FOREX-Dollar hits 13-1/2 year low vs yen, falls vs euro

* Dollar hits 2-1/2 month low vs euro a day after Fed move

* Dollar plunges to 13-1/2 year trough vs yen below 88

* Fed's historic rate cut seen keeping dollar weak

* BoJ seen cutting rates later in the week

(Adds quotes, updates prices)

By Wanfeng Zhou

NEW YORK, Dec 17 (Reuters) - The U.S. dollar tumbled on Wednesday, hitting its lowest in more than 13 years versus the yen and also falling against the euro, a day after the Federal Reserve slashed interest rates to the lowest among major economies.

The dollar's plunge against the yen was stoking speculation that Japanese authorities may intervene to rein in the yen's climb, which is hurting the nation's exporters.

The Fed on Tuesday cut its federal funds rate target to a record low, setting a range of zero to 0.25 percent compared with the previous level of 1.0 percent, and said it would use "all available tools" to battle recession. See [ID:nN16593807].

"The underlying story in the FX market remains yield. The fact that the Fed made this major policy move yesterday really changed the balance of power towards the euro for the time being," said Boris Schlossberg, director of currency research at GFT Forex in New York.

The massive cut further diminished the greenback's yield appeal against the euro, which has registered a staggering 11 percent gain so far during the month.

"The dollar effectively could be the new carry trade (currency), although in an environment where virtually everybody is converging towards zero interest rates, the carry trade is now holding much less power than it used to, with the exception of the very few high-yielding currencies that are out there," Schlossberg said.

In early trading in New York, the euro rose to a new two-and-a-half month high at $1.4436, according to Reuters data. It was last up 0.9 percent at $1.4384 , The euro may test the $1.45 level before year-end, Schlossberg said.

Against the yen, the dollar fell to 87.15 yen , the lowest since mid-1995. It was last down 1 percent at 88.05.

Sterling faced pressure as the argument for more aggressive British interest rate cuts became compelling, with euro/sterling hitting a record high at 92.32 pence . For latest report click on [GBP/].

Against the dollar, the pound last traded down 1.2 percent at $1.5411 .

FOCUS ON BOJ, MOF

The yen has rocketed in recent months as investors unwound carry trades, cutting exposure to riskier and higher-yielding assets as the financial crisis mushroomed. The dollar has lost more than 8 percent versus the yen this month.

The yen rose again as the Fed's move brought U.S. interest rates below the Bank of Japan's target for the overnight call rate -- now at 0.30 percent -- for the first time in well over a decade.

"With rates in Japan now higher than Fed rates, this puts further downward pressure on dollar/yen," Bank of America G10 currency strategist David Powell said.

"It also increases the possibility that the BoJ will cut rates by 20 basis points on Friday," he added.

The BoJ starts its two-day monetary policy meeting on Thursday. Two-thirds of analysts polled by Reuters now expect the BoJ to cut rates this week, and most of them see rates falling to 0.1 percent from the current 0.3 percent. See [ID:nT238594].

The yen's gains prompted Naoyuki Shinohara, Japan's top financial diplomat, to declare on Wednesday that rapid movements in currency markets are undesirable [ID:nTKU003256].

In Norway, the central bank cut interest rates by 175 basis points on Wednesday to 3.0 percent. The Norwegian crown fell, pushing the euro down 0.2 percent to 9.5759 . (Additional reporting by Veronica Brown in London; Editing by Chizu Nomiyama)

source