FOREX-Dollar hobbled, sterling sinks to record low vs euro

Mon Dec 29, 2008 12:04pm GMT

* Dollar falls broadly on gloomy U.S. economy outlook

* Parity moves into view as stg hits record low vs euro

* Swiss franc rises on geopolitical risks

* Commodity currencies catch bid with oil and gold

(Adds quotes, updates prices, changes byline)

By Veronica Brown

LONDON, Dec 29 (Reuters) - The dollar fell broadly on Monday, eroded by a grim outlook for the U.S. economy and the Federal Reserve pouring liquidity into a battered U.S. banking system.

Sterling continued its downtrend, hitting a record low against a broadly stronger euro as parity with the single currency moved into sharp focus.

The pound also hit a record trough versus a basket of currencies earlier in the global session as a bleak economic backdrop and expectations for UK interest rates to stay well below those in the euro zone weighed heavy.

As the U.S. currency softened, dealers said the Swiss franc gained sharply on heightened geopolitical risk as Israeli warplanes pounded the Hamas-ruled Gaza Strip for a third consecutive day. [ID:LT345484].

With U.S. interest rates now at 0-0.25 percent, the U.S. central bank has turned to other ways of boosting growth including flooding the banking system with masses of money.

Analysts say this environment is a bugbear for the dollar from a relative yield perspective compared with the euro zone, where borrowing costs stand at 2.5 percent.

"The fact that rates are so low are a reflection on the state of the U.S. economy and the fact that policy options are becoming very limited. That will be a thorn for the dollar," said Phyllis Papadavid, currency strategist at SocGen in London.

Dealers also cited strength in commodity currencies including the Norwegian crown and Australian dollar as oil CLc1 and gold prices climbed in the wake of hostilities in the Middle East.

By 1140 GMT, the euro had strengthened roughly 2 percent against the dollar to $1.4345 while the U.S. unit shed 2.3 percent against the Swiss franc to 1.0430 francs .

Against the yen, the dollar was down 0.8 percent at 89.95 yen . The dollar also sank 2.1 percent versus the Norwegian crown to 6.9453.

Thin holiday trading conditions exacerbated moves, dealers said.

STERLING POUNDED

The pound tumbled to a record low of 97.98 pence , as dealers eyed parity -- that would be a first since the single European currency's launch in 1999.

Trade-weighted sterling <=GBP> fell to 74.2, the lowest on daily records kept by the Bank of England which date back to 1990.

"Retail sales figures will be closely watched over the coming weeks as the economy hopes to receive a boost from holiday-season sales," said Geoffrey Yu, analyst at UBS in a research note.

"Nevertheless, anecdotal reports continue to suggest limited gains, while other areas of the real economy will continue to see strong challenges."

Higher interest rates in the euro zone have increased the euro's appeal against the pound as it has narrowed the yield spread between euro zone and UK government bonds.

The yield on 10-year UK bonds hovered around 3.114 percent on Monday, near a record low of 3.008 percent hit last week, while the yield on its euro zone counterpart fell to an all-time trough of 2.909 percent. (Reporting by Veronica Brown; Editing by Mike Peacock)