U.S. dollar rallies on dim global growth outlook

By Kevin Plumberg

HONG KONG (Reuters) - The U.S. dollar rose sharply to a five-month high against the euro and Asian stocks fell on Friday, as investors expected the malaise that has afflicted the U.S. economy would spread to other countries.

While the U.S. economy has not greatly improved by almost any measure, investors have begun to reassess other parts of the world, particularly after the European Central Bank president said the euro zone faces substantially weaker growth this year and a Japanese official warned the world's second-largest economy may be in a recession.

"We are seeing a shift away from a focus on the U.S. to a more global problem," said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong. "The dollar is getting a boost by default."

The benchmark yield on the 10-year Japanese government bond, which moves in the opposite direction to the price, tumbled to a four-month low following an overnight rally in U.S. Treasuries, as investors scrambled to the relative safety of government debt.

This week the dollar has rallied 2 percent, as measured by an index of six major currencies on the ICE futures exchange .DXY, and has closed on a daily basis above its 200-day moving average -- a technical signal of a potential turnaround that has not happened since April 2006.

The euro was down more than 0.6 percent at $1.5225, extending a decline that began overnight after comments from ECB President Jean-Claude Trichet suggested interest rates were on hold. Against the yen, the dollar rose 0.25 percent to 109.58 yen.

Japan's Nikkei share average .N225 was down 0.6 percent, with shares of Shin-Etsu Chemical (4063.T), the world's biggest maker of silicon wafers, the heaviest drag on the index.

"As the government report said, the Japanese economy has been deteriorating, and in such an environment investors cannot buy domestic demand-oriented stocks and banks," said Kenichi Hirano, operating officer at Tachibana Securities in Tokyo.