FOREX-Dollar hit by U.S. protectionism fears as Cohn leaves White House

SYDNEY/TOKYO, March 7 (Reuters) - The dollar extended its latest retreat on Wednesday after a key advocate for free trade in the White House announced his resignation, fanning fears President Donald Trump would go ahead with tariffs and risk a trade war.

Dealers feared the departure of economic adviser Gary Cohn, a former Wall Street banker, would embolden protectionist forces in the U.S. administration as Trump tries to impose hefty tariffs on steel and aluminum.

"It's not clear whether Trump is using tariffs as negotiation tactics or he really means it. Whatever the case, we cannot ignore the risk of protectionism," Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

The dollar dropped to as low as 105.45 yen, near Friday's 16-month low of 105.24 yen and last stood at 105.75 yen, down 0.35 percent on the day.

A fall below that level would open the way for a test of 101.19, a low touched in November 2016 just after Trump won the presidential election.

The dollar shed 0.3 percent against the safe-haven Swiss franc, to 0.9379 franc.

"The worst outcome for financial markets, in terms of potential to create volatility, would be a confirmation of rising trade friction and benign neglect of the dollar in the short term," said analysts at ANZ.

Investors suspect protectionist forces in the White House favor using a lower dollar to enhance U.S. export competitiveness while making imports more expensive.

Since Trump announced his tariff plan on Thursday, the dollar index lost about 1.3 percent against a group of currencies to 89.55, near its lowest in two weeks.

The euro hit a two-week high of 1.2429 and last stood up 0.1 percent at $1.2412, extending its rise into the fifth day.

Traders said there were whispers the European Central Bank might drop its easing bias at a policy meeting this week, though President Mario Draghi has shown little public urgency to do so recently.

The dollar had already been under pressure after South Korea said it would hold its first summit with the North in more than a decade, reducing geopolitical tensions.

It also said North Korea is willing to hold talks with the United States on denuclearization and will suspend nuclear tests while those talks are underway.

President Trump said North Korea seemed "sincere" in its apparent willingness to suspend nuclear tests while it held talks with U.S. officials.

The news had briefly boosted risk appetite on Tuesday and lifted currencies such as the Australian dollar, before the revival of trade fears knocked them down.

The Australian dollar fell 0.4 percent to $0.7798.

The Canadian dollar and the Mexican peso also suffered as Cohn's departure was seen as raising risks Washington could walk out of NAFTA.

On Monday, U.S. Trade Representative Robert Lighthizer said time to rework the deal was running "very short" and again raised the possibility of the United States pursuing bilateral deals with its partners.

The Canadian dollar fell 0.4 percent to C$1.2960 to the dollar, near its eight-month low of C$1.3002 per dollar set on Monday.

The Bank of Canada, which has said that uncertainty about the future of NAFTA is weighing increasingly on the outlook for Canada's economy, is expected to leave its interest rates on hold at its policy meeting later in the day.

The Mexican peso fell 0.5 percent to 18.83 per dollar . (editing by Richard Pullin & Simon Cameron-Moore)