* Yen gains on risk aversion
* U.S. July existing-homes sales better than expected
* Sterling hits two-year low versus U.S. dollar
(Recasts, updates prices, adds comment, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 25 (Reuters) - The dollar dropped against the
yen on Monday, pressured by sharp losses in the U.S. equities
market as nagging credit worries prompted investors to trim
risky trades.
However, the dollar gained versus the euro and at one point
rose to a two-year high against the pound, backed by a
predominant view that declining growth in the euro zone and
Britain could force their central banks to cut benchmark
interest rates.
In a session thinned by a UK public holiday, investors
focused on U.S. equities, which fell sharply, led by financial
stocks. A steep fall in Lehman Brothers <LEH.N> shares spooked
currency investors and fueled a sell-off in the dollar against
the yen and Swiss franc, two low-yielding currencies that gain
a bid in times of financial stress.
Earlier on Monday, 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
[].
"The fall in dollar/yen is all on the back of U.S.
equities. There is still some significant worry out there about
the large banking exposure to GSEs," said Greg Salvaggio,
senior vice president for capital markets at Tempus Consulting
in Washington, referring to government-sponsored enterprises
Fannie Mae <FNM.N> and Freddie Mac <FRE.N>.
"Obviously, some of these banks are significantly exposed
to the GSEs' preferred shares and there's been selling on the
back of that. If Fannie and Freddie do take some kind of
bailout from the government, those shares could become
worthless."
Even as the dollar rallied this month, concerns about
capital at the U.S. mortgage finance companies have kept the
greenback's gains in check.
In late afternoon trading, the dollar fell 0.6 percent to
109.34 yen <JPY=>. The yen also firmed against the euro, which
fell 0.9 percent to 161.28 yen <EURJPY=>.
HOUSING CRITICAL TO DOLLAR FATE
Intraday gains in the dollar on better-than-expected U.S.
existing home sales were short-lived even though a recovery in
the U.S. housing market is seen as critical to easing some of
the concern on the U.S. economy.
Against the Swiss franc, the dollar slid 0.3 percent to
1.0960 francs <CHF=>.
The euro also fell versus the dollar, down 0.3 percent at
$1.4749 <EUR=>. The dollar index on the ICE Futures Exchange,
which measures the unit's value versus a basket of six
currencies, was little changed at at 76.830 <.DXY>.
The British pound was one of the major casualties of the
day, plunging as low as $1.8407 <GBP=>, its lowest since July
2006, according to Reuters data. It last traded flat on the day
at $1.8515.
The UK currency has fallen about 6.6 percent on the month,
with sluggish growth in Britain seen as another example of
widespread economic weakness outside the United States.
"With the UK economy continuing to weaken and the downturn
in the economy having spread beyond the housing sector, we
continue to expect the BoE (Bank of England) to cut rates,
(which) should weigh on sterling," said Deutsche Bank in a
research note.
While an economic slowdown in countries such as Britain and
the outlook for monetary easing outside the United States
support the dollar, analysts said worries about the U.S.
financial system suggest the greenback would go through a
period of consolidation.
"The ongoing tensions in U.S. financial markets remain a
periodic irritant for the dollar," wrote JP Morgan Chase in a
research note. "The GSEs have come back into the spotlight,
which leaves the dollar vulnerable near-term. Much depends on
the end-game to the Fannie and Freddie situation."
On Tuesday, currency investors will look to data on U.S.
housing and consumer confidence, along with minutes from the
Federal Reserve's last policy meeting for clues as to where the
economy and interest rates are headed.
(Additional reporting by Nick Olivari; Editing by Dan
Grebler)
