* Dollar posts first yearly gain versus basket since 2005
* Yen a standout in 2008, dollar/yen falls most since 1987
* Pound has worst year versus greenback since 1971
(Adds comments, updates prices, changes byline)
By Wanfeng Zhou
NEW YORK, Dec 31 (Reuters) - The U.S. dollar rose on
Wednesday and posted its first yearly gain against a basket of
currencies since 2005 as the worst financial crisis in 80 years
led investors to take refuge in the greenback.
Despite a deepening recession in the United States, the
dollar emerged from a seven-year downtrend as U.S.-based
investors brought cash home and overseas investors parked money
in the relative safety of dollar-denominated assets such as
Treasuries.
The yen was the other top performer this year, soaring as
the crisis spurred a massive unwinding of carry trades --
borrowing in the low-yielding yen to invest in higher-yielding
assets elsewhere.
Liquidity was thin as traders closed their books on a year
in which banks around the globe failed or sought government
bailouts following the collapse of a U.S. housing bubble.
Central banks fought aggressively to shore up their
economies, with the Federal Reserve and the Bank of Japan
cutting rates virtually to zero.
"In forex, the year could be summed up in two words: risk
aversion," said Dustin Reid, director for FX strategy at RBS
Global Banking & Markets in Chicago. "The yen and the dollar
were at the receiving end of that global flight to safety."
In early afternoon trading in New York, the euro <EUR=> was
down 0.8 percent to $1.3956 after rising above $1.60 in July.
The euro fell about 4.5 percent against the greenback this
year -- its first annual drop since 2005, while the U.S. dollar
gained roughly 6 percent versus a basket of currencies <.DXY>.
"The volatility in euro/dollar in 2008 was simply
spectacular," said Reid. "At the height of risk aversion a
couple of months ago, the entire world rushed to buy dollars.
But as the Fed reacted by bringing rates to zero, the dollar's
luster has been gradually coming off."
Indeed, in the past few weeks, the euro clawed back a
significant portion of its decline from the mid-year peak,
gaining nearly 10 percent against the dollar in December, the
largest monthly advance since the currency's launch in 1999.
YEN GAINS; POUND TUMBLES
Despite its rally versus higher-yielding currencies such as
sterling and the Australian and New Zealand dollars, the U.S.
dollar tumbled more than 18 percent against the yen this year,
the worst annual performance since a 23.2 percent decline in
1987. The euro was 22 percent lower versus the yen.
The dollar was last up 0.6 percent at 90.84 yen <JPY=>
after trading as low as 87.15 to the dollar earlier this month,
according to Reuters data.
Sterling stood out as the major loser in 2008, slumping
nearly 27 percent against the dollar <GBP=>, the biggest since
the last vestiges of the gold standard was abandoned in 1971.
The euro also gained near 30 percent against the pound this
year and touched a high of 98.05 pence on Tuesday, within
striking distance of parity <EURGBP=D4>.
Investors shunned the pound as the Bank of England lowered
interest rates to 2.0 percent, their lowest since the 1950s.
Analysts said that 2008 will remembered as a year of
intense volatility as traders used foreign exchanges as a
platform to put on risk-averse trades.
"It has been an exceptionally active year in the foreign
exchange market as currency volatilities hit record highs,"
Kathy Lien, director of currency research at GFT Forex in New
York, wrote in a research note.
"In the first half of the year, everyone was worried about
how much further the dollar would fall but in the second half
of the year the concern became how much further the dollar
would rise."
While analysts agree that none of the world's major
economies will be spared from recession next year, views are
divided about how economic weakness will affect currencies.
Jeremy Stretch, a strategist at Rabobank in London, said
the euro is likely to continue a slide against the dollar on
growing expectations the U.S. economy may be among the first to
recover from the downturn.
Other analysts such as Bank of America's David Powell
believe that ongoing U.S. economic woes and uncertainty about
how the country will fund a massive fiscal stimulus package
will hurt the dollar in 2009.
"The trend of dollar weakness is unlikely to have yet seen
the end," Powell said.
(Additional reporting by Vivianne Rodrigues; Editing by Tom
Hals)
