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NEW YORK, Jan 8 (Reuters) - The dollar fell against the euro and the yen on Tuesday as a sharp drop in stocks added to concerns about a slowing U.S. economy.
Stocks fell sharply after Bloomberg reported that phone company AT&T (T.N: Quote, Profile, Research) saw softness in its consumer business, causing the dollar to reverse earlier gains against the Japanese currency to touch session lows at 108.96 yen.
"Clearly, there is a fair degree of sensitivity between currency markets and what's happening in stocks. It's a pattern we saw for most of last year. But it's hard to discern any significant trends in FX right now," said Nick Bennenbroek, global currency strategist at Wells Fargo in New York.
The euro was up 0.1 percent at $1.4708 <EUR=> , while the dollar traded at 109.12, down 0.1 percent on the day.
Speculation that mortgage lender Countrywide Financial Corp (CFC.N: Quote, Profile, Research) would file for bankruptcy, which the company denied, boosted the perception that the Fed would cut its benchmark target interest rate by 50 basis points to 3.75 percent at the Jan. 30 meeting.
Such a step by the Fed would erode the dollar's yield advantage over the euro, with the European Central Bank expected to leave rates unchanged on Thursday and stick to its hawkish inflation outlook.
"Trouble in financial institutions is never dollar-positive, especially as that underlines the fact that there are still dislocations in the credit market and that could possibly lead to a lower fed funds rate," said David Powell, currency analyst at IDEAGlobal in New York. (Reporting by Lucia Mutikani and Steven C Johnson, Editing by Leslie Adler)