TOKYO, July 17 - The dollar hovered near a record low against the euro and its weakest in more than 20 years versus sterling and the New Zealand dollar on Tuesday as concern about the U.S. subprime market kept it under selling pressure.
The yen slipped, hitting a 16-year low against the Australian dollar as traders returning after a Japanese public holiday sold the low-yielding currency for assets in higher-yielding ones in what many in the market call the "carry" trade.
"We're seeing ongoing weakness in the dollar due to concerns about the subprime market," said Hideaki Inoue, forex manager at Mitsubishi UFJ Trust and Banking.
"The market wants to see exactly what impact recent problems in the subprime market will have on the rest of the economy."
Investors also shunned the yen on the view that Bank of Japan rate rises will be a slow, gradual process even as the central bank is widely expected to lift rates to 0.75 percent next month.
The dollar stayed under pressure following a slide in the ABX subprime index on Monday that kept concerns about the subprime market simmering, after ratings downgrades on billions of dollars in risky mortgage debt last week triggered a round of dollar selling.
The ABX index is used by investors to hedge subprime mortgage risks.
Traders said any sign of concern by Federal Reserve Chairman Ben Bernanke about problems in the subprime market when he makes his twice-yearly testimony to the government on monetary policy on Wednesday and Thursday could prompt more dollar selling.
But few traders expect any big surprises from his remarks.
The euro inched up 0.1 percent to $1.3785, near a record high of $1.3815 hit on Friday on electronic trading platform EBS.
Some traders were starting to feel uneasy about the dollar's broad weakness in view of a surge in U.S. stocks this month, particularly as both the Dow Jones industrial average <.DJI> and the S&P 500 Index <.SPX> touched record highs on Monday.
But others said even if the dollar gets a reprieve from its recent battering, any short-covering would be limited and dollar weakness would continue.
"It's possible the euro may have been overbought against the dollar recently, so a small correction would not be out of the question," said a trader at Japanese bank.
"But overall, the dollar-selling trend remains intact."
The dollar was flat at 121.90 yen after hitting the day's high around 122.10 yen in earlier trade. The U.S. currency recovered from a one-month low of 120.99 yen hit last week.
The euro was at 168.05 yen , after creeping as high as 168.18 yen and edging towards an all-time high of 168.95 yen late last week.
The dollar remained under selling pressure against higher-yielding currencies, keeping sterling near a 26-year high of $2.0405 hit in the previous session.
The Australian dollar hovered around an 18-year high of $0.8761 touched on Monday, while the New Zealand currency was on the verge of climbing above $0.7941 , its strongest in 22 years hit in the previous session.
The yen also struggled against high yielders, hitting a 16-year trough of 106.55 yen versus the Aussie dollar, which yields 6.25 percent, and trading near a 22-year low against the New Zealand dollar , which yields 8 percent.
In addition to Bernanke's testimony to Congress, the market is awaiting data on June consumer prices on Wednesday.
Also due on Wednesday are June figures on housing starts and building permits, which will be in focus particularly given continuing worries about the housing industry.
Soft readings could bolster the view that the Fed will keep U.S. rates at 5.25 percent through year-end, while central banks in countries such as Britain and the euro zone are seen lifting rates at least once more this year.
Traders showed little reaction to a strong earthquake that shook northwestern Japan on Monday, killing nine people and levelling hundreds of homes, as the overall impact on the nation's economy is expected to be small.
The yen slipped, hitting a 16-year low against the Australian dollar as traders returning after a Japanese public holiday sold the low-yielding currency for assets in higher-yielding ones in what many in the market call the "carry" trade.
"We're seeing ongoing weakness in the dollar due to concerns about the subprime market," said Hideaki Inoue, forex manager at Mitsubishi UFJ Trust and Banking.
"The market wants to see exactly what impact recent problems in the subprime market will have on the rest of the economy."
Investors also shunned the yen on the view that Bank of Japan rate rises will be a slow, gradual process even as the central bank is widely expected to lift rates to 0.75 percent next month.
The dollar stayed under pressure following a slide in the ABX subprime index on Monday that kept concerns about the subprime market simmering, after ratings downgrades on billions of dollars in risky mortgage debt last week triggered a round of dollar selling.
The ABX index is used by investors to hedge subprime mortgage risks.
Traders said any sign of concern by Federal Reserve Chairman Ben Bernanke about problems in the subprime market when he makes his twice-yearly testimony to the government on monetary policy on Wednesday and Thursday could prompt more dollar selling.
But few traders expect any big surprises from his remarks.
The euro inched up 0.1 percent to $1.3785
