The euro climbed on Wednesday as tumbling U.S. yields dogged the dollar, but the single currency was set to post its first full-year drop in three years after the financial crisis sparked a rush into the safety of the greenback. The dollar has slid into year-end as markets have settled down from a historic bout of volatility, leaving it on shaky footing heading into 2009 as investors eye big U.S. deficit-spending and the Fed printing money to revive the economy. The euro was proving the best of a bad bunch as the relatively staid pace of monetary easing by the European Central Bank contrasted with a more dramatic pace of rate cutting by the Federal Reserve and the Bank of England (BoE). Among the milestones, the pound and Australian dollar were set to post record yearly drops against the dollar. Sterling's 27 percent slide would be the biggest since the gold standard was abandoned in 1971. Analysts said the pound's battering may have put it in a position to recover next year, even as investors fret that the dollar could be driven back towards record lows hit earlier in the year due to aggressive U.S. action to help the economy. The Fed has cut rates to virtually zero and has launched an array of asset-purchase programmes to help markets recover. As a result, 10-year U.S. Treasury yields have tumbled to near 2.0 percent -- their lowest since 1950 and below euro zone yields. A drop in volatility in financial markets would likely mean the dollar comes under more pressure in 2009 as safe-haven holdings are trimmed back, traders and analysts said. "Certainly where monetary policy is, it is not dollar-positive. If there's not any more great financial shocks, I think the dollar will weaken a little bit in the first quarter," said Gerrard Katz, head of North Asia currency trading at Standard Chartered in Hong Kong. "But that said, I think Europe is going to be less tolerant of the euro near $1.50 to $1.55." The euro edged up 0.1 percent from U.S. trade to $1.4084 , but was down 3.6 percent since the start of the year having fought back from a 2-1/2-year low near $1.2330 hit in October. Trading was very thin with Tokyo on holiday and many investors away for the New Year break. The pound hovered near an all-time low against the euro at 97.53 pence on the Reuters dealing system. The euro is up 33 percent on the year and seemed set on reaching parity for the first time since its launch in 1999. Against the dollar, the pound was hovering just above a 6-1/2-year low at $1.4445 . STERLING SINKS, YEN SHINES Sterling has taken a beating at year-end because the BoE is seen likely to cut rates further from 2 percent and possibly adopt more aggressive monetary easing measures like the Fed. By contrast, the ECB has eased by a relatively tame 150 basis points to 2.5 percent. More dire U.S. economic data on Tuesday only added to expectations of further Fed action. Prices of single-family homes in October plunged a record 18 percent from a year earlier, while consumer confidence fell to a record low in December. [ID:nNYS004673] [ID:nN30314773] At the same time, the Fed detailed a plan to buy up to $500 billion of agency mortgage debt by the middle of 2009 -- a move that would be funded by expanding its balance sheet and in effect printing more dollars. [ID:nN21494092] "The dollar has the added problem that the Fed is printing loads of them to rescue the economy," said a trader at a local bank in Sydney. The standout winner of 2008 is the yen, which has surged across the board this year on a massive unwinding of leverage carry trades -- borrowing in the low-yielding yen to invest in higher-yielding currencies, stocks and commodities. The yen's spike higher slammed the country's exporters, helped fuel the biggest yearly drop in the Nikkei's <.N225> history and prompted a rare statement from Group of Seven economic powers warning against excessive yen volatility. The dollar edged up 0.2 percent to 90.32 yen , but for the year the yen has soared 23 percent against the dollar -- the most since 1987. The euro has shed about 22 percent this year to hover around 127.20 yen . The Bank of Japan's trade-weighted yen index has shot up 25 percent this year through November. If maintained to the end of the year, it would be the biggest rise since the currency was allowed to trade freely in 1973.

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