RPT-FOREX-Dollar falls on Mideast tensions, gloomy outlook

Mon Dec 29, 2008 2:54pm GMT

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* Dollar falls on Mideast tensions, gloomy outlook

* Pound hits record low vs euro, nears parity

* Swiss franc rises on geopolitical risks

* Commodity currencies catch bid with oil and gold (Recasts, adds comments, changes byline and dateline, previous LONDON)

By Vivianne Rodrigues

NEW YORK, Dec 29 (Reuters) - The dollar fell broadly on Monday, eroded by a grim outlook for the U.S. economy and concerns Israeli attacks in the Gaza strip will destabilize the Middle East and threaten oil supplies.

Sterling extended last week's declines and hit a record low against the euro, approaching parity with the single currency, after reports pointed to a further slide in UK home prices in 2009.

The Swiss franc jumped as well as gold and oil prices as Israeli warplanes warplanes pounded the Hamas-ruled Gaza Strip for a third consecutive day. [ID:LT345484]

Investors have generally fled to the dollar in periods of political uncertainty, although that has changed in recent months as the U.S. recession has deepened and government bond yields have sunk to record lows.

"Price action this morning has been driven mainly by a sudden rise in global risk aversion following the attacks in Gaza, which in turn led to a spike in oil and gold," said Matt Esteve, a foreign exchange trader at Tempus Consulting in Washington D.C.

"The dollar is softer across the board, while the Swiss franc and most commodity currencies are advancing. In these low-volume conditions and with the absence of key U.S. data, we may easily see euro/dollar trading back at 1.44," he said

In morning trading in New York, the euro was 1.7 percent higher at $1.4293 , its biggest gain in about a week. The euro traded as high as $1.4361.

The dollar shed 2 percent against the Swiss franc to 1.0469 francs .

Thin holiday trading conditions exacerbated moves, dealers said.

Commodity currencies including the Norwegian crown and Australian dollar rose, tracking a jump in oil CLc1 and gold prices in the wake of hostilities in the Middle East. [ID:nLT459307]

Oil prices rose to as high as $42.20 a barrel earlier and gold prices gained around 1.9 percent to $883 an ounce.

Against the yen, the dollar was down 0.5 percent at 90.27 yen and the U.S. currency sank 1.5 percent versus the Australian dollar to trade at 69.53.

STERLING DECLINES

The pound tumbled against the euro to a record low of 97.99 pence according to Reuters data, as it approached parity for the first time since the single European currency's launch in 1999.

"It seems more and more likely that the pound is going to trade in parity with the euro fairly soon," said Esteve at Tempus Consulting. "We could trade at those levels as early as the start of next week."

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

The euro was headed for a 33 percent gain versus the pound this year, its biggest annual advance ever, on speculation a deepening UK economic slump may prompt the Bank of England to cut interest rates, which at 2 percent are the lowest since 1951.

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 were 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. (Additional reporting by Veronica Brown in London; Editing by Tom Hals)