Dollar at 2-1/2-month euro low

HONG KONG (Reuters) - The U.S. dollar hit 2-1/2-month lows against the euro on Thursday, with investors deterred by the world's lowest interest rates, while weak energy demand due to the global downturn kept oil prices near 4-year lows below $40 a barrel.

Expectations that deep recessions from Britain to the United States could lock their economies in a deflationary spiral of falling prices and profits kept investors reaching for longer-dated U.S. government bonds seeking both safety and yield as a most difficult year winds down.

Japanese stocks edged up, led by bank shares as the country's central bank kicked off a two-day meeting that many economists say could produce a rate cut to follow the U.S. Federal Reserve's historic cut in base rates to near zero on Tuesday.

The dollar's uncertain prospects as the Fed engages in quantitative easing -- when central banks overwhelm the financial system with money to promote lending -- has spooked dealers who had bets on further strength in the dollar. As a result, they have rapidly liquidated their positions.

"2009 will be a very negative year for the dollar," said Mitul Kotecha, head of global foreign exchange research with Calyon in Hong Kong. "The risk is that we could see the dollar weakening fairly sharply."

The Fed also said it would keep rates low for a while and take unconventional measures to boost the U.S. economy, including buying Treasuries and government sponsored-agency debt to get market rates lower.

The euro rose to as high as $1.4456 on trading platform EBS, the highest since late September, before easing back to $1.4400, down slightly on the day.

Against the yen, the dollar climbed 0.6 percent to 87.75 yen after plumbing a 13-year low overnight of 87.13 yen.

The sustained drop below 90 yen, a psychologically important level for the market, has sparked concern Japanese officials could intervene to cap the yen's gains.

Japan's Finance Minister Shoichi Nakagawa said he would not comment on whether the ministry would enter the market. The stance was different from just a week ago when Nakagawa said flatly he was not thinking about whether Japan should intervene.