Dollar pressured near three-and-a-half month lows ahead of Yellen testimony

By Hideyuki Sano

TOKYO (Reuters) - The dollar nursed losses around 3-1/2-month lows on Wednesday, pressured by the spectre of a global economic slowdown as European banks struggled to fend off growing doubts over their health and as oil prices slipped back.

Many traders suspect those troubles will prevent the Federal Reserve from raising interest rates in the near future and look to Fed Chair Janet Yellen's congressional testimony later in the day for clues on the outlook for policy.

The dollar index hit a 3-1/2-month low of 95.663 at one point on Tuesday and last stood at 96.05 in early Asia, down 1.0 percent so far this week.

The low represented a 4.8 percent decline from its 12-1/2-year peak touched in early December when the consensus was for the Fed to keep raising rates this year, stoking a global capital rush of funds to higher-yielding dollar assets.

"Concerns about European banks are contributing to the risk off mood in markets. In addition, U.S. data this month has been weak and Fed officials appear to be toning down on rate hikes," said Shinichiro Kadota, chief FX strategist at Barclays in Japan.

The dollar's fall has been most notable against the yen, which had been depressed at low levels over a long period because of the Bank of Japan's aggressive monetary easing since 2013.

The dollar traded at 115.22 yen, off its 15-month low of 114.205 yen hit on Tuesday. The options market also indicated investors want protection against further falls in the dollar against the yen.

Risk reversal spreads, which measure the price gap between the yen calls and yen puts, are at their widest in favour of yen calls since 2010, suggesting huge demand for yen calls, or right to buy the yen.

At a time of economic stress, countries or regions running current account surpluses, such as Japan, the euro zone and Switzerland, are seen as safer compared to those that have deficits and rely on foreign capital to finance the gap.

The United States, UK and Australia fall into the latter category.

That explains why the euro is supported despite surprisingly weak German industrial output data published on Tuesday and the banking woes in the continent.

The euro hit a 3-1/2-month high of $1.1385 on Tuesday and last stood at $1.1286.

"At the moment, the euro has a very high inverse correlation with risk assets," said Barclay's Kadota.

Global share prices fell on Tuesday with MSCI's broadest gauge of world stocks edging near its 2-1/2-year low hit last month.

Oil price also slipped for the fourth straight session on Tuesday and teetered close to 12-1/2-year lows hit last month, following weak demand forecasts from the U.S. government and the western world's energy watchdog.

The Swiss franc stood firm at 0.9731 franc to the dollar, near a 3-1/2-month high of 0.9695 set on Tuesday.

(Editing by Shri Navaratnam)