(Updates prices, adds fresh quotes, changes byline)
By Simon Falush
LONDON, Aug 24 (Reuters) - The yen strengthened on Friday and the dollar slid as weaker Asian and European stocks reminded investors that problems in U.S. housing and credit markets may sting the global economy.
Trading was quiet, with few investors willing to take on fresh positions a week after worries about U.S. subprime mortgage lending caused a sharp contraction in credit market liquidity and triggered a frantic sell-off in global markets.
Higher-yielding currencies have since recovered somewhat, but investors remain wary that subprime-related problems will continue, keeping demand low for riskier assets.
"It continues to be all about risk aversion, and whether it's on or off is the only story driving all (currency) pairs," said Geoff Kendrick, currency strategist at Westpac.
At 1030 GMT, the euro was up 0.2 percent versus the dollar at $1.3591, after earlier rising above $1.36 to its highest level for 10 days <EUR=>.
The dollar dropped half a percent against the yen to 115.81 yen <JPY=>, but was off the day's lows of 115.54. The greenback rebounded as much as 5 percent this week from a 14-month low.
The euro also fell a third of a percent against the yen to 157.36 yen <EURJPY=>, after recovering around 6.5 percent this week from 2007 lows.
Data showing euro zone private sector growth cooled in August did little to move the euro.
The high-yielding New Zealand dollar stayed under selling pressure, falling 0.3 percent against the dollar to $0.7121 <NZD=>.
Market volatility has calmed since last week, but currency moves remained at the mercy of equities.
The Nikkei average (.N225: Quote, Profile, Research) fell 0.4 percent on Friday, while European stocks (.FTEU3: Quote, Profile, Research) were also trading lower and U.S. stock index futures (SPc1: Quote, Profile, Research) (DJc1: Quote, Profile, Research) indicated a weaker opening on Wall Street.
But markets have stabilised from a week ago, helped by Bank of America's move on Wednesday to invest $2 billion in troubled U.S. mortgage lender Countrywide Financial, which soothed credit jitters and offered some stability to global stocks.
Despite some improvements in credit and equities markets, investors remained concerned about a possible subprime spillover to the broader U.S. economy.
Countrywide Chief Executive Angelo Mozilo said on Thursday the slumping housing market could drag the U.S. economy into recession.
Analysts say any further bad news on the U.S. housing market could lead to further moves away from the carry trade.
"Further subprime shocks may spread fast across markets and derail the recovery of investor sentiment," said Dresdner Kleinwort in a note to clients.
Japan's top financial diplomat Naoyuki Shinohara said on Friday the worst was over in the overall adjustment in financial markets, but that market adjustment would continue.
Economists forecast new home sales data, due at 1400 GMT, to show a drop in the seasonally adjusted annual rate of 820,000 in July from 834,000 in June.
U.S. durable goods data at 1230 GMT is forecast to show a rise in orders of 1.0 percent in July, against a 1.3 percent rise in June.