Dollar down vs yen as investors weigh risk

[NesmithDJ]

* Yen gains on risk aversion

* U.S. July existing-homes sales better than expected

* Sterling hits two-year low at $1.8407

(Recasts, updates prices, adds comment).

By Nick Olivari

NEW YORK, Aug 25 (Reuters) - The U.S. dollar was down against the yen on Monday, dropping as U.S. financial shares dragged equity markets lower on persistent credit concerns, which prompted investors to reduce risk.

Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) shares fell more than 7 percent after a top South Korean regulator voiced concern about state-run Korea Development Bank's interest in buying a global bank. KDB on Friday had named Lehman as one of its options for an overseas acquisition. For details, see [ID:nSEO367339].

The decline in the attractiveness of U.S. assets reduced demand for the dollars to buy them while simultaneously pushing investors into investments perceived as less risky, such as the yen.

Intra-day gains in the dollar on a better-than-expected U.S. existing-home sales report tended to be short lived even though a recovery, or at least stabilization, in the U.S. housing market is seen as critical to ending some of the concern on the U.S. economy. For more details.

"I'm not going to read a lot into one-month uptick in existing-home sales," said David Gilmore, partner, Foreign Exchange Analytics in Essex, Connecticut. "I think the trend is still downward in housing. There's always the knee-jerk reaction."

In thin trade on the back of a UK public holiday, the euro was last down 0.1 percent at $1.4779 <EUR=> and down 0.7 percent at 161.68 yen <EURJPY=>, while the dollar eased 0.6 percent at 109.41 yen <JPY=>.

The dollar index, measuring the U.S. unit's value versus a basket of six major currencies, was 0.1 percent lower at 76.704 .DXY.

The euro was little changed after a G20 finance official told Reuters the International Monetary Fund has cut its 2008 growth estimate for the euro zone to 1.4 percent from 1.7 percent. The IMF forecast for 2009 was revised to 0.9 percent versus 1.2 percent, the source said. [ID:nMAT008505].

POUND LOW

The British pound earlier hit two-year lows against the dollar on Monday, with stalled UK growth seen as another example of growing economic malaise outside the United States. The pound later recovered but its general weakness helped the dollar against some currencies including the euro.

Sterling bounced up 0.1 percent to $1.85462 <GBP=> midway through the New York session, having fallen as low as $1.8407 earlier -- its lowest since July 2006, according to Reuters data. The pound is down 6.6 percent against the dollar in 2008, the largest drop of any major currency other than the New Zealand dollar.

Data on Friday showed the UK economy ground to a halt in the second quarter of the year, its worst quarterly performance since 1992, highlighting the risk of a British recession and raising the chance of a UK interest rate cut later this year.

"The growth number confirmed our worst expectations. We've seen that the fall in house prices in the UK seem to have no end. We cannot detect this bottom in house prices that everyone seems to be looking for," said John Hydeskov, senior FX analyst at Danske bank in Copenhagen.

Longer term, analysts said the prospects for a stronger dollar remain intact given that the United States is likely to overcome the problem of slower growth sooner than other nations.

Bank of Japan Governor Masaaki Shirakawa said on Monday the nation's economic growth will likely remain sluggish due to high energy costs and slowing export growth [ID:nT337552].

"The general sentiment towards lower rates and towards the U.S. economy managing to get out of the global crisis earlier than the other economic areas will support the dollar over the next couple of months," said Antje Praefcke, currency strategist at CBCM in Frankfurt.

Still, lingering concerns on problems at U.S. mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), are keeping housing data at the forefront of investors' focus for this week. Data on new-home sales for July and two surveys of nationwide house prices are expected to be released on Tuesday. (Additional reporting by Wanfeng Zhou in New York and Veronica Brown in London; Editing by Leslie Adler)