* Dollar plunges to 13-1/2 year trough vs yen, below 88
* European, U.S. government debt touch fresh historic lows
* Oil slips; OPEC's record cut doesn't offset demand slide
* Stocks fall as economic worries overshadow retail gains
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, Dec 17 (Reuters) - The dollar fell to a 13-year
low against the yen while yields on U.S. long bonds slipped to
fresh historic lows on Wednesday, a day after the Federal
Reserve took bold measures to arrest a worsening recession.
Oil prices dropped to their lowest in more than four years
after dealers said a record supply cut by the Organization of
Petroleum Exporting Countries may fail to fully offset slumping
energy demand brought on by the global economic downturn.
U.S. stocks fell as pessimism about the economy
overshadowed a gain in retailers' shares on hopes that lower
oil prices and interest rates will boost consumer spending.
Investors fearful of deflation and further losses in
riskier assets from a worsening economy piled into longer-term
government debt, sending their yields -- which move in the
opposite direction to price -- to lows last seen in the 1950s.
"If we are going into a deflationary environment, you want
the longest maturing instrument with the lowest default risk,"
said Tom Girard, co-portfolio manager at MainStay Income
Manager Fund in New York.
Thirty-year U.S. government bonds <US30YT=RR> led the
rally, with the yield, which moves inversely to price, hitting
an intraday record low near 2.58 percent.
Yields on the benchmark 10-year U.S. Treasury note
<US10YT=RR> briefly dropped below 2.08 percent, the lowest
level since 1950, according to Global Financial Data.
Two-year German government bond yields hit their lowest
level since the euro zone was created, with the two-year Schatz
hitting 1.842 percent <EU2YT=RR>, according to Reuters data.
It was the lowest level since the rate-sensitive Schatz was
launched in 1991.
Equity markets on either side of the Atlantic slid as the
initial enthusiasm over the Fed's surprisingly aggressive
interest rate cut on Tuesday gave way to weak financial results
at key banks and European data reinforced a dismal outlook.
The Fed's surprisedly large cut further eroded the U.S.
currency's appeal against the euro, which has gained a
staggering 11 percent so far during the month.
The dollar hit a fresh 2-1/2 month low versus the euro and
its plunge against the yen stoked speculation that Japanese
authorities may intervene to rein in the yen's climb, which is
hurting the nation's exporters.
"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 dollar fell against a basket of major currencies, with
the U.S. Dollar Index <.DXY> down almost 2 percent at 78.606.
Against the yen, the dollar <JPY=> fell 1.70 percent to 87.42.
The euro <EUR=> rose 2.17 percent to $1.4404.
U.S. stocks fell as pessimism about the economy
overshadowed gains by retailers that recovered on hopes falling
oil prices and interest rates will boost spending.
Energy companies also slipped as crude oil fell briefly
below $40 a barrel for the first time since July 2004. Shares
of Exxon Mobil <XOM.N> fell 2.5 percent while Chevron Corp
<CVX.N> edged down 2.8 percent.
Financial stocks recouped earlier losses and added to sharp
gains a day earlier after an analyst said poor results from
Morgan Stanley <MS.N> will likely not be repeated. The bank's
shares rose 2.3 percent.
The Dow Jones industrial average <> closed down 99.80
points, or 1.12 percent, at 8,824.34. The Standard & Poor's 500
Index <.SPX> fell 8.76 points, or 0.96 percent, at 904.42. The
Nasdaq Composite Index <> shed 10.58 points, or 0.67
percent, at 1,579.31.
In Europe, BNP Paribas <BNPP.PA> revealed an 11-month loss
at its investment banking unit, hit by exposure to an alleged
fraud by U.S. financier Bernard Madoff.
The FTSEurofirst 300 <> index of top European shares
closed down 0.76 percent at 828.53 points.
Oil fell. U.S. crude oil prices <CLc1> fell $3.54 to settle
at $40.06 a barrel after dipping below $40 for first time since
July 2004. London Brent <LCOc1> fell $1.12 to$45.53.
OPEC, eager to push prices back up, announced an agreement
to cut 2.2 million barrels per day of output starting Jan. 1,
the biggest single reduction on record.
The cut was slightly bigger than expected and will add to
previous cuts of a daily 2 million barrels since September.
U.S. gold futures ended 3 percent higher after the Fed's
action underscored mounting economic problems, bolstering
bullion's appeal as an alternative investment.
The February gold contract <GCG9> settled up $25.80 to
$868.50 an ounce in New York.
Asian stocks rose overnight, supported by sectors sensitive
to interest rates in anticipation regional policy-makers will
take more aggressive steps to support growth after the Federal
Reserve's easing on Tuesday.
The MSCI index of Asian-Pacific stocks outside Japan
<.MIAPJ0000PUS> rose 2.5 percent. But Japan's Nikkei share
average <> shed early gains to end down 0.5 percent as the
yen's strength walloped exporters.
(Reporting by Leah Schnurr, Richard Valdmanis, Richard Leong,
Wanfeng Zhou in New York; George Matlock in London and
Christoph Steitz in Frankfurt; writing by Herbert Lash; Editing
by Chizu Nomiyama)
