(Updates prices, adds comment, byline)
By Steven C. Johnson
NEW YORK, May 9 (Reuters) - The dollar fell on Friday as another round of credit market losses prompted investors to reduce exposure to risky assets and heightened concern about the health of the U.S. economy.
The U.S. currency fell sharply against the yen after American International Group (AIG.N: Quote, Profile, Research), the world's biggest insurer, posted its largest ever quarterly loss and said it planned to raise $12.5 billion in fresh capital.
That rekindled concern about the U.S. economy, particularly with crude oil CLc1 again rising to a record high, and sent the dollar 0.8 percent lower to 102.94 yen <JPY=>.
On the week, the greenback was down by more than 2 percent against the Japanese currency, its worst weekly performance in nearly two months.
AIG's surprising large losses dimmed a growing sense of financial market optimism. On Thursday, U.S. Treasury Secretary Henry Paulson said he believed the credit crisis was "closer to the end than the beginning."
"The mood swings in the market continue to amaze me," said Jay Meisler, principal of Global-view.com, an online forum for traders and investors. He said the flow out of high-yield currencies and into low-yielding ones on Friday "signals a fresh bout of risk aversion."
The euro also fell 0.2 percent to 159.40 yen <EURJPY=>. Against the dollar, it rose 0.5 percent to $1.5480 <EUR=> after hitting a two-month trough below $1.53 a day ago.
The Japanese currency, which also gained on the high-yield Australian and New Zealand dollars, rises when investors unwind risky trades that were financed with cheaply-borrowed yen.
The dollar fell 0.9 percent against the low-yielding Swiss franc, last changing hands at 1.0410 francs <CHF=>. U.S. stocks also fell, with the Dow Jones Industrial Average closing down .DJI nearly 1 percent.
The jump in oil prices to an all-time high also pressured the dollar lower, knocking 1.2 percent off its value against the Canadian dollar <CAD=>.
Investors fear surging oil prices will worsen already weak demand in the United States, the globe's biggest energy consumer.
TRADE DEFICIT NARROWS, EURO DILEMMA
Data showing the U.S. trade deficit narrowed in March thanks to a record plunge in the value of imports did little to lift the dollar on Friday, with investors instead focused on risk. For more click [ID:nN08510436].
Euro gains against the dollar were more subdued on Friday, though the currency did get a boost from expectations that the European Central Bank will hold interest rates steady at 4 percent.
On Thursday, ECB President Jean-Claude Trichet said inflation remains his top concern, warning energy and food costs would lead to a "protracted period" of higher prices.
However, the euro was still almost 4 percent off its record high versus the dollar set in April as a series of soft data keeps the euro zone single currency on the back foot.
"For the time being, the euro zone economy is experiencing the worst of both worlds, higher inflation and slowing growth," said Boris Schlossberg, senior currency strategist at DailyFX.com.
"(The euro is) going to have a hard time climbing back up, because at this point, the market assumes that, eventually, the ECB is going to have to begin an easing process." (Additional reporting by Nick Olivari and Lucia Mutikani; Editing by James Dalgleish)