NEW YORK, Oct 23 (Reuters) - The U.S. dollar touched a fresh two-year high versus a basket of currencies on Thursday as investors off-loaded risky assets like stocks in favor of reserve currencies on worries of a severe global recession.
The greenback scaled a two-year high against the euro, while the low-yielding yen hit a six-year peak versus the euro zone single currency. The yen also recorded its strongest performance versus the dollar in seven months.
Both the dollar and the yen have surged against higher-yielding currencies this week as risk demand has shriveled. Evaporating liquidity has led to severe volatility in most markets, and analysts said currencies remained vulnerable to erratic moves.
"What is going on is that investors are still very panicky and very much in a trigger-happy mood. The market is still dominated by risk aversion flows and and we are pretty much trading off what equities are doing," said Boris Schlossberg, director of foreign exchange research at GFT Forex in New York.
"The reason we have such volatility is because visibility is completely clouded. Almost all asset classes are being priced for a very serious, almost depression-like scenario and the market is waiting to see if this is going to happen."
The ICE Futures U.S. dollar index rose as high as 86.120, a level last seen in late 2006, according to Reuters data. The index, which measures the dollar's value against a basket of six currencies, was last up 0.3 percent at 85.710 .DXY.
The euro slumped to a two-year low of $1.2726 on electronic trading platform EBS. It was last down 0.3 percent at $1.2808 .
EMERGING MARKET TROUBLES BUOY DOLLAR
The dollar was bolstered as trouble in emerging markets compounded worries about the outlook for the global economy, with countries such as Hungary and Argentina taking desperate measures to shore up their ailing economies.
"We are going to see the recent pressures maintained as emerging markets tensions continue. The dollar will remain supported and the high-yielders will stay under pressure," said Ian Stannard, senior currency strategist at BNP Paribas in London.
Some market participants said dollar strength was being driven by demand from U.S. funds, including hedge funds, selling debt for dollars in preparation to pay out upcoming redemptions.
Weaker global equities handed the yen strong gains across the board.
News that the number of U.S. workers filing new claims for jobless benefits rose by a larger-than-expected margin to a seasonally-adjusted 478,000 last week from a revised a 463,000 the prior period also dampened the mood for investors.
The dollar traded 0.7 percent lower at 97.19 yen , after falling to a seven-month low of 96.85 yen according to EBS. The euro was down 0.8 percent at 124.37 yen , having hit a fresh six-year low of 123.40 yen.
With one day still left in the trading week, the euro has already tumbled more than 8 percent against the yen since last week and looks set to clock its worst five-day run on record.
The yen has shot up drastically versus the euro and other high yielders like the Australian and New Zealand dollars as investors dump positions that had used the low-yielding Japanese currency to buy assets in higher-yielding ones.
Sterling fell 1.1 percent to $1.6113, after tumbling to a five-year low against the dollar around $1.6046 as concerns about the country's vulnerability to the financial crisis remain. (Additional reporting by Naomi Tajitsu in London; Editing by James Dalgleish)
