Dollar dives as global growth fears fester

By Dion Rabouin

NEW YORK (Reuters) - The dollar fell to a 15-month low against the yen on Thursday, on track for its worst week against the Japanese currency since 2008, as fears of a global economic slowdown and concerns about stress in the banking system increased demand for safe havens.

The dollar fell as much as 2 percent against the yen , touching a low of 110.98 yen. It recovered modestly in afternoon trading and was down 1 percent at 112.18.

A slump in major stock markets and a jump in bond prices this week has forced traders out of risky positions, leading to the unwinding of the carry trade and repayment of cheap yen funds.

Traders use the yen to fund trades of riskier assets. When markets sour and traders become risk averse, they unwind those trades and buy back the currency.

Recent global market turmoil has prompted large-scale yen buying even though Japan recently lowered its interest rates below zero, which theoretically should reduce the yen's value.

Doubts about the effectiveness of the Bank Of Japan's rate policy has prompted traders to ignore traditional fundamentals and pack into the Japanese currency.

"What the market is telling you with the price action in dollar/yen since the Bank of Japan moved to negative rates is that it doesn't think that the BOJ's policy is sustainable or going to be effective," said Ian Gordon, FX strategist Bank of America-Merrill Lynch in New York.

"That's why you've seen the yen strengthen back so much...the market is basically saying we don't think this policy is going to work."

The collapse of expectations for further Fed rate rises this year has also undermined support for the U.S. dollar against major currencies.

The U.S. dollar index was at 95.52, down 0.4 percent, and has fallen 4 percent since the end of January.

Federal Reserve Chair Janet Yellen testified for a second day, this time before the Senate Banking, Housing and Urban Affairs Committee and reasserted that she expects the Fed to gradually raise rates this year. She did, however, acknowledge that weakened global demand and a slide in stock markets was tightening financial conditions faster than the bank would like.

The euro rose against the dollar to a fresh 3-1/2-month high of $1.1368. It was last up 0.45 percent to $1.1339.

"There are mounting concerns about the ability of central banks to continue to prop up asset prices," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "That's part of why we're seeing assets across the board come under pressure."

(Reporting by Dion Rabouin; Editing by Clive McKeef and Andrew Hay)