* Investors debate possibility of intervention by Japan
* U.S. jobless claims rise; Philly Fed lowest in a year
* Euro falls against dollar as risk appetite ebbs (Adds comment, updates prices)
By Wanfeng Zhou
NEW YORK, Aug 19 (Reuters) - The U.S. dollar on Thursday dropped near a 15-year low versus the yen but rose against the euro after weak U.S. economic data and steep losses in the stock market reignited risk aversion.
Mid-Atlantic factory activity contracted in August for the first time in more than a year and new U.S. jobless claims scaled a nine-month high last week, delivering another blow to the fragile U.S. economic recovery. For details, see [ID:nN19350083]
Investors flocked to safe havens such as the U.S. dollar, yen and Swiss franc. A decline in U.S. bond yields on worries about the economy also helped the yen gain versus the greenback, though investors were reluctant to chase it higher amid fears Japanese authorities may take steps to rein in the currency.
"If you look at the Swiss franc and if you look at what the equity markets are doing, the euro's weakness would be consistent with higher risk aversion," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.
"But we would suspect that the markets are wary of pushing the yen too high at this juncture, given the possible escalation in rhetoric from Japanese officials," he added.
In late trading, the euro fell 0.3 percent to $1.2822 EUR=, after touching a session trough of $1.2773, according to Reuters data. Support comes in at the 100-day moving average around $1.2776.
The dollar lost 0.1 percent to 85.33 yen JPY=. It hit a session low of 84.89 on electronic trading platform EBS, within striking distance of a 15-year low of 84.72 set last week.
The Philadelphia Federal Reserve Bank said its business activity index for the Mid-Atlantic region fell to minus 7.7, confounding markets that had expected a rise to 7.0. Any number below zero indicates a shrinking in the region's manufacturing. [ID:nN19254823]
"The Philly Fed number is shockingly bad, resulting in the U.S. two-year making new lows in yield," said Douglas Borthwick, managing director at Faros Trading LLC in Stamford, Connecticut. "With yields at these lows the dollar is quickly becoming the funding currency of choice."
A funding currency is used in carry trades, which involve borrowing in a low-yielding currency to buy higher-yielding assets elsewhere. Though not inherently bad for the dollar, being a funding currency weakens the unit as investors borrow it, then immediately sell it.
DOLLAR GAINS CAPPED
The ICE Futures U.S. dollar index, which measures the greenback versus a basket of currencies, rose 0.3 percent to 82.442 .DXY.
Gains in the dollar were limited, however, as a recent string of weak U.S. data fueled worries about the possibility of a double-dip recession and sparked talk of additional easing measures from the Federal Reserve to boost the economy.
"People are still questioning whether to sell the dollar on weak U.S. data or buy it on a general move away from risk," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York.
Wells Fargo's Serebriakov expects to see some dollar weakness in the short term as U.S. data will likely stay weak, but he added this may be somewhat offset should global stocks react negatively and boost safe-haven demand.
The dollar hit a seven-month low versus the Swiss franc and was last down 1 percent at 1.0320 CHF=. The euro lost 1.3 percent to 1.3228 francs EURCHF=.
Investors were watching to see if the Bank of Japan will take more monetary easing steps -- such as expanding liquidity -- ahead of a meeting between Prime Minister Naoto Kan and BOJ Governor Masaaki Shirakawa expected on Monday.
The yen earlier slipped as rumors circulated that the central bank would hold an emergency policy meeting. Sources later said this was unlikely [ID:nTKW007065]. (Additional reporting by Nick Olivari; Editing by Leslie Adler)