By Dhara Ranasinghe
LONDON, July 11 -The dollar shed over half-a-percent against the euro and the Swiss franc on Wednesday as turmoil in some emerging markets and weakness in stocks encouraged safe-haven flows into European currencies.
The U.S. currency even retreated against the yen, shedding about half a percent to one-week lows even though the Japanese currency set seven-week troughs against the euro on further worries about Japanese economy.
The euro was benefiting from emerging market jitters as European investors repatriated funds back to euros, while the dollar was also being undermined by a sell off in U.S. stocks dicouraging foreign investors.
"It's a dollar weakness story, especially against European currencies and if U.S. equities keep confirming a bear market, European investors will reduce or stop U.S. stock buying," said Jesper Dannesboe, chief currency strategist at Dresdner Kleinwort Wassertein in London.
"If you look at emerging markets, bonds tend to be donominated in dollars, particularly in Latin America. When the market looks shaky, European investors get out of these positions and are left with dollars which they sell for euros."
The dollar fell to two-week lows around $0.8620 and 1.7630 Swiss francs .It fell to one-week lows around 124.50 yen and $1.4175 per sterling .
EURO BUOYANT
The euro rose to seven-week highs around 108 yen , two-week peaks against sterling and a 2-1/2 year high against the Swedish crown .
Europe's single currency has gained more than two cents against the dollar in the last week with the tech-laden U.S. Nasdaq stock index and the bencmark Dow Jones Industrial average falling to three month lows on Tuesday.
Traders said the dollar has come under pressure from a growing feeling that major powers are becoming uneasy with the effect of the dollar's strength on the global economy.
Monday's comment from Bank of England Governor Sir Edward George that the dollar was hurting both the United States and the euro zone seemed to catch the mood quite well.
However, when asked on Tuesday if he agreed with this sentiment European Central Bank President Duisenberg responded with a flat no, although traders did not pay too much attention this comment.
The euro also drew some support from the day's German economic data. German May retail sales fell 0.8 percent on the month, far smaller than the 1.6 percent drop forecast by analysts, while Germany's trade surplus in May was also higher than market expectations.
"Everyone is selling dollars," said a trader at a Japanese bank in London.
"With emerging markets and stocks in dire straits, the Swiss franc, followed by the euro and stering and even the yen are gaining against the dollar."
YEN TUMBLES VS EURO
The yen's fall to seven-week lows against the euro came as the Nikkei average shed more than two percent, dented after Japan's Finance Minister Masajuro Shiokawa said the government had yet to come up with specific steps to boost the stock market.
The Japanese government's latest monthly report, meanwhile, kept its grim wording about the economy deteriorating and industry and exports suffering, while new data showed the country's current account surplus shrank for the sixth month in a row.
Japan's Prime Minister Junichiro Koizumi said on Wednesday the economy was in a severe condition, highlighting the difficult task he faces in implementing structural reform measures which could add pressure on growth.
Meanwhile, Japanese Finance Minister Masajuro Shiokawa said that his ministry will tell the Bank of Japan that monetary easing is necessary to boost domestic prices but will refrain from making a formal request when the central bank meets to decide policy later this week.