* Dollar index rise to 10-1/2 month high on oil losses
* Oil falls near $105 a barrel before recovering
* Pound falls to 2-1/2-year low vs dollar
(Updates prices, adds comments, changes byline)
By Vivianne Rodrigues
NEW YORK, Sept 2 (Reuters) - The U.S. dollar rose to a
10-1/2 month high as measured by a basket of major currencies
on Tuesday, boosted by a sharp drop in oil prices and
persistent concerns about the health of other major global
economies.
The theme driving global financial markets on Tuesday was
crude oil's tumble to as low as $105.46 per barrel earlier
<CLc1> as Hurricane Gustav had limited impact on energy
infrastructure. For details, see []. Oil futures
last traded down 4.5 percent at $110.22 per barrell.
"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.
Malyon said the greenback also drew support from weakness
in high-yielding currencies triggered by the Reserve Bank of
Australia's interest-rate cut.
In late afternoon New York trading, the dollar index <.DXY>
rose 0.6 percent to 78.052, after earlier hitting a
10-1/2-month high of 78.310. The index has gained about 9
percent since mid-July.
The euro was down 0.6 percent on the day at $1.4517 <EUR=>,
after falling 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 $1.7832, down 1.1 percent. Adding to sterling's
woes was a forecast by the Organization of Economic
Co-operation and Development on Tuesday suggesting the U.K.
would fall into a recession in late 2008.
Sterling was also under pressure after Britain's finance
minister said over the weekend that economic challenges were
the greatest in 60 years. The euro rose earlier to a record
high of 81.62 pence <EURGBP=>.
The dollar was up 0.7 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.
A report earlier today showed U.S. factory activity
unexpectedly shrank slightly in August while inflation
pressures also eased. For more details, see [].
"Falling crude prices have widespread benefits for the U.S.
economy," said Kathy Lien, director of currency research at GFT
Forex. "Inflation going forward will ease. Today's
manufacturing ISM number is the first example of that."
WORRIES ABOUT GLOBAL GROWTH
The focus later this week is expected to shift to the news
conference that 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. Oil has
fallen more than 25 percent from July's record peaks near
$150.
"This week, we're going to see a lot of U.S. economic data,
but we're also going to see some pretty soft economic data out
of the euro zone," said Andrew Busch, BMO Capital Markets'
global FX strategist in Chicago.
Earlier on Tuesday, Australia's central bank cut rates by a
quarter percentage point to 7.0 percent, helping shove the
Australian dollar down to its lowest in a year. The Australian
dollar last traded down 1.3 percent at US$0.8387 <AUD=>.
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. For more,
see: []. The won last traded 1.3 percent lower at
1130.50 against the dollar.
(Additional reporting by Wanfeng Zhou in New York; Editing by
tktk)
