By Kevin Plumberg HONG KONG (Reuters) - The U.S. dollar hit 2-1/2-month lows against the euro on Thursday, with investors deterred by the world's lowest interest rates, while weak energy demand due to the global downturn kept oil prices near 4-year lows below $40 a barrel. Expectations that deep recessions from Britain to the United States could lock their economies in a deflationary spiral of falling prices and profits kept investors reaching for longer-dated U.S. government bonds seeking both safety and yield as a most difficult year winds down. Japanese stocks edged up, led by bank shares as the country's central bank kicked off a two-day meeting that many economists say could produce a rate cut to follow the U.S. Federal Reserve's historic cut in base rates to near zero on Tuesday. The dollar's uncertain prospects as the Fed engages in quantitative easing -- when central banks overwhelm the financial system with money to promote lending -- has spooked dealers who had bets on further strength in the dollar. As a result, they have rapidly liquidated their positions. "2009 will be a very negative year for the dollar," said Mitul Kotecha, head of global foreign exchange research with Calyon in Hong Kong. "The risk is that we could see the dollar weakening fairly sharply." The Fed also said it would keep rates low for a while and take unconventional measures to boost the U.S. economy, including buying Treasuries and government sponsored-agency debt to get market rates lower. The euro rose to as high as $1.4456 on trading platform EBS, the highest since late September, before easing back to $1.4400, down slightly on the day. Against the yen, the dollar climbed 0.6 percent to 87.75 yen after plumbing a 13-year low overnight of 87.13 yen. The sustained drop below 90 yen, a psychologically important level for the market, has sparked concern Japanese officials could intervene to cap the yen's gains. Japan's Finance Minister Shoichi Nakagawa said he would not comment on whether the ministry would enter the market. The stance was different from just a week ago when Nakagawa said flatly he was not thinking about whether Japan should intervene. 40 AND BELOW The weakening dollar has not provided much support for oil prices, which traded around $40 a barrel after U.S. crude for January delivery fell as low as $39.19 earlier in the session, the lowest since July 2004. The Organization of the Petroleum Exporting Countries, eager to build a floor under dipping prices, announced on Wednesday it would cut 2.2 million barrels daily of output starting January 1, slightly more than expected. However, instead of boosting prices, the planned cut deepened a sense of gloom about global demand. "Countries other than the Saudis are going to have difficulty to comply with this cut. Those oil producing countries, if they want to survive, have to produce, even at $40 oil," said Tetsu Emori, fund manager at Astmax Co Ltd in Japan. "Prices have to head lower, now that we are through $40. As long as demand continues to weaken, prices will weaken too." U.S. Treasuries extended gains in Asia, particularly long-dated maturities, pushing down the 30-year bond yield to a record low of 2.64 percent. The benchmark 10-year yield, which moves in the opposite direction to the price, dropped further to 2.19 percent, the lowest in more than five decades. The yield has plunged a stunning 166 basis points in the last month, as investors crowd into the late maturities to squeeze out what yield they can. FOCUS ON BANK OF JAPAN Asian stocks rose modestly, helped by property and bank shares, on hopes policymakers will follow the Fed's lead and cut rates with abandon to spur growth. Japan's Nikkei average rose 0.9 percent, as shares of big banks and brokerages rallied on growing expectations the Bank of Japan will lower rates on Friday. Japan's biggest bank Mitsubishi UFJ Financial Group rose 2.3 percent, while second-ranked Mizuho Financial Group climbed 2.8 percent. The MSCI index of stocks in Asia-Pacific outside Japan climbed 0.6 percent to a 1-month high, as some foreign investors scooped up cheap shares. Hong Kong's Hang Seng index was down 0.3 percent, dragged lower by a 3.8 percent drop in HSBC on fears about dividend cuts and the potential need to raise capital to weather rough times ahead. Fund managers' views on China remained quite optimistic because of its capacity for more rate cuts and fiscal stimulus and the world's fourth largest economy was the preferred choice of Asian equity investors, according to a Merrill Lynch survey. However, the proportion of fund managers' portfolios dedicated to emerging markets is at the lowest since 2001. "It would now be a major surprise for global fund managers if emerging markets were to outperform U.S. equities in 2009," said Michael Hartnett, chief emerging markets equity strategist at Merrill, in a note.

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