* Dollar falls, seen vulnerable on financial system worries
* Market closely watching how Bernanke testimony
* Euro testing $1.6020 record high vs dollar
By Chikako Mogi
TOKYO, July 15 (Reuters) - The dollar fell towards a record
low against the euro on Tuesday as investors fretted about the
U.S. financial system and took little comfort from the
government's emergency plan to support the top mortgage lenders.
The U.S. government's rescue plan only underscored the
severity of the credit market problems from the deteriorating
housing market. Along with the economic damage from record oil
prices, market players have all the more reason to sell the
dollar, traders said.
Late on Sunday the Treasury said it would boost its direct
credit lines to the companies that fund nearly half of all U.S.
mortgages and buy their shares if necessary, while the Fed opened
its direct lending facility to them. []
"It's difficult to actively buy the dollar just because of
government support measures, because there are other factors
weighing on the dollar, such as worries over the health of
financial institutions and rising oil prices," said Hiroshi
Yoshida, a trader at Shinkin Central Bank.
Shares of major U.S. banks plunged on Monday amid fears about
the sector's stability after regulators seized IndyMac Bancorp
<IMB.N> as withdrawals by panicked depositors led to the
third-largest U.S. bank failure. The S&P financial index <.GSPF>
hit a decade low. []
Traders said they were closely watching Fed Chairman Ben
Bernanke's testimony before Congress later in the day to see how
the latest financial system strains affect his views on monetary
policy and the economy.
"Bernanke has to touch on inflation considering his hawkish
stance for the past few months or so," said Osamu Takashima,
chief currency analyst at Bank of Tokyo-Mitsubishi UFJ.
"But we believe Bernanke has to evenly balance both inflation
concerns and financial sector woes. This will reduce rate hike
expectations, which will be negative for the dollar."
The euro <EUR=> inched up 0.2 percent from late U.S. trade to
$1.5936, not far from the record high of $1.6020 hit in April.
The single currency may be set to test the record peak in
coming sessions as many dealers bet on the uptrend, but not
before it absorbs profit-taking, traders said.
The euro inched down 0.1 percent against the yen to 168.65
yen <EURJPY=R> but held near a record high.
The dollar fell 0.3 percent to 105.83 yen <JPY=>.
The Australian dollar hit a 25-year high against the U.S.
dollar of $0.9758 <AUD=D4> after minutes of the Reserve Bank of
Australia's July meeting showed the central bank remained
concerned about inflation, suggesting it will likely keep
interest rates at a 12-year high. []
The Aussie was flat at 103.16 yen <AUDJPY=R>, holding near an
eight-month high.
The yen edged up as the Nikkei share average <> fell
about 2 percent, but gains were limited as Japanese investors
continued to shift funds abroad for higher returns.
The yen is benefiting less from tumbling shares, which used
to give it a boost as market players rushed to reverse carry
trades using the low-yielding Japanese currency as a cheap source
of funds.
"The sense of crisis is lacking among Japanese investors who
continue to flock into foreign assets despite the deepening
market turmoil overseas," said a senior dealer at a Japanese
trading firm.
"This difference in risk assessment has resulted in an
outflow of funds from Japan that has kept the yen pressured
regardless of selling in stocks," he said.
Traders said the euro could test a new high against the
dollar in coming weeks on the view that the European Central Bank
could raise interest rates later in the year.
ECB President Jean-Claude Trichet said last week that euro
zone inflation would remain above the central bank's desired
level for longer than first expected.
Analysts said his concerns expressed about the risk of a
wage-price spiral suggested that rates are still more likely to
rise than fall later in the year.
The Bank of Japan kept rates steady at 0.5 percent on Tuesday
as widely expected and cut its growth forecast for the current
business year, reinforcing expectations that it will be on hold
for several more months. []
(Additional reporting by Shinichi Saoshiro; Editing by Edwina
Gibbs)
