* MSCI world equity index up 0.4 percent at 231.13
* Dollar hits 2-1/2 mth low vs euro, sterling at record lows
* Oil falls below $40 before recovering
By Natsuko Waki
LONDON, Dec 18 (Reuters) - The dollar hit a 2-1/2 month low
against the euro and held close to a 13-year low versus the yen
on Thursday, pressured by the Federal Reserve's aggressive rate
cut this week, while European stocks ticked higher.
Oil hit a four-year low below $40 a barrel, having fallen
eight percent on Wednesday, as further evidence of slowing
demand outweighed OPEC's biggest ever production cut.
The fallout from Tuesday's dramatic move by the U.S. central
bank to cut interest rates to near zero and the promise for more
quantitative easing action intensified, with investors betting
that the Bank of England would also deliver deep rate cuts,
which knocked sterling.
The euro has gained nearly 8 percent against the dollar this
week, on track for its biggest weekly gain ever since its
introduction in 1999.
"The dollar ... is vulnerable because of what they're doing
in terms of policy and the potential for quantitative easing in
the U.S.," said Robert Minikin, senior currency strategist at
Standard Chartered in London.
The euro rose to a high of $1.4493 <EUR=>, before trimming
gains after a weaker-than-expected reading in the
closely-watched German IFO business climate index survey.
The dollar stood at 87.85 yen <JPY=>, after falling as low
as 87.11 yen on Wednesday, a day after U.S. target interest
rates fell below those of Japan for the first time in more than
10 years.
MSCI world equity index <.MIWD00000PUS> rose 0.3 percent,
helped by Asia's 1.6 percent gains. The FTSEurofirst 300 index
of leading European shares were up 0.2 percent <> in
volatile trade. Emerging stocks <.MSCIEF> rose 1.1 percent.
FX WARNING
Sterling fell as low as 94.01 pence per euro <EURGBP=>, its
lowest on record, and also hit a record trough of 77.4 on a
trade-weighted basis <=GBP>.
Bank of England Deputy Governor Charles Bean said zero
interest rates in Britain are a possibility and further capital
injections may be required in the banking sector. The benchmark
UK rates currently stand at 2 percent.
The Bank of Japan is expected to cut interest rates toward
0.1-0.15 percent on Friday.
An export-damaging strengthening of the yen prompted an
intervention warning from Japanese authorities. A senior
Ministry of Finance official said the ministry would take
appropriate action as needed in the currency market, while
Japan's top government spokesman said the government would take
proper steps to cope with the yen's rise.
The dollar <.DXY> was steady against a basket of major
currencies.
U.S. crude oil <CLc1> traded at $40.38 a barrel, having
fallen as low as $39.19 earlier. The March bund futures <FGBLc1>
were down 7 ticks.
(Additional reporting by Naomi Tajitsu; Editing by Toby
Chopra)
