* 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 [].
"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 <> 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 <> 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)
