U.S. dollar up as cash is hoarded, market looks to G7

By Lucia Mutikani

NEW YORK (Reuters) - The U.S. dollar edged higher again on Thursday as short term interest rates for dollars continued to rise on global money markets, despite coordinated efforts by many central banks this week to ease the credit crisis.

Despite unprecedented efforts by central banks to increase liquidity in money markets and lower borrowing costs, the fear of further bank failures continued to deter inter-bank lending and led corporations, funds, and banks to hoard cash, especially in U.S. dollars.

"(There has) been a scarcity of dollars and investors looking for dollars have gotten some through the forex market," said Robert Sinche head of strategy for currencies at the Bank of America in New York.

"That bid will remain for a bit, although there are some signs that dollar funding markets are beginning to stabilize a little a bit and if that happens some of this temporary bid for dollars will begin to susbside."

In late New York trade, the euro was off 0.3 percent at $1.3585, while the dollar was up 0.5 percent at 99.720 yen, after dropping to a six-month trough the previous session.

The Intercontinental Exchange's U.S. dollar index, which measures the dollar's value against major currencies, was last up 0.7 percent at 81.462 .DXY, not far from its 14 month high seen earlier this week.

LOOKING TO THE G7

The dollar's gains on Thursday came amid speculation that the Group of Seven meeting of finance ministers and central bankers on Friday in Washington D.C. would follow Wednesday's coordinated rate cuts with bold steps to unblock the flow of credit in global markets.

"There are some rumors going around that there is going to be some more guarantees by the central banks. That has tried to put a little bit of more confidence in the market," said Ken Duerr, VP of foreign exchange, BMO Capital Markets in Toronto.

"But looking at the stock market ... the market doesn't seem too convinced. I think the market needs to hear first-hand that something actually will happen."

U.S. stocks fell to new five year lows and long dated U.S. Treasury bond yields rose, while investors in emerging markets fled to the safety of U.S. dollars and even gold.

"The risk aversion is still very high. What you're seeing is players exiting the market on risk aversion and speculators pushing us to new lows for profit. This is a terrible crisis we're in by any means," said Michael Woolfolk, senior currency strategist, the Bank of New York Mellon in New York.

"It's very difficult to turn market sentiment around quickly."

Stocks on Wall Street tumbled for a seventh straight session, with the Dow Jones industrial average .DJI closing below 9,000 for the first time since June 2003.

Markets are looking to the G7 meeting, as well as a broader meeting of G20 countries over the weekend, for a more coordinated approach to the global financial crisis.