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By Veronica Brown
LONDON, July 25 (Reuters) - The dollar rebounded from recent record lows versus the euro on Wednesday, benefiting from rising risk aversion as global stocks fell as investors tried to assess whether contagion in the U.S. housing market was spreading.
The greenback also steadied from a earlier 2-1/2 month low against hit against the yen as investors looked to U.S. housing data for further clues on the troubled U.S. subprime mortgage market.
Falling stock markets in Asia, taking a lead from tumbling U.S. stocks on Tuesday, had also prompted investors to trim some risky trades financed by borrowing in the low-yielding yen.
Sterling and the New Zealand dollar retreated from multi- year peaks versus the greenback, but the Australian dollar bucked that trend to hit an 18-year high on the back of strong inflation data.
June U.S. existing home sales at 1400 GMT were seen pointing to persistent weakness in the housing sector. Economists polled by Reuters expect existing home sales fell to a 5.87 million annual rate in June from 5.99 million in May.
"The dollar seems to be undergoing a slight recovery but it will probably be short-lived. We've had a continuing rise in risk aversion, with subprime concerns intensifying and U.S. and Asian equities falling," said Mitul Kotecha, head of global foreign exchange research at Calyon.
"The dollar generally benefits when risk aversion rises unless its U.S.-centric, but the risk is that today's U.S. housing numbers are likely to be very soft," he added.
By 0830 GMT, the euro was down almost 0.4 percent on the day at $1.3767 <EUR=>, retreating from a record high of $1.3852 hit on Tuesday according to Reuters data.
The dollar was up 0.5 percent at 1.2090 Swiss francs <CHF=>, while sterling fell a third of a percent to $2.0554 <GBP=>, off a 26-year peak of $2.0655 hit on Tuesday.
The dollar index, a gauge of the dollar's value against a basket of six major currencies, was up 0.3 percent at 80.350 (.DXY: Quote, Profile, Research), after hitting a 15-year low of 80.016 on Tuesday.
RISK AVERSION RISING
Market talk on Wednesday suggested Deutsche Bank's earnings could be hit by exposure to the U.S. subprime market, sending the bank's shares down 2 percent. Deutsche declined to comment.
Worries about the U.S. economy were rippling across other markets after a hefty fall in U.S. stocks on Tuesday, with Asian and European equities also heading south.
Tokyo's Nikkei share average (.N225: Quote, Profile, Research) hit a six-week low on Wednesday, tracking U.S. shares which tumbled the previous day.
The pan-European FTSEurofirst 300 index (.FTEU3: Quote, Profile, Research) was down 0.3 percent at 1,581.6 after falling to its lowest since June 27. The index lost 1.5 percent on Tuesday.
The market showed little reaction to remarks by top Federal Reserve officials that played down fears that turmoil in U.S. credit markets is spreading to the overall economy.
"A sharp pullback in U.S. equity indices has left the market slightly bemused about the implications for the USD. In so far as it reflects ongoing unease about the fallout from sub-prime it is a U.S. problem, but if it spreads to other global markets, any recoil in the investor flows of recent years will be USD supportive," said Ian Gunner, head of FX research at Mellon Bank.
Philadelphia Fed President Charles Plosser told the Wall Street Journal on Tuesday the U.S. economy is not at risk of a credit crunch despite problems in high-risk mortgage investments.
St. Louis Fed President William Poole said on Tuesday that mortgage woes are not spilling over to the broader economy.
The ability of U.S. credit markets to attract funds from overseas has played a big role in helping the United States to finance its huge trade deficit.