U.S. dollar drops to near one-year lows

NEW YORK (Reuters) - The U.S. dollar fell on Wednesday, hitting its lowest level in nearly one year against a basket of major currencies, as growing evidence of a global recovery spurred investors to move into riskier currency trades.

A rise in European and U.S. stocks further underpinned the market's appetite for risk and reduced demand for the dollar as a safe haven, pushing the euro to fresh highs for 2009.

Low yields on U.S. assets have also prompted investors to seek higher returns, analysts said, with options-related euro buying further contributing to the dollar's sell-off.

"The dollar is under a lot of pressure and this is being driven by two things -- abysmally low U.S. yields and easing risk aversion," said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York.

Two-year note yields were at 0.933 percent on Wednesday down from Tuesday's close at 0.953 percent. Benchmark 10-year yields were also lower at 3.475 percent from 3.486 the previous session.

"Now that the world doesn't seem to be on the brink of collapse, the market is looking for higher yields elsewhere," McCarthy said.

In late afternoon trading, the euro rose 0.6 percent to $1.4561 after briefly touching $1.46, a fresh 2009 high, according to Reuters data.

Brian Dolan, chief currency strategist, at Forex.com in Bedminster, New Jersey thinks the rally in the euro zone single currency may be running out of steam.

"We have come off about 70 to 80 points from the highs (in the euro) and that's a big deal," said Dolan. "It's clear that the risk rally is stalling. Both gold and oil have also come off."

A Federal Reserve report on Wednesday also dimmed optimism in the market. The Fed's Beige Book said although the U.S. central bank saw evidence of an improving economy, labor markets remained weak while retail sales were flat.

Dolan believes the Fed report was on the whole "dovish and unlikely to stimulate a fresh rally in risk assets."

The ICE Futures' dollar index .DXY, which tracks the performance of the greenback against a basket of six major currencies, fell 0.4 percent to 76.992. It touched 76.803 earlier, its lowest since late September 2008.

Against the yen, the dollar fell 0.3 percent to 92.04 yen after earlier falling to a near a seven-month low at 91.59 on Reuters.

Commodities, including oil and gold, overall rose on Wednesday, although they have fallen from their highs of the day. That helped higher-yielding currencies, such as the Australian and New Zealand dollars, as well as emerging markets assets such as the South African rand. The rand earlier touched a fresh 13-month high against the dollar.

Investor are now turning their focus to monetary policy decisions. Over the next 24 hours, the Bank of England and Bank of Canada will hold monetary rate-setting meetings.