* Dollar up for 10th day as global economy downgraded
* RBA says can cut rates before inflation cools, Aussie falls
* Japan retail trader selling of Aussie, kiwi calm for now
* German and euro zone Q2 GDP, US CPI data due later in day
By Eric Burroughs
TOKYO, Aug 14 (Reuters) - The dollar gained for a 10th
straight day against a basket of currencies on Thursday, with
investors cutting holdings of the euro and higher-yielding
currencies on a downbeat view on the global economic outlook.
The dollar struck a two-year high against the pound as
investors see major central banks cutting interest rates to limit
the damage from the global slowdown, while the Federal Reserve is
expected to keep rates on hold having already slashed them.
In particular, the Bank of England's bleak assessment of the
British growth outlook in its quarterly inflation report on
Wednesday opened the door to interest rate cuts. [].
Data on Wednesday also showed Japan's economy shrank in the
second quarter at the sharpest pace since its last recession in
2001, keeping intact expectations for steady rates.
Market players have been caught off guard by the sudden
downturn in global economic expectations, leading to heavy
selling of once popular bets favouring the euro, Australian
dollar and commodities on the view world growth would hold up.
But the yen rose broadly as some Japanese retail traders cut
more of their big positions in the Aussie and New Zealand dollar,
trying to limit losses from the sharp slide in those currencies
over the past few weeks.
More Japanese traders may be forced to sell the Aussie and
kiwi, potentially driving the dollar down against the yen.
"The yen short position is still large," said Tohru Sasaki,
chief foreign exchange strategist at JPMorgan Chase in Tokyo,
estimating that it currently totalled about 5 trillion yen ($45.7
billion). "The risk is to the downside."
The dollar was little changed at 109.43 yen <JPY=>, down from
a seven-month peak of 110.40 yen struck earlier this week. The
dollar index <.DXY>, which gauges its performance against six
major currencies, was up 0.2 percent and near a six-month high.
A retreat in global stock markets on renewed jitters about
the ongoing fallout from the year-old credit crisis also spurred
market players to trim carry trades which use the low-yielding
yen to buy higher-yielding currencies.
The euro fell 0.3 percent to $1.4883 <EUR=>. It touched a
six-month low of $1.4815 this week. Sterling slipped 0.1 percent
to $1.8668 <GBP=D4> after touching a 22-month low of $1.8619.
"The market will likely react with euro selling if growth
data due later in the day matches or falls below expectations,"
said a senior trader at a European bank. The euro zone's gross
domestic product is expected to shrink 0.2 percent in the second
quarter from the previous quarter.
AUSSIE RATE CUTS
Australia's central bank said on Thursday it would not wait
for inflation to fall before cutting rates, the strongest signal
yet that a rate cut is coming next month and pushing the Aussie
down. []
The Australian dollar fell 0.6 percent to $0.8694 <AUD=D4>,
but still up from a seven-month low of $0.8590 hit on Wednesday.
The Aussie shed 0.6 percent to 95.09 yen <AUDJPY=R> but was
above a four-month low of 93.09 yen. In the past two weeks, the
Aussie has slid 8 percent versus the yen.
The Aussie and kiwi both rebounded overnight as some
speculators rushed to cover short positions built up against the
yen during their drop.
Traders in Tokyo said that while some of Japanese day traders
had panicked the previous day and were forced to sell the Aussie
and kiwi to cut losses, others were seeing this as an opportunity
to buy.
The individual traders, who make leveraged bets with borrowed
funds, had lifted long positions favouring the Aussie and kiwi to
a record high in the past few weeks on the Tokyo Financial
Exchange.
But in the first three days this week, net long kiwi
positions dropped 30 percent -- suggesting forced selling.
($1=109.37 Yen)
(Additional reporting by Chikako Mogi; Editing by Edwina Gibbs)
