Dollar sinks to 2-year low vs yen, euro hits highs

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The yen surged to its highest level against the dollar in more than two years on Wednesday as investors pared back exposure to risky trades on worries about credit market losses and the health of the U.S. economy.

The dollar also hit a record low against the euro for the second straight day.

The U.S. currency fell below 109 yen for the first time since June 2005 as global stocks weakened and oil prices pushed toward $100 a barrel.

The low-yielding Japanese currency tends to do well in times of risk aversion because investors unwind carry trades that use cheaply borrowed yen to buy higher-yielding currencies.

Meanwhile, the high-yielding Australian dollar fell 2.3 percent against the greenback, while sterling hit a four-and-a-half-year low against the euro.

"Risk aversion is dominating the FX market and the trend was set overnight with the fall in global equities," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

"Increased concerns about the credit market are not only focused on the U.S., but also globally. That supported the unwinding of carry trades, boosting the yen," he added.

The dollar fell as low as 108.27 yen and last traded at 108.65 yen, down 1.2 percent. The euro was 1.0 percent weaker at 161.34 yen. Against the Swiss franc, the dollar hit an all-time low for a second straight session, dipping to 1.1025 francs.