By Rika Otsuka TOKYO (Reuters) - The dollar hit a two-year high against a basket of currencies on Thursday as concerns about a worsening global economy prompted investors to cut risky assets. The yen hit a six-year peak against the euro and a seven-month high versus the dollar as Japanese investors continued to repatriate overseas investments they had made in recent years to make up for low domestic yields. Deteriorating financial conditions in emerging markets, which have prompted governments such as Hungary to take action to protect their economies, prompted investors to rush to the dollar, the world's most liquid currency, and the safe-haven yen. "Market players are staggered by the unexpectedly sharp fall in the euro, as well as some emerging currencies," said Tsutomu Soma, senior manager of foreign securities at Okasan Securities. "Selling in European currencies keeps piling up as investors have realized economies in Europe could deteriorate as much as the U.S. economy," Soma said. The euro slipped 0.3 percent from late U.S. trade to $1.2814. In early Asian trade, the European single currency fell as low as $1.2726, its lowest since November 2006, on trading platform EBS. The dollar index, which measures the U.S. currency's value against a basket of six currencies, edged up 0.2 percent to 85.631 .DXY after hitting a two-year peak of 86.070. The euro slid as low as 123.40 yen, its lowest since 2002, before rebounding to 125.14 yen, down 0.3 percent on the day. The dollar was nearly flat at 97.66 yen, after hitting a seven-month low of 96.85 yen on EBS. "We see constant buying of the yen from Japanese institutional investors and asset managers either to hedge or dump their overseas investments," said a senior trader at a Japanese bank. In late afternoon trade, Tokyo shares recovered from an earlier plunge to a near 5- year low after a report saying the U.S. is mulling a plan to shore up the troubled housing sector. That helped trim the yen's gains, traders said. EMERGING CURRENCY WEAKNESS BENEFITS YEN? Investors were keeping an eye on movements in emerging currencies as they believe that a further slide in them could spark more buying in the yen, traders said. Some investors are suspected of using the yen to hedge against losses in their assets in emerging countries, said Tohru Sasaki, chief forex strategist at JPMorgan Chase Bank in Tokyo. "If that is the case, the yen would automatically get a boost from a slide in emerging currencies," Sasaki said. Fears of trouble in emerging markets were fueled by huge falls in Argentine stocks after the government there moved to nationalize private pensions. The Hungarian central bank on Wednesday raised interest rates by 300 basis points to prop up the battered currency. Meanwhile, New Zealand's central bank slashed interest rates by a record one percentage point to 6.5 percent on Thursday and said further cuts are in the pipeline as the global financial crisis threatens to exacerbate a local recession. But traders said the central bank's move had little impact on the New Zealand dollar as it was widely expected. According to Reuters dealing system, the New Zealand dollar edged up 0.2 percent to $0.5950 from around $0.5940 in late U.S. trade. (Additional reporting by Satomi Noguchi; Editing by Chris Gallagher)

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