cycle. It's usually darkest at the bottom."

Worries about a world-wide recession and its impact on company profits savaged global equities, with Tokyo's Nikkei average .N225 diving 9.6 percent to a 5-1/2-year closing low. Europe's FTSEurofirst 300 dropped to its lowest since April 2003, according to Reuters data.

Stocks on Wall Street followed global markets down, with the Dow Jones industrial average .DJI plummeting more than 5 percent at one point before recovering a tad to close down 3.6 percent.

That equities sell-off buoyed the low-yielding Japanese yen as risk-averse investors dumped carry trades. Before the current financial crisis, investors often borrowed cheaply in yen and channeled the funds to countries offering higher returns.

The dollar fell to a 13-year low of 90.950 yen, according to Reuters data. It was last down 3.3 percent at 94.570 yen <JPY=>. The euro at one point fell more than 10 percent against the yen to hit a low of 113.82 yen <EURJPY=>.

The euro zone currency was last down 6.5 percent at 118.82 yen for the session and on track for its biggest monthly percentage loss on record against the Japanese currency with a loss of 20.6 percent for the month to date at current prices.

The sharp surges in the dollar and yen have raised concerns that financial authorities may act in the currency market to rein in volatile moves. But some traders are skeptical and reckon central banks would likely prefer more interest rate cuts.

"The currency events are secondary to the more absolute breakdown in trust of the overall financial system. Central banks will probably want to keep their powder dry. The currencies are reacting to equities and not the other way round," said BMO Capital's Askari.

The Australian dollar dived 8 percent to US$0.6187 <AUD=> while the New Zealand dollar tumbled 6.6 percent to US$0.5571 <NZD=>.

"Do we think this trend is long lasting? We don't know. The only thing that is hopeful is the fact that we have the U.S. presidential election in a week and a half," said Tempus Consulting's Salvaggio. "The prospect of change and a fresh approach might stabilize the market."

Polls show Democratic candidate Barack Obama leading his Republican opponent John McCain. (Additional reporting by Lucia Mutikani; Editing by James Dalgleish)

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