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.

The Bank of England offered a bleak assessment of the British growth outlook in its quarterly inflation report on Wednesday, opening the door to interest rate cuts. [ID:nBOE001516]

“Reading the report almost leaves one overwhelmed by impending doom,” said currency strategists at RBC Capital Markets in a note to clients.

Data on Wednesday showing that Japan’s economy contracted in the second quarter at the sharpest pace since its last recession in 2001 highlighted the spreading pain from the U.S. housing crisis and global credit crunch.

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.

Tohru Sasaki, chief foreign exchange strategist at JPMorgan Chase in Tokyo, said more Japanese traders may be forced to sell the Aussie and kiwi, potentially driving the dollar down against the yen as well.

“The yen short position is still large,” said Sasaki, estimating that it currently totalled about 5 trillion yen ($45.7 billion). “The risk is to the downside.”

The dollar was little changed from late U.S. trade at 109.41 yen <JPY=>, down from a seven-month peak of 110.40 yen struck earlier this week.

A retreat in stock markets around the world on renewed jitters about the ongoing fallout from the year-old credit crisis also spurred market players to trim carry trades — using the low-yielding yen to buy higher-yielding currencies.

The euro inched down 0.2 percent to $1.4887 <EUR=> after touching 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 dollar index <.DXY>, which gauges its performance against six major currencies, was up 0.2 percent and near a six-month high.

AUSSIE RATE CUTS

A top Australian central banker 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. [ID:nSYD17077]

The Australian dollar fell 0.6 percent to $0.8694 <AUD=D4> but was 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 up from 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 the 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.

Source: http://www.afxnews.com

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