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Dollar Falls To New Low Against Euro on Subprime Worry

The dollar dropped to a record low against the euro Thursday as troubles in the U.S. mortgage and credit markets continued to dampen the currency's appeal.

The dollar also fell to a 2-1/2-year low against a basket of six major currencies on concerns that credit market problems could hurt the economy and lead the Federal Reserve to cut benchmark U.S. interest rates by year-end.

"There is still some jitters about the subprime issue and that's still weighing on the dollar," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York.

Subprime loans are extended to borrowers with poor credit histories.

"There's some concern about the economy, that troubles in those sectors will spread to other areas of financial markets and cause a broader slowdown. Also, we have seen expectations of a rate cut start to come back into calculations and this is a reflection of the subprime jitters," he added.

Midday in New York, the euro was up 0.3 percent on the day against the dollar, having set a record high of $1.3799. The euro zone single currency also hit a lifetime peak at 168.83 yen, according to electronic trading platform EBS, before trading back down to 168.78, up 0.3 percent on the day.

U.S. data showing the trade deficit widened as expected in May had marginal impact on the dollar.

The dollar index was little changed at 80.713, having fallen to its lowest in more than two years on Wednesday at 80.545. Separately, the Fed's trade-weighted broad nominal dollar index fell to its lowest in a decade.

Against the yen, the dollar was up slightly, helped by gains in the U.S. stock market. U.S. equities advanced on Thursday, drawing support from major retailers which posted surprisingly strong monthly sales figures.

"The equity market has helped the dollar a good deal since this morning when we were at the highs. We have retraced a decent amount," said Brian Taylor, managing director of foreign exchange trading at M&T Bank in Buffalo, New York.

"We've seen the equities market rally and when that happens, we see people putting on a little more risk," he added.

The yen earlier took advantage of the dollar's malaise after the Bank of Japan left interest rates on hold at 0.5 percent, as expected.

Broader yen gains were short-lived however, with the ultra-low yielding currency sliding to record lows versus the euro as investors remained sceptical on the chances of an August BOJ rate increase.

Still the market's focus has been the dollar's sell-off. Investors sold the dollar this week after reports from credit rating agencies Standard & Poor's and Moody's Investors Service Tuesday, warning of downgrades to more than $17 billion of debt related to risky mortgages, much of it subprime.

This has prompted interest rate futures markets to go back to pricing in a Fed rate cut this year. That has eroded the dollar's yield appeal as other central banks, such as the European Central Bank, Bank of England and eventually the BOJ, are in tightening mode.

"With the U.S. Fed the only G7 central bank not expected to hike rates during the second half of this year, higher interest rates overseas will continue to weigh on the dollar," said Michael Woolfolk, senior currency strategist at Bank of New York.