* Dollar hits 2-year high vs basket of currencies
* Investors drop bets on high-yielders on global growth fears
* Euro hits 4-year low vs yen on carry trade unwind
* Japan life insurers among sellers to cut losses
By Satomi Noguchi
TOKYO, Oct 22 (Reuters) - The dollar jumped to a two-year
high against a basket of currencies on Wednesday as investors bet
that interest rates outside the United States will be cut sharply
to try to bolster global growth.
Concerns there may be a deep slowdown in the world economy
prompted investors to liquidate more bets against the dollar
built up in recent years, which at one point this year sent the
euro to a record high above $1.60, traders said.
The yen also climbed to a four-year high against the euro as
investors further unwound risky carry trades that had been a
worldwide fad since the early 2000s.
Traders said investors, from Japanese life insurance firms to
hedge funds, were dumping riskier assets in thin trade,
bolstering safe-haven currencies like the U.S. dollar and yen.
Some said the euro's recent slide against the dollar and yen also
likely reflected fund repatriation by U.S. and Japanese
investors.
"The pattern among investors has been toward avoiding risk,"
said Kimihiko Tomita, head of foreign exchange for State Street
Global Markets in Tokyo. "Repatriation is a main driver of the
market now," he said.
Thin volumes exaggerated the moves, with bid/ask spreads
unusually wide. Even speculators were reluctant to step into the
market, adding to the volatility, traders said.
Selling of the dollar and the yen to fund investment in the
euro and other higher-yielding currencies and assets -- different
forms of carry trades -- was most beneficial to investors when
the global economy grew steadily and emerging markets boomed.
But all that has changed now, traders said.
"People are shifting from high leverage to low leverage and
to cash, and this shift is expected to continue," said Satoshi
Okagawa, head of FX forwards trading group at Sumitomo Mitsui
Banking Corp.
"There is momentum that can't be stopped," said a senior
dealer at a European bank.
"Even if Japanese lifers say they are buying foreign assets
due to interest rate differentials, they are forced to sell to
cut losses when currencies drop this sharply," he said.
The euro fell 1.7 percent to $1.2831 <EUR=> after dropping as
low as $1.2740 on trading platform EBS, a fresh 20-month low.
Sterling was down 2.5 percent at $1.6255 <GBP=D4>, after
sliding as low as $1.6201, its lowest since September 2003.
The dollar index, which measures the greenback's value
against a basket of six currencies, was up 1.5 percent to 85.658,
after rising to 85.921, the highest since November 2006.
Against the yen, the euro fell to as low as 127.00 yen, the
lowest since April 2004 <EURJPY=R>, and was at 127.84 yen, down
2.1 percent on the day.
The dollar eased 0.7 percent to 99.69 yen.
"The euro is being hit by concerns that the euro zone economy
will be hurt by the deteriorating economic conditions in the
surrounding emerging markets," said Shuichi Kanehira, a senior
trader at Mizuho Corporate Bank.
Sterling tumbled after Bank of England Governor Mervyn King
said on Tuesday that Britain's economy was probably entering its
first recession in 16 years. []
Worldwide efforts have eased some strains in dollar funding
among banks in money markets, but investors continue to pick up
the world's most liquid currency for safety as the state of
financial markets remains fragile, traders said.
The Federal Reserve has slashed its benchmark overnight
lending rate by 375 basis points to 1.50 percent, with the last
50 basis points of easing coming earlier this month in
coordinated action with other major central banks.
In contrast, the European Central Bank has only lowered rates
by 50 basis points to 3.75 percent and that step was part of the
coordinated move this month.
(Additional reporting by Chikako Mogi, Masayuki Kitano and Kaori
Kaneko; Editing by Edwina Gibbs)
