Dollar slips vs yen; concerns on U.S. economy weigh

A currency dealer looks into a monitor showing the Japanese yen's exchange rate against the U.S. dollar, in Tokyo March 17, 2008.

NEW YORK (Reuters) - The dollar fell against the yen on Wednesday, as investors remained bearish on the U.S. currency amid concerns about the health of the U.S. economy and financial system.

The dollar recovered from the day's lows however, in part bolstered by news that regulators have lifted capital limits on mortgages that Fannie Mae FNM.N and Freddie Mac FRE.N may purchase. That could free up as much $200 billion in liquidity for the stricken mortgage market.

Still, the news was not enough to completely offset the overall negative market sentiment on the dollar, as U.S. interest rates were still seen heading lower even after a 75 basis-point easing to 2.25 percent by the Federal Reserve on Tuesday.

"We are in a market that is still very nervous and undecided about whether we are at the beginning of the end of the financial turmoil or whether significant further weakness may be expected in the market," said Matthew Strauss, a currency strategist at RBC Capital in Toronto.

In late afternoon New York trading, the dollar was down 1 percent against the yen at 98.990 yen, trimming losses following the Fannie and Freddie announcement. It hit a 13-year trough of 95.71 yen on Monday.

The dollar was also down 0.2 percent against the Swiss franc trading at 1.0001 francs, way above record lows at 0.9637 struck last Monday.

The euro was down 0.1 percent at $1.5608, down from the day's highs at $1.5785 but up from the low of $1.5584. The euro/dollar touched a record peak of $1.5904 on Monday.

"There is no change in the underlying fundamentals and the market is deciding where the euro should settle," said RBC's Strauss.

STILL A BLEAK DOLLAR OUTLOOK

Analysts say the outlook for the dollar remains bleak, with lower interest rates set to further cut the currency's yield appeal.

"It's still a very dollar-negative environment as the Fed is expected to cut to about 1.50 percent by mid-year and this leaves the larger dollar sell-off trend still in place," said David Powell, a currency strategist, at IDEAglobal in New York.

In its statement on Tuesday, the Fed indicated it could cut rates again, even though two voting members dissented against the depth of the latest move. The rate futures market has priced in a 58 percent probability of a 50 basis point cut to 1.75 percent, down from about 94 percent early in New York trading.

Tuesday's rate cut is the latest in a series of emergency measures undertaken by the Fed to prevent the credit crisis from escalating. On Sunday, the Fed cut its discount rate by a quarter point and opened up discount window lending to major investment banks, a tool not used since the Great Depression.

But these measures did little to ease the market's concerns.

"A severe recession in the U.S. is clearly underway and data are likely to continue to come in thick and fast, providing evidence to that effect," said CitiFX in a research note."

Sterling, meanwhile, fell as minutes from the Bank of England's Monetary Policy Committee showed two of nine policymakers favored a rate cut this month, which added to speculation that UK rates are heading lower soon.

The pound fell as low as $1.9951 before trading back up at $1.9811, down 1.3 percent from late on Tuesday.

The dollar gained 2.4 percent against the Canadian dollar on concerns that problems in the U.S. economy will seep through to the Canadian economy. The U.S. is Canada's largest trading partner.

(Reporting by Nick Olivari and Gertrude Chavez-Dreyfuss, Editing by Chizu Nomiyama,)