TOKYO, Oct 16 (Reuters) -The dollar was little changed on Tuesday after retreating from a two-month high against the yen, and stayed on the back foot due to a slide in U.S. stocks and more evidence that financial institutions are struggling due to the subprime fallout.
The dollar hovered near a record low versus the euro, stung as a dim economic outlook by a Citigroup official highlighted ongoing credit concerns and kept speculation simmering that the Federal Reserve may cut rates this month after slashing them by 50 basis points in September.
The possibility that the fallout from the credit crunch over the past few months may keep market volatility high cooled demand for risky trades, supporting the yen against higher-yielding currencies.
''In the end, the big question is whether the Fed will lower rates again, and if so, when the cut will come,'' said Hideaki Inoue, forex manager at Mitsubishi UFJ Trust and Banking.
Traders showed limited initial reaction to a speech by Fed Chairman Ben Bernanke, who said that U.S. financial markets are healthier after a turbulent summer, and that the Fed would support market stability as well as non-inflationary growth.
Speaking to the New York Economic Club late on Monday, he added that a full market recovery would take time, and that the ultimate implications of recent credit problems and their impact on the broad economy remained uncertain.
The dollar traded around 117.40 yen in early Tokyo trade, little changed from late levels in New York when it retreated from a two-month high of 117.95 yen hit on electronic trading platform EBS.
The euro was barely moved at $1.4200 hovering near a record high around $1.4280 hit at the start of the month.
The dollar smarted after U.S. stocks fell, as Citigroup's pessimistic outlook, coupled with news that big banks were forming a fund to shore up the commercial paper market, dashed investor hopes for a fast resolution to the credit crunch.
This crimped demand for risky trades where investors sell the low-yielding yen for assets in higher-yielding currencies, pushing the euro 0.15 percent lower to 166.65 yen down from a 12-week high of 167.73 yen hit on Monday.
Traders said that dollar weakness would continue if expectations further tilt towards the possibility of a 25 basis point rate cut by the Fed from 4.75 percent when it holds a policy meeting at the end of the month.
But they added currency movements would likely be limited this week ahead of a meeting of Group of Seven financial officials on Friday, when currencies and the impact of subprime and credit problems will top the agenda of discussions.
REUTERS CS BST0627