FOREX-Dollar rallies vs euro, trades at multi-month highs
* Euro falls to five-month lows versus dollar
* Pound hits 17-month low, dollar trades at 110 yen
* Some analysts say long-term dollar recovery under way (Recasts, adds comments, changes byline, dateline, previous LONDON)
NEW YORK, Aug 8 (Reuters) - The dollar surged against the euro on Friday and was on track for its biggest one-day gain in four years as concerns mounted that the U.S. economic slowdown is spreading to the euro zone and around the world.
Most major currencies, including sterling and the Swiss franc, fell 1 percent or more against the dollar, which some analysts suggest may finally be emerging from a broad downtrend that has lasted almost seven years.
On Thursday, European Central Bank President Jean-Claude Trichet highlighted increasing risks to euro zone growth, Japan's government said the country's economy may be in recession, and one closely-watched measure of British house prices showed the biggest monthly fall on record in July.
Coupled with dollar-supportive developments such as a surprising rebound in U.S. home sales Thursday and continued decline in oil prices Friday, demand for the greenback soared.
"This is the capitulation of the last euro bulls out there," said Michael Woolfolk, a senior currency strategist at The Bank of New York Mellon in New York. "After Trichet's remarks yesterday on the poor outlook for the euro zone economy, they had to throw in the towel and buy dollars."
In morning trading, the euro was down 1.7 percent on the day at $1.5057 EUR=, a five-month low and its steepest one-day drop since June 2004, according to Reuters data.
The euro is now almost 10 cents below the record high of $1.6038 struck less than a month ago.
The dollar's rally has been supported in part by a sell-off in crude oil. Prices tumbled from a peak of over $147 a barrel CLc1 last month to below $117 on Friday in New York.
Despite the continued fragility of the U.S. financial and housing sectors, the near-term technical picture for the euro and other currencies has deteriorated quickly and further declines are likely, analysts said.
"The contagion is now going global. The data is manifesting itself in economies around the world," said Neil Jones, head of hedge fund FX sales at Mizuho in London. "The contagion trade is very much factored into the dollar, but not for other economies."
The euro traded below major technical support to below its 200-day moving average at $1.5225. It hasn't closed below this technical level since March 2006.
"Euro/dollar broke through some important levels and despite the rapid advance of the dollar this week, we may see more gains," said Woolfolk at the Bank of New York. "Bottom line: this may be a sustained rally." Continued...
