Dollar slips as Bernanke hits on housing woes

NEW YORK (Reuters) - The dollar fell against most major currencies on Wednesday and stayed within sight of a record low against the euro after Federal Reserve Chairman Ben Bernanke said U.S. housing market woes could worsen.

In testimony before Congress, Bernanke reiterated that inflation is the Fed's top concern but said weakness in the housing sector would likely crimp economic growth in coming quarters.

His remarks touched a nerve with dealers already reeling from a crisis tied to defaults on risky mortgage debt, leaving little reason to buy the greenback.

Bernanke's "words are clearly dollar bearish," said Kathy Lien, chief strategist with Forex Capital Markets in New York.

"The Fed is not ready to lower rates, but the fact that Bernanke notched down his hawkish tone is a clear indication that even Fed officials are becoming worried," she said.

In prepared remarks, Bernanke said: "Rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities, problems that likely will get worse before they get better."

The Federal Reserve also has slashed its forecasts for U.S. economic growth this year and in 2008.

"Not too many people are opening the champagne. They're worried because it feels like something big is going to break at any moment," said Dixon Fung, currency strategist with MG Financial, in New York.

Late afternoon, the euro traded at $1.3790, little changed from late Tuesday and near an all-time high above $1.3830 touched overnight.

The dollar slipped to 121.95 yen, down 0.2 percent from late Tuesday, while the dollar index, which measures the greenback against a basket of major currencies, was down 0.15 percent at 80.424 .DXY, near a 12-year low at 80.227.

On Thursday, markets will scour minutes from the Fed's last policy meeting for any signs of changes to the bank's inflation and economic outlook.

For now, though, most expect the central bank to hold U.S. interest rates steady for some time to come.

That view led to dollar selling against high-yielding currencies such as sterling, which would benefit from an expected Bank of England rate hike in September.

Sterling was last up 0.3 percent at 2.0524 after earlier hitting a 26-year peak at $2.0548. The high-yielding Australian dollar hit an 18-year high of $0.8789 overnight and is on pace for the biggest monthly gain all year.

The European Central Bank is also expected to lift interest rates in September.

"The publicity around the subprime market is not good for the dollar, and that's especially so when you've got a strong trend running against the dollar already based on prospective rate hikes in two major U.S. trading partners," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.

The dollar's interest-rate advantage in recent years has been a major source of support for the currency. But the spread of the implied benchmark U.S. interest rate in December 2008 over the euro zone's narrowed to a premium of 43 basis points, the thinnest since early May, according to futures markets.