* Euro falls vs dollar after Fitch cuts Greece rating
* German data also weighs; Dubai woes dent risk appetite
* Dollar falls vs yen as yen-funded carry trades trimmed
* Bank of Canada leaves benchmark interest rate unchanged (Updates prices)
By Steven C. Johnson
NEW YORK, Dec 8 (Reuters) - The dollar rose against the euro for the third straight session on Tuesday as fears about government deficits and a credit downgrade for Greece raised concern about obstacles still facing the global economy.
Fitch's downgrade of Greece's debt rating followed a Standard & Poor's report saying Greek banks faced the highest risks in western Europe, and investors said that had dashed hopes of a near-term rise in euro zone interest rates.
Renewed worries about Dubai's debt woes also discouraged risk appetite, lifting the dollar as investors unwound "carry trades" that involved borrowing the U.S. currency at low rates to finance purchases of higher-yielding currencies and assets.
The yen also rose broadly as investors reduced yen-funded carry trades, and Moody's Investors Service stoked unease when it said fiscal crises in a number of top-rated countries could last for "several years."
"Prospects for sovereign downgrades are really creating a bearish backlash in the market right now," said Andrew Wilkinson, senior analyst at Interactive Brokers' Group in Greenwich, Connecticut.
For details, see [ID:nGEE5B71A1] and [ID:nWNA9534].
The euro fell 0.8 percent to $1.4702 <EUR=>, well off a 2009 high above $1.51 and its lowest since Nov. 3. It fell 2.1 percent to 129.87 yen <EURJPY=>, on track for its biggest one-day loss against the Japanese currency since late October.
The dollar fell 1.3 percent to 88.31 yen <JPY=> but rose 0.8 percent to 1.0270 Swiss francs <CHF=>. Sterling fell 1 percent to $1.6283 <GBP=>.
Investors' taste for risk had already been dulled on Monday when Federal Reserve Chairman Ben Bernanke said the U.S. economy still faced headwinds and unemployment could stay high for some time.
That doused optimism seen after surprisingly strong U.S. employment data last week and dashed hopes that the Fed would hike interest rates sooner than previously expected.
Analysts said the yen was the main gainer because Friday's jobs data had sparked talk the yen would return to being the funding currency of choice.
"We're in a period of dialing back risk, though I still think there's a material amount of risk appetite out there," said Michael Woolfolk, senior currency strategist at BNY-Mellon in New York.
He said the dollar would likely renew its struggles in the coming months, at least until the Fed signals it's ready to lift interest rates from record lows.
An unexpected 1.8 percent month-on-month decline in German industrial output [ID:nGEE5B70O7] also weighed on the euro, while concerns about Dubai's debt woes pushed investors to seek the safety of the U.S. currency.
Worries about Dubai deepened after Moody's downgraded six Dubai-linked issuers after concluding that no "meaningful" government support would be provided for top firms like DP World <DPW.DI> or Emaar Properties <EMAR.DU>. [ID:nGEE5B718F]
The Bank of Canada held its key interest rate at 0.25 percent on Tuesday, as expected, and maintained its outlook on the economic recovery despite unexpectedly weak third-quarter growth. [ID:nBAC002349]. The dollar was up 1.1 percent against the Canadian dollar at C$1.0639 <CAD=>. (Additional reporting by Nick Olivari; Editing by James Dalgleish)