FOREX-Dollar drops to near 1-year lows on stocks, recovery

* Dollar slide continues on higher stocks, risk appetite

* Dollar hits lowest since September vs euro, basket

* Yen rises to 7-month high against dollar

* Fujii: Strong yen has merits for Japanese economy (Adds comment, detail, updates prices)

By Wanfeng Zhou

NEW YORK, Sept 16 (Reuters) - The dollar dropped to near one-year lows against the euro and a basket of currencies on Wednesday as optimism about the global economy eroded the greenback's safe-haven appeal.

U.S. stocks hit fresh 2009 highs as increased industrial production reinforced hopes the economy was gaining speed. Improving risk appetite pushed higher-yielding currencies like the Australian and New Zealand dollars up more than 1 percent.

Traders have sold the dollar heavily this month as recovery hopes diminished safe-haven demand. The prospect of low U.S. yields and concerns about the U.S. fiscal deficit fueled dollar selling.

"There's still this persistent link between Wall Street and risk," said Ronald Simpson, managing director of global currency analysis at Action Economics in Tampa, Florida. "With stocks going up, it continues to be very difficult for the dollar to rally."

U.S. industrial output advanced for a second consecutive month in August, while higher gasoline costs pushed up consumer prices, although economists said the risk of inflation remained low.

"The data still suggests strength in the U.S. economy in the second half," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut. "If we see strong numbers between now and next March, it's going to be pretty hard to get in the way of equities going higher and risk assets going higher."

In late New York trading, the euro EUR= rose 0.5 percent to $1.4731. It had earlier climbed to $1.4736, the highest since late September.

The ICE Futures U.S. dollar index .DXY, which tracks the dollar against a basket of six other major currencies, fell as low as 76.151, its weakest in nearly a year. It last traded down 0.5 percent at 76.178. The index has declined about 2.5 percent so far in September.

CAPITAL OUTFLOWS

Adding to pressure on the dollar was Treasury data showing foreign investors sold U.S. assets for a fourth straight month in July, with private outflows hitting their highest since February.

"The headline number certainly paints a bit of a dark picture with regard to overall demand for U.S. assets," said Omer Esiner, a senior market analyst at Travelex Global Business Payments in Washington. "The momentum is clearly poised for further dollar decline. Optimism about a near-term recovery ... will continue to drive sentiment."

Despite the sharp move lower, analysts said the dollar's recent weakness is unlikely to be a concern for the Obama administration as it tries the bring the economy out of the worst recession in decades. A weaker dollar will benefit U.S. manufacturing and exports although the government's massive stimulative measures could push up inflation down the road.

Against the yen, the dollar fell 0.2 percent to 90.79 yen. It earlier fell to 90.10 yen, according to Reuters data, the lowest since February, after Japan's incoming finance minister said a strong yen had advantages for the nation's economy.

Hirohisa Fujii also said he was opposed to currency intervention if movements were gradual, while adding that current moves were not rapid.

Some traders said Fujii's comments suggested that the new government, like the old one, remained concerned with the speed of yen rise. The risk of intervention may limit yen gains around 87 yen, a level hit earlier this year for the first time since 1995.

In other trading, the Australian dollar gained 1.3 percent to US$0.8746 and the New Zealand dollar was up 1.4 percent at US$0.7142. (Additional reporting by Nick Olivari; Editing by Leslie Adler)