By Naomi Tajitsu The dollar rallied broadly on Thursday, hitting an eight-month high versus the euro as escalating concerns about downside risks to the global economy prompted investors to dump riskier units in favor of the world's most liquid currency. A warning by the U.S. Federal Reserve that the global economy may deteriorate and ongoing speculation about a Greek debt default pushed the euro to $1.3421, its weakest since January, while it plumbed a 10-year low versus the yen. The dollar jumped as high as 78.594 versus a currency basket, its highest since February, and made gains across the board as escalating risk aversion sparked heavy selling of emerging currencies. "The Fed is just one element that has contributed to the sell-off (along with) concerns about the euro zone and banks' capital," said Geoffrey Yu, currency strategist at UBS. "People are just trying to get out the door," he said, adding that market participants were converting investments in developing markets bank into dollars. The low-yielding dollar and the yen are usually sought during times of financial stress and pessimism about global growth. The yen surged across the board, knocking sterling to its weakest ever level, according to Reuters charts. Investors dumped Asian currencies along with the Brazilian real and the South African rand, which were on track to post their biggest daily losses since the global financial crisis in 2008. The Australian, New Zealand and Canadian dollars each fell more than 2 percent on the day to multi-month lows. Those three currencies are often vulnerable to shifts in the global economic outlook. A European Central Bank study stating that the whole common currency project was in danger due to fiscal imbalances added to the risk-averse environment by highlighting the prospect of a Greek default that could deeply affect other euro zone states. Adding to the gloom, the euro zone's dominant services sector registered a shock contraction in September, its first for two years, survey data showed, while its manufacturing sector, which drove most of the bloc's recovery, shrank for a second month. Globally, PMI indices have been providing warning signals of a slowdown and the latest surveys hit risk appetite further. "As a result, we expect the pro-cyclical and commodity currencies to be increasingly at risk, while we expect the dollar to continue its move back into favor," said Ian Stannard, currency analyst at Morgan Stanley. European shares fell 4.0 percent, adding to the euro's downward momentum, and analysts expected the single currency to head lower. "The break below the $1.35 level for the euro/dollar could see it settle in a new $1.30-1.35 range in coming months," said Neil Mellor, currency strategist at Bank of New York Mellon. Support for the euro is seen at around $1.3400, the 50 percent retracement of the euro's move from a low of $1.1875 in early June 2010 to a high of above $1.49 in early May 2011. FED TWIST The Fed on Wednesday unveiled a program, dubbed "Operation Twist," to bring down long-term interest rates in a bid to help the ailing housing sector, but few think it will be enough to seriously bolster growth. It stopped short of announcing more quantitative easing, which was seen as a factor supporting the dollar. Market participants said hedge funds remained bearish on the euro, a view backed up by Societe Generale Cross Asset Research, which claims hedge funds have initiated their biggest net short positions against the euro since June 2010. While current positioning was below peaks reached in June last year, it lent strong support to the U.S. dollar especially against the euro, it said. The euro fell as low as 102.24 yen on trading platform EBS, its weakest since mid-2001. The dollar slipped 0.2 percent on the day to 76.26, keeping the yen near a post-war high of 75.94 yen and raising the risk of intervention by Tokyo authorities. The Japanese currency is likely to see upward pressure in an environment where investors shun risk due to worries about a global slowdown and a possible default in the euro zone. Against the Swiss franc, the dollar rose to 0.9183 francs, its highest since April. The safe-haven franc was also weak against the euro, sliding to its lowest since July as the Swiss currency continued to struggle on talk that the Swiss National Bank may lift its euro/Swiss target to 1.25 from 1.20. (Additional reporting by Anirban Nag; Editing by Catherine Evans)

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