* MSCI world equity index up 0.7 percent at 231.78
* 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 and sterling fell
sharply on Thursday, boosting the euro broadly as this week's
aggressive U.S. rate cuts prompted speculation for deep rate
cuts in Britain, while oil's tumble weighed on European shares.
The dollar hit a 2-1/2 month low against the euro and held
close to a 13-year low versus the yen after the U.S. central
bank cut interest rates to near zero and pledged for more
quantitative easing.
Sterling hit record lows versus the euro and on a
trade-weighted basis as Bank of England Deputy Governor Charles
Bean said interest rates could fall to zero. The Bank of Japan
is also expected to cut interest rates towards 0.1 percent on
Friday.
While Thursday's weaker-than-expected IFO German business
climate survey reinforced gloom over the euro zone's biggest
economy, recent comments from the region's policymakers suggest
they are not in a hurry to cut interest rates aggressively.
"The euro is picking up quite a lot of support -- the yield
differentials have moved out and that may well be providing some
support," said Ian Stannard, senior currency strategist at BNP
Paribas.
The euro rose to a high of $1.4719 <EUR=>, gaining eight
percent against the dollar this week, on track for its biggest
weekly gain ever since its introduction in 1999.
Sterling fell as low as 95.04 pence per euro <EURGBP=>,
within cents of parity with the single currency. It also hit a
record trough of 76.9 on a trade-weighted basis <=GBP>.
MSCI world equity index <.MIWD00000PUS> rose 0.7 percent,
helped by Asia's 1.6 percent gains. The FTSEurofirst 300 index
of leading European shares were lost 0.5 percent <> in
volatile trade. Emerging stocks <.MSCIEF> rose 1.1 percent.
U.S. crude oil stood at $40.60 a barrel <CLc1>, having hit
a four-year low below $40 a barrel earlier as further evidence
of slowing demand outweighed OPEC's biggest ever production cut.
EXPORT-DAMAGING STRENGTH
Barclays estimates that the single currency has risen more
than 10 percent on a trade-weighted basis since Dec 3, the day
before European Central Bank last met to decide on rates.
It calculates that a six-percent appreciation in the euro's
TWI is roughly equivalent to a 100bp rise in the policy rate.
"Even though the euro does often show some degree of
appreciation late in December, this startling appreciation is
likely to have taken the Governing Council by surprise," the
bank said in a note to clients.
"The rapid euro appreciation does strengthen sharply the
case for aggressive further ECB easing."
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.
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> fell 1 percent against a basket of major
currencies. It's down nearly 7 percent this week, on track for
its biggest weekly loss since at least early 1980s.
The March bund futures <FGBLc1> were down 7 ticks. The
two-year euro zone government bond yield <EU2YT=RR> fell to a
record low 1.837 percent before coming back up to 1.88 percent.
(Additional reporting by Tamawa Desai, Editing by Andy
Bruce)
