* Dollar rallies to six-week high versus yen
* Euro falls to 3-month low vs dollar, bank woes weigh
* Obama administration releases plan to help homeowners
(Adds comments, updates prices)
By Wanfeng Zhou
NEW YORK, Feb 18 (Reuters) - The U.S. dollar rallied to a
six-week high against the yen on Wednesday on growing worries
about a steep contraction in Japan's economy and after the
Obama administration released a plan to tackle the U.S. housing
crisis.
The euro fell to a nearly 3-month low against the
greenback, under heavy pressure due to growing worries that a
deep recession in Eastern Europe would cause more damage to
western European banks, which have significant exposure to the
region.
Demand for the yen fell sharply after data released earlier
this week showed Japan's economy shrank in the fourth quarter
at its fastest pace in 35 years.
"The Japanese economy is far worse than the American
economy. You look at the fourth-quarter GDP numbers and they're
not just bad, they're dismal. They're kind of frightening,
actually," said Joseph Trevisani, chief market analyst at FX
Solutions in Saddle River, New Jersey.
"With that kind of economic uncertainty ... you are getting
a reaction in the dollar/yen," he added. "That leads people to
reassess the level that the yen had been at primarily based on
deleveraging of the crosses. The deleveraging is over."
In midday trading in New York, the dollar rose 1.6 percent
to 93.82 yen <JPY=> after earlier hitting 93.87 yen, the
highest level since Jan. 7.
Despite Wednesday's sharp drop, the yen has benefited from
extreme risk aversion in recent months as investors unwound
riskier trades funded by cheap borrowing in the Japanese
currency.
Some analysts said the correlation between the yen and risk
aversion may be breaking down with traders starting to refocus
on deteriorating fundamentals in the Japanese economy.
"Though (the yen) still trades in line with the ebb and
flow of risk appetite, the dollar has been outperforming the
yen over the past few sessions, as the yen feels a greater
impact from Japan's very bad economic situation," said Sacha
Tihanyi, currency strategist at Scotia Capital, in a note.
OBAMA OPTIMISM SHORT-LIVED
The dollar briefly found some support after the Obama
administration released a plan to help as many as 9 million
families restructure or refinance mortgages to avoid
foreclosure. Market optimism quickly faded, however, as
concerns about the global economic outlook persisted.
[].
Investor appetite for risk remained low amid persistent
worries over the economy and more woes in the financial sector.
That is set to continue to boost the greenback's safe-haven
appeal, analysts said.
In a sign of more trouble in the U.S. economy, new housing
starts and permits dropped to record lows in January, data
showed on Wednesday. See [].
"There's no bottom yet in sight for the U.S. economy," said
Matt Esteve, foreign-exchange trader at Tempus Consulting in
Washington. "But the truth is that the outlook for the rest of
the world is even worse and that should sustain the dollar
bid."
The euro was down 0.4 percent at $1.2533 <EUR=> after
having fallen to $1.2514, its lowest since Nov. 21.
The euro tumbled after Moody's Investors Service warned on
Tuesday that the deepening recession in emerging Europe would
put ratings of local banks and their western parents under
pressure. Rival ratings agency Standard & Poor's expressed
similar concerns about emerging Europe.
In other trading, sterling fell 0.1 percent <GBP=> after
minutes from the BoE's February interest-rate meeting showed
policy-makers voted unanimously to seek government consent for
so-called "quantitative easing" through buying gilts and other
securities [].
Later in the session, U.S. Federal Reserve Chairman Ben
Bernanke is scheduled to speak on the central bank's lending
programs and its balance sheet. Minutes from the Fed's January
rate-setting meeting also will be released.
(Additional reporting by Vivianne Rodrigues; Editing by Dan
Grebler)
