* Yen gains vs dollar and euro but off session highs
* Markets still volatile on bank woes, recession fears
* Safe-haven flows boost dollar vs euro
* US housing, consumer data paint gloomy economic picture
(Updates prices, adds comment, U.S. data)
By Steven C. Johnson
NEW YORK, Oct 17 (Reuters) - The dollar dipped against the
yen in choppy trade on Friday as data showing declines in U.S.
consumer sentiment and housing construction stoked fear that
the credit crisis had knocked the economy into recession.
However, evidence of financial stress and economic malaise
beyond U.S. borders that prompted investors to reduce risk also
weighed on the euro, which fell against the dollar and yen.
Trading was extremely choppy, though, with rapid rises and
falls in the U.S. stock market driving currency price moves.
Though governments worldwide have started pouring cash into
troubled banks, helping reduce the cost of interbank borrowing,
investors remain worried about the cost to the real economy
from a credit crisis that has persisted for more than a year.
"There's a real tug of war going on as investors determine
what is the most dominant influence on currencies, the outlook
for the real economy or the credit markets and whether the
banking sector turns the corner," said Nick Bennenbroek, head
of currency strategy at Wells Fargo in New York.
Around midday, the dollar was off its lows against the yen
but remained down 0.3 percent at 101.35 yen <JPY=>. The euro
fell 0.5 percent to 136.30 yen <EURJPY=> and shed 0.3 percent
to trade at $1.3448 <EUR=>. Sterling fell 0.1 percent to
$1.7299 <GBP=>.
When risk appetite fades, investors unwind trades financed
with cheaply borrowed yen, lifting the Japanese currency. The
dollar tends to benefit as well, as dollar-based investors
repatriate funds, seeking safety in U.S. assets.
That's a trend that may be hard to break if incoming
economic data continues to deteriorate, analysts said.
On Friday, data showing U.S. consumer confidence suffered
its steepest monthly decline on record in October while new
home construction last month hit a 17-1/2-year low followed
reports detailing drops in retail sales and industrial output.
Signs of trouble also emerged in economies in Eastern
Europe and Asia, while investors expect slower euro zone growth
to force the European Central Bank to cut interest rates again
by year end.
"I'd characterize recent U.S. data as dismal, but no matter
how bad things get here, the global picture looks just as bad,"
and that will support the dollar and the yen, said Omer Esiner,
senior currency analyst at Ruesch International in Washington.
But Wells Fargo's Bennenbroek said any sustained recovery
in U.S. stocks heading into the weekend could reverse yen
gains, pushing the euro higher.
Indeed, stocks and risky assets pared losses in tandem on
Friday. The high-yielding Australian dollar was last down 0.6
percent against the greenback to $0.6885 <AUD=>, though it was
earlier as much as 2 percent lower.
Anxiety remained high, though, stoked partly by news that
Ukraine and Hungary had turned to the International Monetary
Fund and other foreign lenders to help bolster their financial
systems.
"We're still in an incredibly unstable market which will
persist for a long time. Although we've had all these policy
initiatives, it won't necessarily stop the extreme moves we've
seen across markets," said Bilal Hafeez, foreign exchange
strategist at Deutsche Bank in London.
(Additional reporting by Naomi Tajitsu in London; Editing by
James Dalgleish)
