RTRS: FOREX-Dollar climbs two-year peaks, risk stays in focus
* Dollar scales two-year peak versus basket of currencies
* Euro slumps to two-year low against dollar
* Brazilian central bank sells dollars via swap contracts (Recasts, updates prices)
By Lucia Mutikani
NEW YORK, Oct 23 (Reuters) - The dollar climbed to a fresh two-year high versus the euro and a basket of currencies in choppy trade on Thursday as investors nervous of a severe global recession kept their faith in reserve currencies.
A brief rise in stocks on Wall Street and aggressive dollar selling by the Brazilian central bank helped to lend some stability to emerging market currencies, limiting the dollar's upward momentum, analysts said.
Emerging market currencies have borne the brunt of the global financial crisis as U.S.-based investors offloaded assets in developing markets and repatriated the money.
Analysts were skeptical that the calm would be sustainable, with investors remaining wary of a sharp global economic downturn and a poor profit outlook for corporations.
"The Brazilian central bank intervened materially and bought reals against the dollar ... that seems to have calmed the price action, not only in the G10, but global currencies as well," said Dustin Reid, head of FX strategy at RBS Global Banking & Markets in Chicago.
"We have seen a significant reversal in a lot of those currencies. The Brazilian central bank action has had a turn around effect (but) I am looking for risk aversion to dominate markets in the coming weeks and months despite this."
Brazil's central bank's sold dollars both on the spot market and via swap contracts.
The euro was last down 0.2 percent at $1.2825, after briefly racing to a session peak of $1.2893 , according to electronic trading platform EBS. Earlier, the European single currency slumped to a two-year low of $1.2726.
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 0.1 percent at 85.535 .DXY.
EMERGING MARKET CURRENCIES RECOVER
"We have seen rebounding emerging market currencies, we have seen stocks up," said Steven Butler, director of FX trading at Scotia Capital in Toronto.
"We are not sure we can keep the momentum, but we hope we can. As long as stocks stay positive, we may see a bit of a pause in the U.S. dollar buying that we have seen."
Trouble in emerging markets has 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. That has helped the dollar maintain a safe-haven bid.
The euro was last down 0.7 percent at 124.54 yen , having touched a fresh six-year low of 123.40 yen. It briefly turned positive as U.S. stocks rose and traded at an intraday peak of 126.29 yen.
The dollar was 0.8 percent down at 97.020 yen , after falling to a seven-month low of 96.85 yen according to EBS.
Stocks on Wall Street gave up gains as bargain-hunting fizzled.
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 yen has shot up drastically versus the euro and other high yielders such as the Australian and New Zealand dollars as investors dumped positions that had used the low-yielding Japanese currency to buy assets in higher-yielding ones.
Sterling fell 1.2 percent to $1.6100, after tumbling to a five-year low against the dollar around $1.6046 due to concerns about the country's vulnerability to the financial crisis. (Editing by Tom Hals)
