(All UK financial markets are closed on Thursday for the New Year holiday, and will reopen on Friday, Jan. 2. FX coverage from London will end around midday on Wednesday, and resume on Friday.)
* Dollar rises; euro/dlr eyes first yearly drop since 2005
* Yen seen as standout FX winner in 2008
* Pound down 27 percent vs dlr, worst since gold standard ended
(Changes byline, adds comment, updates throughout)
By Naomi Tajitsu
LONDON, Dec 31 (Reuters) - The euro fell against the dollar on Wednesday and was poised to post its first annual fall versus the U.S. currency in three years as a historic financial crisis sparked a rush into the dollar this year.
Along with the yen, the dollar is seen ending 2008 higher against major currencies as the financial market meltdown and a global recession has triggered a wave of deleveraging and repatriation flows in both currencies amid extreme risk aversion.
Currency moves were limited as traders closed their books at the end of a year which saw failures and part-nationalisations of banks around the world and an escalation of the credit crunch triggered as the U.S. subprime mortgage market went belly up.
This triggered a massive slashing of global interest rates as central banks fought to shore up their economies -- the Federal Reserve and the Bank of Japan cut rates virtually to zero -- and analysts said that the gloomy economic scenario will continue to drive the currency market next year.
"The legacy of 2007-2008 is going to hang over into 2009. the question is whether we're going to see any traction on the economic backdrop and at least at this juncture that's difficult to see that occurring," said Jeremy Stretch, strategist at Rabobank in London.
The euro is en route to posting a 3.9 percent fall against the dollar this year -- its first annual drop since 2005 -- while the U.S. currency is seen gaining roughly 5.5 percent against a basket of currencies.
The yen inched up slightly, prodding the dollar down to 90.20 yen. Despite its rally against higher-yielding currencies like sterling and the Australian and New Zealand dollars, the U.S. dollar has tumbled roughly 19 percent against the yen since the start of the year.
This year's standout currency is the yen, which has soared as the financial crisis prompted a massive unwinding of carry trades -- borrowing in the low-yielding yen to invest in higher-yielding assets elsewhere.
Sterling stood out as the major currency loser in 2008. Its near 27 percent slide against the dollar this year would be the biggest since the gold standard was abandoned in 1971, while euro/sterling hovers around a record high and inches towards parity.
The pound has taken a beating as the Bank of England frantically slashed rates to 2.0 percent this year, their lowest since the 1950s, and investors see more room for rates to fall.
Analysts said that 2008 will remembered by currency market participants as a year of intense volatility as traders used foreign exchanges as a platform to put on risk-averse trades.
"People are shell shocked from the past year... It's been a roller coaster ride," said Stretch at Rabobank.
"Clearly it's been a year when forex has moved back up onto the radar screens of financial markets.
2009 OUTLOOK
While analysts agree that none of the world's major economies will be spared from recession next year, views are divided about how economic weakness will affect currencies.
Rabobank's Stretch said that the euro is likely to continue a slide against the dollar from past weeks on growing expectations that the U.S. economy may be among the first to recover from the downturn, while the fragility of the euro zone economy is likely to become more pronounced in 2009.
Still, other analysts say that ongoing U.S. economic woes and uncertainty about how the country will fund a massive fiscal stimulus programme when it is running a substantial current account deficit will sting the dollar in 2009.
"The trend of dollar weakness is unlikely to have yet seen the end," Bank of America G10 currency strategist David Powell said.
"Euro/dollar is set for additional gains on the continued easing of monetary policy in the U.S. via quantitative easing," he added.
He added that the relatively staid rate of monetary easing by the European Central Bank -- which has cut rates to 2.5 percent -- has benefitted the euro as it contrasts with the dramatic pace set by the Fed and the BoE.
(Additional reporting by Jessica Mortimer; Editing by Ron Askew)