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TOKYO, Aug 1 (Reuters) The yen hovered near a three-month high against the dollar on Wednesday as fears of a deterioration in U.S. credit markets and a fall in U.S. equities caused investors to shy away from yen carry trades.

Traders said the yen took cues from U.S. share prices, which slid on Tuesday after mortgage lender American Home Mortgage Investment Corp. said it could not fund home loans and may have to liquidate assets.

Risk aversion stemming from such falls in equities and worries about the U.S. housing and credit markets, could prompt the dollar to eventually break below 118.00 yen, said a trader for a major Japanese trading house.

''This credit market turmoil can't be taken lightly.

Direction-wise, I think we will see another big move down,'' the trader said.

The dollar stood at 118.55 yen hovering near a three-month low of 118.02 yen hit on electronic trading platform EBS last week.

The euro fell slightly from late U.S. trading on Tuesday to 162.07 yen and $1.3672 Japan's Nikkei share average fell 0.7 percent in early trade after the fall in U.S. stocks in the previous session. On Tuesday, the Standard&Poor's 500 Index slid 1.26 percent and the Dow Jones industrial average fell 1.10 percent.

In the near-term, market players will be watching whether the dollar finds support near 118.00 yen as it did earlier this week and late last week, said the trader for a major Japanese trading house.

The dollar had been supported by sizeable bids around that level on Monday and Friday, the trader said, adding that such buying may have been related to currency options.

Reuters SAM VP0630

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