U.S. dollar index touches 15-month high as G7 meets

By Nick Olivari

NEW YORK (Reuters) - The U.S. dollar surged to a 15-month high against a basket of other major currencies on Friday as plunging stocks and persistently tight credit markets prompted investors to scramble for cash in the world's reserve currency.

With a 6.7 percent gain in the last two weeks, the basket, known as the Intercontinental Exchange's U.S. dollar index, is having its best two weeks since September 1992.

Earlier the flight to safety sent the yen to a more than six-month high against the dollar and a three-year peak versus the euro. The Japanese currency also rose against higher-yielding units such as the Australian and New Zealand dollars, as carry trades were unwound.

In such trades, investors borrow the low-yielding yen to buy assets in higher-yielding currencies.

Investors are looking to the Group of Seven industrial nations finance ministers and central bankers, meeting now in Washington, for remedies to revive the global banking system after recent bailouts, liquidity injections and coordinated rate cuts failed to thaw frozen credit markets.

"The U.S. dollar continues to trade broadly stronger on an aggregate basis as risk aversion continues to be the key driver of forex and equity markets globally," said Dustin Reid, senior currency strategist at RBS Global Banking & Markets in Chicago.

"The demand for dollars on the funding side remains high. As long as markets remain risk-averse to this degree, it is difficult to see the U.S. dollar making a material reversal despite many of the issues currently gripping global markets being home grown," he said.

In late New York trading, the ICE dollar index, which tracks the value of the greenback against a basket of six currencies, rose 1.25 percent to 82.450 .DXY, after rising as high as 83.191, the strongest since June 2007.

The euro fell 1.5 percent against the dollar at $1.3399 after touching an 18-1/2-month low. The euro has lost 7.8 percent against the dollar in two weeks, the worst two-week period since its introduction at the start of 1999.

G7 ACTION AWAITED

Coordinated interest rate cuts by the Federal Reserve and other major central banks this week failed to relieve investor fears that the freeze in credit markets will damage banks further and provoke a deep recession around the world.

Early in the New York session, U.S. stocks tumbled, sending the benchmark S&P 500 index below 900 for the first time in five years as investors liquidated risky bets. By the close, they had rallied off the lows but still ended lower on the day.

"There are hopes out there that the G7 meeting will end with some coordinated action from policymakers. It is still an extremely volatile, extremely nervous market," said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York.

"But in our view, the events of the last week have shown policymakers are prepared to do whatever it takes to stabilize markets. There is a global understanding of the severity of the problem," he added.

The dollar got an added boost when a G7 official said on Friday the Group of Seven major nations is unlikely to adopt Britain's proposal to guarantee lending between banks.  Continued...