NEW YORK (Reuters) - The U.S. dollar jumped to a two-year high on Wednesday as a deteriorating global economic picture and worries stability would not return any time soon to financial markets spurred investors to dump risky assets.
The dollar climbed to a two-year high versus the euro and a five-year high against sterling, with analysts citing remarks by Bank of England Governor Mervyn King that the British economy was probably entering its first recession in 16 years.
The yen climbed to a 4-1/2-year high against the euro, with the low-yielding Japanese currency also benefiting from the exodus from risky assets after being dogged by carry trades for years.
On Tuesday King said "Not since the beginning of the First World War had our banking system been so close to collapse. We are far from the end of the road back to stability ..."
Analysts said these remarks reminded investors that while governments globally had taken aggressive steps to shore up the financial sector it could take a while to see results.
"These comments were unexpected and reverberated globally among financial markets overnight and prompted follow-through selling not only in sterling, but also exacerbated the safe-haven buying of the U.S. dollar and yen," said Michael Woolfolk, currency strategist at Bank of New York Mellon.
"The yen is benefiting more strongly than the U.S. dollar because of the safe-haven repatriation on behalf of Japanese abroad, not just carry trades. We see this trend continuing until the extreme levels of risk begin to subside."
The euro fell as far as $1.2740, according to electronic trading system EBS, its lowest since November 2006. It was last down 1.3 percent at $1.2885.
The British pound dropped to $1.6203, its weakest in five years. It was last down 1.5 percent at $1.6438.
KING'S COMMENTS MISTIMED
The ICE Futures U.S. dollar index .DXY, which measures the dollar's value against a basket of major currencies, climbed to a two-year high of 85.921, before pulling back slightly to be up around 1.3 percent at 85.528 in New York morning trade.
"Whether or not the BoE Governor was speaking the truth, given how vulnerable markets are, this may not have been the time to speak it," said Jon Gencher, director of FX sales at BMO Capital Markets in Toronto.
"There is still all sorts of talk of U.S. names repatriating U.S. dollars, ongoing pullback from emerging markets and the sense that many participants had underestimated the speed and magnitude of the U.S. dollar and got caught out on their hedging."
Despite the dollar's broad gains, it fell 1.3 percent to 99.030 yen as the ongoing unwind in carry trades extended the Japanese currency's rally.
The euro dropped as low as 126.30 yen, its lowest level in 4-1/2 years, according to Reuters data. It was last down 2.6 percent at 127.61 yen.
The yen has shot up after having suffered for years as low Japanese yields made the currency a prime candidate to fund risky investments in assets of higher-yielding currencies.
Other high-yielders were hammered against the yen, with sterling dropping as low as 160.60 yen. The Australian dollar fell 1.75 percent to 66.95 yen and New Zealand dollar slipped 3.5 percent to 59.09 yen.
(Additional reporting by Naomi Tajitsu in London; Editing by James Dalgleish)
