* Dollar index scales 1-1/2 year high, euro slides
* Fed creates new money market funding facility
* Yen rises on deleveraging, Wall Street opens down
(Recasts, changes byline, dateline, previous LONDON)
By Lucia Mutikani
NEW YORK, Oct 21 (Reuters) - The U.S. dollar surged to a
1-1/2 year peak versus a basket of currencies on Tuesday due to
strong demand from financial institutions seeking a safe-haven
despite a moderation in interbank rates.
Analysts said the demand for the greenback was also driven
by signs that momentum was building for a second program to
stimulate the flagging U.S. economy. Federal Reserve Chairman
Ben Bernanke threw his support behind such a package on
Monday.
There was also speculation that banks needed more dollars
to settle credit derivatives tied to the bankruptcy of Lehman
Brothers.
By contrast, the euro was left on the defensive on the
growing perception that policy-makers in the currency zone have
scope for aggressive interest rate cuts. The yen rose broadly,
reflecting underlying nerves on the global economy's outlook.
"The one thing that remains clear is there is still a
desire to get U.S. dollars and U.S assets," said Matthew
Strauss, senior currency strategist at RBC Capital Markets in
Toronto.
"Although we have seen the funding situation easing
somewhat, especially if we look at the Libor rates, it's still
at elevated levels. Financial institutions that have direct
exposure to the derivatives market are looking for a
safe-haven."
The ICE Futures U.S. dollar index climbed to 83.846 <.DXY>,
its highest since March 2007, according to Reuters data. The
index, which measures the greenback's value against a basket of
six currencies, was last up 1.0 percent at 83.781.
The euro dropped to its lowest level since March 2007 at
$1.3161, according to Reuters data. It was last down 1.3
percent at $1.3169 <EUR=>.
FED CREATES NEW FACILITY
The Fed on Tuesday announced the creation of a new funding
facility to provide liquidity to money market investors. For
details, see [].
While interbank lending has started to revive from a state
of near-paralysis, the dollar and yen benefited as investors
continued to liquidate highly leveraged positions.
The interbank cost of borrowing dollars, euros and sterling
fell across all maturities on Tuesday, according to the British
Bankers' Association's daily fixing. Dollar overnight rates
were fixed below the Fed's 1.5 percent target for its federal
funds rate.
Against the yen, the dollar fell 1.0 percent to 100.80 yen
<JPY=>. The euro dropped 2.3 percent to 132.82 yen <EURJPY=>.
The yen was boosted as U.S. stock indexes opened more than
1 percent lower due to worries about the profit outlook.
"The deleveraging story will continue and remain in place
for quite some time," said Audrey Childe-Freeman, senior FX
strategist at Brown Brothers Harriman in London.
"The other interesting thing coming through is the policy
responses to the crisis. I think the U.S. remains ahead on that
front."
As financial markets regain some poise, analysts said fears
about the credit crisis were starting to give way to concerns
about economic fundamentals and monetary policy.
The Fed's Bernanke on Monday said the economy was expected
to be weak for several quarters and there was some risk of a
protracted slowdown.
Analysts reckon aggressive interest cuts by the U.S.
central bank put the economy in a better position to recover
quickly compared to its peers around the world.
Fed policy-makers meet next week, and economists and
investors widely expect another rate cut from the current 1.5
percent after leading global central banks recently acted in
concert to cut borrowing costs.
The high-yielding Australian dollar fell 3.2 percent to
US$0.6827 <AUD=> on expectations of further policy easing from
the Reserve Bank of Australia.
RBA minutes from its meeting earlier this month indicated
there was more room for rate cuts, though not as aggressive as
this month's 100 basis point cut. []
(Additional reporting by Veronica Brown in London; Editing by
Tom Hals)
