Array

TOKYO, July 25 (Reuters) The dollar fell to a 2 1/2-month low against the yen on Wednesday as fears about worsening U.S. credit market problems and housing sector weakness prompted investors to shun the U.S. currency.

Against the yen, the dollar fell as low as 120.00 yen on electronic trading platform EBS in early Asian trade, a day after U.S. stock indexes post their worst one-day performance since mid-March on concerns about the weak housing sector.

The tumble in the U.S. stock market also prompted investors to trim risky trade financed by borrowing in the low-yielding yen, boosting the Japanese currency broadly on Tuesday.

Market participants were keeping an eye on share prices, and another sell-off in global stock markets could prompt more investor risk aversion, traders said.

''The yen was the weakest currency among the euro, dollar, yen trio until recently,'' said Tsutomu Soma, a senior manager at Okasan Securities. ''But now the dollar is clearly the weakest, with market players expecting it to fall further.'' The euro stood at $1.3810 hovering near a record high of $1.3853 struck the previous day.

The dollar recovered against the yen to 120.25 yen after hitting 120.00 yen, the lowest since mid-May.

A break below 120 yen, a psychologically significant level, would likely trigger a wave of new sell orders, accelerating the dollar's decline, traders said.

The dollar index, a gauge of the dollar's value against a basket of six major currencies, stood at 80.141, near the psychologically important level of 80.00.

The market will look to the June reading of U.S. existing home sales at 1400 GMT for clues about the health of the slumping housing sector and its influence to consumption.

REUTERS CS PM0650