Euro hits 1-week low versus yen

By Naomi Tajitsu

LONDON (Reuters) - The euro hit a one-week low against the yen and the dollar on Thursday after a dim economic outlook from the Federal Reserve underlined dire global conditions, sparking fresh demand for lower-yielding currencies.

The yen rallied across the board, as a near 3 percent drop in European shares kept demand high to drop carry trades where the low-yielding Japanese currency was used to buy assets in higher-yielding ones, such as the euro and the Australian and New Zealand dollars.

Stock markets suffered around the world, with the U.S. S&P 500 index dropping to its lowest since early 2003 .SPX. Some analysts said moves in the yen have been tracking the stock index very closely, and that a further S&P fall toward a six-year low would push the Japanese currency higher.

"People are starting to give up on the hope that the economy is going to recover," said David Woo, head of currency research at Barclays Capital in London.

"Further losses in the S&P will lead to more yen gains."

By 0909 GMT, the euro had fallen 0.7 percent to 119.22 yen, hovering near a one-week low of 118.59 yen hit according to Reuters data earlier in the day.

It slipped 0.2 percent to $1.2495 having fallen as low as $1.2472 earlier in the day to hit its weakest in a week.

GRIM OUTLOOK

The single European currency was pressured by a 2.55 percent fall in regional shares, which approached a 5-1/2 year low due to falls in commodity shares as U.S. crude oil prices hit their lowest level in nearly two years.

High-yielding currencies like the Australian and New Zealand dollars in particular took a beating, with the Aussie falling roughly 2 percent against the dollar and the yen.

The New Zealand currency slipped more than 1 percent to $0.5432, its lowest level since early 2003, and tumbled 1.3 percent against the yen..

Investors shunned risk after minutes released on Wednesday from the Fed's October policy meet showed the central bank sees U.S. growth contracting in the second half of the year and the first half of 2009, even after a 50 basis point interest rate cut to 1.0 percent.

This kept prospects high that U.S. rates could fall even further as the Fed tries to minimize the impact of the recession.

The latest casualties of the severe downturn are U.S. automakers, who are begging for a government bailout as they face the possibility of bankruptcy.

Major central banks have been slashing rates aggressively in an attempt to boost their economies during an extreme slowdown. Figures this month show that Japan, and the euro zone fell into a recession in the third quarter.

(Reporting by Naomi Tajitsu; editing by Chris Pizzey)