* Dollar hits 2-year high vs euro and currency basket
* BoE's King's recession comments rattle investors
* Traders liquidate high-risk positions, also boosting yen
(Recasts, changes byline, dateline, previous LONDON)
By Lucia Mutikani
NEW YORK, Oct 22 (Reuters) - The U.S. dollar jumped to a
two-year high on Wednesday as a deteriorating global economic
picture and worries stability would not return any time soon to
financial markets spurred investors to dump risky assets.
The dollar climbed to a two-year high versus the euro and a
five-year high against sterling, with analysts citing remarks
by Bank of England Governor Mervyn King that the British
economy was probably entering its first recession in 16 years.
The yen climbed to a 4-1/2-year high against the euro, with
the low-yielding Japanese currency also benefiting from the
exodus from risky assets after being dogged by carry trades for
years.
On Tuesday King said "Not since the beginning of the First
World War had our banking system been so close to collapse. We
are far from the end of the road back to stability ..."
Analysts said these remarks reminded investors that while
governments globally had taken aggressive steps to shore up the
financial sector it could take a while to see results.
"These comments were unexpected and reverberated globally
among financial markets overnight and prompted follow-through
selling not only in sterling, but also exacerbated the
safe-haven buying of the U.S. dollar and yen," said Michael
Woolfolk, currency strategist at Bank of New York Mellon.
"The yen is benefiting more strongly than the U.S. dollar
because of the safe-haven repatriation on behalf of Japanese
abroad, not just carry trades. We see this trend continuing
until the extreme levels of risk begin to subside."
The euro fell as far as $1.2740, according to electronic
trading system EBS, its lowest since November 2006. It was last
down 1.3 percent at $1.2885 <EUR=>.
The British pound dropped to $1.6203 <GBP=>, its weakest in
five years. It was last down 1.5 percent at $1.6438.
KING'S COMMENTS MISTIMED
The ICE Futures U.S. dollar index <.DXY>, which measures
the dollar's value against a basket of major currencies,
climbed to a two-year high of 85.921, before pulling back
slightly to be up around 1.3 percent at 85.528 in New York
morning trade.
"Whether or not the BoE Governor was speaking the truth,
given how vulnerable markets are, this may not have been the
time to speak it," said Jon Gencher, director of FX sales at
BMO Capital Markets in Toronto.
"There is still all sorts of talk of U.S. names
repatriating U.S. dollars, ongoing pullback from emerging
markets and the sense that many participants had underestimated
the speed and magnitude of the U.S. dollar and got caught out
on their hedging."
Despite the dollar's broad gains, it fell 1.3 percent to
99.030 yen <JPY=> as the ongoing unwind in carry trades
extended the Japanese currency's rally.
The euro dropped as low as 126.30 yen <EURJPY=>, its lowest
level in 4-1/2 years, according to Reuters data. It was last
down 2.6 percent at 127.61 yen.
The yen has shot up after having suffered for years as low
Japanese yields made the currency a prime candidate to fund
risky investments in assets of higher-yielding currencies.
Other high-yielders were hammered against the yen, with
sterling <GBPJPY=R> dropping as low as 160.60 yen. The
Australian dollar <AUDJPY=R> fell 1.75 percent to 66.95 yen and
New Zealand dollar <NZDJPY=R> slipped 3.5 percent to 59.09
yen.
(Additional reporting by Naomi Tajitsu in London; Editing by
James Dalgleish)
