FOREX-Dollar drops broadly on rising risk aversion

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NEW YORK, May 9 (Reuters) - The dollar dropped against most currencies on Friday as rising risk aversion stoked by a larger than expected quarterly loss at a U.S. insurer helped bolster low yielding currencies such as the yen.

The loss from American International Group (AIG.N), the world's largest insurer by market capitalization, rekindled concerns about credit problems and ongoing risk to the U.S. economy, particularly with crude oil again rising to a record.

That put into question comments from U.S. Treasury Secretary Henry Paulson, who on Thursday said that he believed the credit crisis was "closer to the end than the beginning" and prompted investors to dump riskier assets.

Gains on the back of a narrower U.S. trade deficit for March, on a record plunge in the value of imports even as average oil prices surged to a record, proved fleeting. For more details, click [ID:nN08510436]. The dollar's recovery of some losses as the Standard & Poor's 500 Index pared declines was also brief.

"The rise in risk aversion is mostly AIG," said Ron Simpson, director of FX research at Action Economics in Tampa, Florida. "It's brought credit market nervousness back."

Midway through the New York session, the dollar was down roughly 0.4 percent against a basket of currencies to 73.167 .DXY.

The euro rose 0.3 percent to 1.5447, though off the day's high of $1.5489 EUR=.

The euro's gains were on the back of those in the previous session after ECB President Jean-Claude Trichet said on Thursday that inflation remained his top concern, suggesting the bank may not cut interest rates any time soon. [ID:nL08596967].

However, the euro was still almost 4 percent off its record high versus the dollar set in April as a series of soft data keeps the single currency on the back foot.

The dollar was down 0.7 percent against the yen at 103.03 yen JPY=. The euro also slid against the yen, falling 0.3 percent to 159.14 EURJPY=.

The yen rose across the board, pushing higher-yielding currencies like sterling and the Australian and New Zealand currencies lower, which analysts said was contributing to dollar losses.

In selling these currencies, investors unwound positions where they borrow low-yielding currencies like the yen to fund purchases of higher-yielding assets.

The jump in oil prices to an all-time high also pressured the dollar lower, as it was seen worsening already weak consumer demand in the United States, one of the world's biggest energy consumers.

Sterling fell 0.3 percent against the dollar to 1.9484, off a two-month low of $1.9460 GBP= touched earlier in the day, with investors still selling the pound after the Bank of England kept interest rates on hold at 5 percent on Thursday. (Reporting by Nick Olivari; Additional reporting by Naomi Tajitsu in London; Editing by Andrea Ricci)