FOREX-Dollar hits 10-1/2 mth high as oil accelerates loss

                                
 * Dollar extends gains <.DXY> as oil drop accelerates
                                
 * Dlr index at 10-1/2 month high, euro at 7-month low
                                
 * Oil slides toward $105 <CLc1>
                                
 * Sterling slides to new 2-1/2-year lows vs dollar
  (Updates prices, adds comment, changes byline, dateline,
previous LONDON)
                                
 By Wanfeng Zhou
                                
 NEW YORK, Sept 2 (Reuters) - The dollar rose to its highest
in more than 10 months against a basket of currencies on
Tuesday, as a plunge in crude oil prices stoked expectations of
lower global inflation and interest rate cuts outside the
United States.
                                
 The euro fell to a seven-month low against a resurgent
dollar, sliding below $1.45. Combined with an increasingly
bleak UK economic outlook, the dollar's broad strength pushed
sterling further below $1.78, to its lowest since April 2006.
                                
 The theme driving financial markets on Tuesday was oil's
tumble to a low of $105.46 per barrel <CLc1> after early
reports showed Hurricane Gustav had spared major U.S. Gulf oil
facilities. For details, see [ID:nL2728932].
                                
 Oil has fallen almost 30 percent from July's record peaks
near $150. That prompted traders to bet inflation would ease in
the coming months, giving central banks room to make
growth-supportive rate cuts.
                                
 "The decline in crude oil is probably the big catalyst for
the dollar move," said Stephen Malyon, senior currency
strategist at Scotia Capital in Toronto. "There are also some
other small factors that are reinforcing the strength in the
U.S. dollar today.
                                
 "The rate cut from the Reserve Bank of Australia has put
some pressure on some of the high-yielding currencies, such as
Aussie and kiwi," Malyon said. Sterling is under pressure
partly because of some worrisome comments on the UK economy."
                                
 Australia's central bank cut rates by a quarter percentage
point earlier on Tuesday to 7 percent, helping shove the
Australian dollar down to its lowest in a year
                                
 In early New York trading, the dollar index <.DXY> rallied
1.4 percent to 78.236, having earlier hit a 10-1/2-month high
of 78.274. The index has racked up gains of 10 percent since
mid-July.
                                
 The euro was down 0.9 percent on the day at $1.4480 <EUR=>,
below $1.45 for the first time since February and more than 15
cents off the record high scaled in mid-July.
                                
 Sterling hit a 2-1/2-year low of $1.7784 <GBP=> before
pulling back to $1.7809, down 1.1 percent.
                                
 The Australian dollar fell more than 2 percent to US$0.8270
<AUD=>, its lowest in a year.
                                
 The dollar was up 0.9 percent against the yen at 108.86 yen
<JPY=>, above a one-month low of 107.63 struck the previous
day, according to Reuters data.
                                
 Boris Schlossberg, director of currency research at GFT
Forex, cautioned that while dollar bulls hoped a rapid decline
in energy prices will dampen fears of a recession, this bullish
scenario may be too optimistic.
                                
 "If crude drops below $100/bbl, the pair may test the
$1.4000 level (euro/dollar), but unless lower oil prices
quickly translate into a pickup in consumer spending, traders
may reassess their optimism with respect to U.S. rates and the
EUR/USD could once again rally on interest rate differentials,"
Schlossberg said in a research note.
                                
 ECB LOOMS
                                
 Liquidity in the global foreign exchange market was
returning to more normal levels as U.S. markets began opening
after Monday's Labor Day holiday.
                                
 The focus later this week is expected to shift to the news
conference which European Central Bank chief Jean-Claude
Trichet will hold after Thursday's policy meeting, at which the
ECB is expected to leave interest rates unchanged at 4.25
percent.
                                
 With oil prices falling sharply, investors will look for
signs that Trichet's anti-inflation stance is cooling.
                                
 Sterling was under heavy selling pressure after Britain's
finance minister said over the weekend that economic challenges
were the greatest in 60 years. It fell further on Tuesday to
hit a 12-year low on a trade-weighted measure at 88.3 <=GBP>,
with the euro rising to a record high of 81.62 pence
<EURGBP=>.
                                
 Investors were also paying close attention to Asian
currencies on Tuesday, especially the South Korean won, which
hit a nearly four-year low against the dollar despite official
warnings of stern measures in the currency market.
[ID:nSEO84858]
                                
 The won last traded down 1.4 percent at 1131.25 against the
dollar.
                                
 Earlier in the global session, Asian currencies extended
losses against a broadly stronger U.S. dollar, prompting
central banks in Thailand, Malaysia and Indonesia to sell
dollars to support their currencies.
 (Additional reporting by Veronica Brown; Editing by Jonathan
Oatis)