* Dollar hits 2-1/2 month low vs euro a day after Fed move
* Dollar plunges to 13-1/2 year trough vs yen below 88
* Fed's historic rate cut seen keeping dollar weak
* BoJ seen cutting rates later in the week
(Adds quotes, updates prices)
By Wanfeng Zhou
NEW YORK, Dec 17 (Reuters) - The U.S. dollar tumbled on
Wednesday, hitting its lowest in more than 13 years versus the
yen and also falling against the euro, a day after the Federal
Reserve slashed interest rates to the lowest among major
economies.
The dollar's plunge against the yen was stoking speculation
that Japanese authorities may intervene to rein in the yen's
climb, which is hurting the nation's exporters.
The Fed on Tuesday cut its federal funds rate target to a
record low, setting a range of zero to 0.25 percent compared
with the previous level of 1.0 percent, and said it would use
"all available tools" to battle recession. See
[].
"The underlying story in the FX market remains yield. The
fact that the Fed made this major policy move yesterday really
changed the balance of power towards the euro for the time
being," said Boris Schlossberg, director of currency research
at GFT Forex in New York.
The massive cut further diminished the greenback's yield
appeal against the euro, which has registered a staggering 11
percent gain so far during the month.
"The dollar effectively could be the new carry trade
(currency), although in an environment where virtually
everybody is converging towards zero interest rates, the carry
trade is now holding much less power than it used to, with the
exception of the very few high-yielding currencies that are out
there," Schlossberg said.
In early trading in New York, the euro rose to a new
two-and-a-half month high at $1.4436, according to Reuters
data. It was last up 0.9 percent at $1.4384 <EUR=>, The euro
may test the $1.45 level before year-end, Schlossberg said.
Against the yen, the dollar fell to 87.15 yen <JPY=>, the
lowest since mid-1995. It was last down 1 percent at 88.05.
Sterling faced pressure as the argument for more aggressive
British interest rate cuts became compelling, with
euro/sterling hitting a record high at 92.32 pence <EURGBP=>.
For latest report click on [].
Against the dollar, the pound last traded down 1.2 percent
at $1.5411 <GBP=>.
FOCUS ON BOJ, MOF
The yen has rocketed in recent months as investors unwound
carry trades, cutting exposure to riskier and higher-yielding
assets as the financial crisis mushroomed. The dollar has lost
more than 8 percent versus the yen this month.
The yen rose again as the Fed's move brought U.S. interest
rates below the Bank of Japan's target for the overnight call
rate -- now at 0.30 percent -- for the first time in well over
a decade.
"With rates in Japan now higher than Fed rates, this puts
further downward pressure on dollar/yen," Bank of America G10
currency strategist David Powell said.
"It also increases the possibility that the BoJ will cut
rates by 20 basis points on Friday," he added.
The BoJ starts its two-day monetary policy meeting on
Thursday. Two-thirds of analysts polled by Reuters now expect
the BoJ to cut rates this week, and most of them see rates
falling to 0.1 percent from the current 0.3 percent. See
[].
The yen's gains prompted Naoyuki Shinohara, Japan's top
financial diplomat, to declare on Wednesday that rapid
movements in currency markets are undesirable [].
In Norway, the central bank cut interest rates by 175 basis
points on Wednesday to 3.0 percent. The Norwegian crown fell,
pushing the euro down 0.2 percent to 9.5759 <EURNOK=>.
(Additional reporting by Veronica Brown in London; Editing by
Chizu Nomiyama)
