Dollar soars on global growth fears

NEW YORK (Reuters) - The dollar on Wednesday chalked up its biggest daily gain in nearly two years against major currencies as a gloomy U.S. economic growth outlook and weak Chinese data suggested global growth was faltering.

Investors reacted by dumping risky assets, including higher-yielding currencies and stocks, and taking refuge in the U.S. dollar and safe haven U.S. Treasuries.

The Intercontinental Exchange's (ICE) U.S. dollar index, a weighted index of six currencies against the dollar, soared 1.8 percent for it's biggest one day rise since October 2008.

The dollar had been under steady pressure over the last six weeks as weak U.S. economic reports fed fears that economic growth was slowing.

But markets have since grown anxious about the state of the broader world economy, with some investors afraid the sluggish U.S. economy will slow growth beyond American shores as well.

Data on Wednesday showing a slowdown in Chinese factory output intensified these fears, analysts said.

Slower U.S. growth "creates problems for China, for Japan, for the world," said Robert Smith, chairman of Smith Affiliated Capital, a New York firm with $2.2 billion under management.

"Everyone's waking up and talking deflation. There's still money to be made in U.S. Treasuries in this environment, and I think the dollar will continue to surprise people."

The yen was the only major currency to rise against the dollar which hit a 15-year low around 84.72 yen

Heavy purchases of safe-haven U.S. Treasuries, which pushed yields lower, encouraged Japanese investors with large dollar-denominated Treasury holdings to take profits and return funds into yen. Japan is the second-largest holder of Treasuries after China.

The two-year U.S. Treasury yield hit a record low a day after the Federal Reserve downgraded its U.S. growth outlook and said it would try to revive the flagging economy by buying more government debt with cash from maturing mortgage bonds.

The euro lost 2.2 percent to $1.2882, its lowest close since late July and its worst one-day showing since October 2008. Sterling fell 1.1 percent to $1.5676 after the UK central bank said inflation would fall below its 2 percent target level in two years.

'WIN WIN' FOR YEN

The dollar hit a 15-year low at 84.72 yen on electronic trading platform EBS after taking out option barriers at 85.00 and 84.75, fueled by a narrowing of the spread between U.S. and Japanese two-year yields. It was last down 0.2 percent at 85.24 yen.

Ashraf Laidi, chief market strategist at CMC Markets in London, said the Fed's "outright Treasuries purchases will likely extend the yen's win-win scenario." Falling U.S. yields will keep Japanese capital at home, while falling stocks will also boost the currency, he said.

Japanese Finance Minister Yoshihiko Noda said Wednesday he was closely watching foreign exchange markets, but analysts doubted his comments would escalate into currency intervention to weaken the yen.

A euro zone official told Reuters on Wednesday that authorities in Brussels would welcome Japanese intervention, saying the yen will likely benefit as Asian demand increases.

"Japan needs the support of the U.S. and Europe to intervene, but the Fed and the European Central Bank are focused on other problems right now. So I don't think it is possible at these levels," said Manuel Oliveri, currency analyst at UBS in Zurich. "I see no upside for dollar/yen right now, and I can see it falling toward 80 yen," he said.

The record low came in April 1995 at about 79.75 yen.

The yen gained across the board, with the euro down 2.5 percent at 109.74 yen and the Australian dollar losing 1.8 percent.

(Additional reporting by Neal Armstrong in London;)