FOREX-Dollar slides on subprime worries, yen down

The dollar sank to a record low against the euro and a 26-year trough versus sterling on Wednesday for the second consecutive day, undermined by problems in the U.S. subprime mortgage market.
The yen, on the other hand, fell against most currencies except the New Zealand dollar, as risk appetite recovered after U.S. equities rebounded on Wednesday.
"Essentially, the equity market has been dictating what's happening with the dollar. U.S. stocks got a little bit of a boost even though the subprime news is all bad," said John McCarthy, director of foreign exchange at ING Bank in New York.
U.S. stocks rallied on Wednesday, which one analyst attributed to news from the U.S. Treasury urging caution about raising taxes on hedge funds and private equity.
"The recovery in stocks drove people into selling yen again, unwinding what we did yesterday. But in the broadest terms, the mindset is still to sell the dollar, because of the subprime issue, and the yen because of low interest rates," he added.
Midday in New York, the euro was up 0.1 percent on the day at $1.3764 , having earlier set a record high of around $1.3787, according to electronic trading platform EBS.
Against the yen, the euro rose 0.5 percent to 168.08 .
The euro also drew support from comments by European Central Bank President Jean-Claude Trichet, who signaled more interest rates hikes. He said the ECB's monetary policy remained on the accommodative side and the bank will monitor developments closely. For details, see
Sterling was up 0.3 percent at $2.0323, after hitting a 26-year peak of $2.0363 .The dollar recovered from a one-month low of 120.99 yen to trade up 0.3 percent at 122.09 yen.
While the greenback recovered from its lowest levels, it failed to gather enough momentum to reverse its losses.
Shaun Osborne, chief currency strategist at TD Securities in Toronto believes there was more two-way action in the dollar on Wednesday after the currency took a pounding the previous day. He cited the slight widening in the interest rate spread between U.S. and euro zone two-year bonds in the dollar's favor.
The dollar's sell-off on Tuesday was exacerbated by reports from Standard & Poor's and Moody's Investors Service that warned of ratings cuts on $17 billion of debt related to risky mortgages, much of it subprime. Subprime loans are extended to borrowers with poor credit.
U.S. subprime worries prompted markets to price in a greater risk of a Federal Reserve interest rate cut this year or next.
In contrast, other central banks around the globe are expected to continue tightening monetary policy, with yield differentials thus set to move to the detriment of the dollar.
The Bank of Japan is widely expected to hold interest rates steady on Thursday, although some of the more hawkish members of the board may vote for a hike to 0.75 percent.