Stocks plunge pushes dollar to 2-1/2-year low vs yen

A woman looks at U.S. one dollars notes on display in Hong Kong November 1, 2007.

NEW YORK (Reuters) - The dollar slid further to a fresh 2-1/2-year low against the yen on Monday in line with falls in U.S. equities, as renewed credit worries affirmed expectations that more U.S. rate cuts are imminent.

Investors are on edge about fallout from the credit crunch as the approaching year-end may force them to dump assets or scramble for cash to get books in order in strained markets.

Worries about the U.S. economy and expectations for additional Federal Reserve interest rate cuts have caused the dollar's broad tumble.

"The market got back into risk aversion mode late in the day and we saw equities get hit hard as did the yen crosses and dollar/yen," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.

"Should we continue to get bad news out of the subprime arena, we can expect that the risk aversion trade will continue to unwind," he added.

U.S. Treasury yields also fell as investors sought the safety of government bonds. Flight-to-safety buying in Treasuries pushed benchmark 10-year note US10YT=RR yields to their lowest in more than two years.

Late in New York, the dollar dropped to 107.23 yen, the lowest since June 2005, according to Reuters data. It last traded at 107.28, down nearly 1 percent from late on Friday.

The Dow Jones industrial average .DJI closed down 237.44 points, or 1.83 percent, at 12,743.44. The Standard & Poor's 500 Index .SPX was down 33.48 points, or 2.32 percent, at 1,407.22.

Financial services companies led the stock market's fall.

"The focus has also been on the reemergence of money market strains, with the ECB (European Central Bank) and the Federal Reserve announcing measures to mitigate liquidity pressures around the year-end," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York.

"Developments in the money markets in the United States are encouraging expectations of a December rate cut and that is weighing on the dollar," Bennenbroek added.

The interest rate futures market has fully priced in a quarter-percentage-point monetary policy easing by the Fed when it next meets on December 11, to 4.25 percent and show a 20 percent implied chance it could cut rates by a half point instead.

London interbank offered rates for two-month euro deposits rose to new 6-1/2-year highs on Monday and three-month euro rates rose for a ninth straight session on persistent concerns over banks' year-end funding. Two-month and three-month dollar Libor rates also rose to their highest in a month.

The Fed and the ECB on Monday sought to calm stressed money markets by promising banks extra money to help them cope with a possible year-end cash squeeze.

The euro was up 0.3 percent at $1.4878, within sight of the lifetime high of $1.4966 set on Friday, according to Reuters data.

A growing number of analysts suggest the exchange rate will breach the psychologically key $1.50 level this year.

The dollar index .DXY fell 0.4 percent to 74.802.

The euro dropped 0.7 percent against the yen to 159.65.

European officials have increasingly expressed concern about the euro's rapid rise and the potential drag on exporters. ECB Governing Council member Nout Wellink said on Monday its rise against the dollar was not of "immediate concern" for European exporters but a further ascent would be "worrying".

A weak dollar, for instance, poses a serious danger for Airbus, Airbus CEO Louis Gallois said. "It is a vital danger, which means it is eating the margins of the company, but it is not an immediate one," Gallois told Reuters.

(Additional reporting by Nick Olivari; Editing by James Dalgleish)