* Dollar hits one-year low vs basket, 2009 low vs euro
* Dollar selling continues on improving risk appetite
* U.S. retail sales rise at fastest pace in 3-1/2 years
* Sterling drops after BoE Governor King (Adds comment, details; updates prices)
By Wanfeng Zhou
NEW YORK, Sept 15 (Reuters) - The U.S. dollar fell on Tuesday to its lowest level in nearly a year against a basket of currencies as gains in global stock markets reduced the greenback's appeal as a safe haven.
Risk appetite improved and the euro climbed to a fresh 2009 high above $1.4680 as Wall Street stock indexes advanced following surprisingly strong U.S. retail sales data. European shares and oil prices also rose amid recovery hopes.
"The equity markets are doing better, which is driving people into more risky trades," said John McCarthy, director of foreign exchange trading at ING Capital Markets in New York. "A firmer Dow has generally undermined the dollar."
Traders have sold the U.S. currency heavily so far this month as optimism about a global economic recovery diminished safe-haven demand. The prospect of low U.S. yields and concerns about the widening U.S. fiscal deficit fueled dollar selling.
In late New York trading, the ICE Futures U.S. dollar index, which measures the greenback against a basket of six major currencies, fell 0.3 percent to 76.472, after sliding to 76.407, its lowest since late September 2008.
The euro rose 0.4 percent to $1.4673, after touching a session high of $1.4686, the best level since December, according to Reuters data. The dollar was up 0.1 percent at 91.03 yen, pulling away from a seven-month low hit on Monday.
Sales at U.S. retailers rose at their fastest pace in three-and-half years in August as government-sponsored auto incentives buoyed demand for motor vehicles, according to data on Tuesday that also showed strong sales outside the auto sector.
"There is no question of this being positive data, even though the cash-for-clunkers program was a huge part of it," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
U.S. RECOVERY
The dollar had risen earlier in the session after the retail sales data bolstered expectations the United States will be at the forefront of a global economic recovery. That would help push up U.S. rates and make the dollar more attractive compared with other currencies.
"The U.S. dollar is oversold," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. "As the economic recovery both in the United States and globally starts to gain more traction, the traditional link between domestic data and the local currency will strengthen."
But some analysts said that with the Federal Reserve consistently saying U.S. rates will stay low for an extended period, speculation that the dollar is replacing the yen as a funding currency will continue to hurt the greenback.
"The dollar is being hampered given the prospect of low U.S. yields for the foreseeable future," said ING Capital's McCarthy. "With U.S. yields remaining under pressure on the downside, that's not helping the U.S. dollar."
In other trading, sterling dropped after Bank of England Governor Mervyn King said the central bank was looking at reducing the rate on commercial banks' reserves, fueling speculation of further quantitative easing.
Sterling was last down 0.4 percent against the dollar at $1.6498 and off 0.8 percent versus the euro at 88.92 pence.
Improving risk appetite and a 3 percent jump in oil lifted commodity currencies. The Australian dollar rose 0.3 percent AUD=>, erasing losses made after minutes of the Reserve Bank of Australia's last policy meeting gave little guidance on when the cash rate would be raised.
The New Zealand dollar gained 0.7 percent and the Canadian dollar was up 1.1 percent against the U.S. currency.