The dollar dipped against the yen on Friday as renewed worries about US financial institutions' losses from credit market turmoil eroded investors' risk appetite.

The New York Times reported that Merrill Lynch was expected to suffer $15 billion in losses from soured mortgage investments, and that it was trying to raise additional capital from an outside investor.

The report pressured the dollar, hurt regional stock markets and gave a lift to US Treasuries, traders said.

"The dollar is likely to be a currency that people will stay away from in the near term," said Tomoko Fujii, head of economics and strategy for Japan at Bank of America.

"With earnings from US banks coming up and due to market expectations for US rate cuts, that can't really be helped," Fujii said.

The dollar slipped 0.3 percent to 109.02 yen having pulled back from the day's high of 109.72 yen on electronic trading platform EBS.

The yen had dipped earlier as money markets in Japan shifted towards the view that the Bank of Japan's next move is more likely to be a rate cut from the current 0.5 percent rather than an increase, as investors have long expected.

The euro was steady at $1.4812 hovering near a five-week high of $1.4825 hit on EBS a week ago and clinging to its overnight gains.

Tokyo financial markets will be closed on Monday for a national holiday.

The Nikkei average fell 1.9 percent by late trade. Falling stock markets tend to prompt investors to unwind risky carry trades, which involve selling low-yielding currencies like the yen to buy higher-yielding currencies.

The high-yielding Australian and New Zealand dollars both fell around 0.5 percent against the yen.

The dollar tumbled against the euro on Thursday when comments by Federal Reserve Chairman Ben Bernanke suggested an aggressive half-point rate cut could be made later in the month.

Bernanke said the Fed was ready to take substantial additional action to boost the economy, though the central bank was not forecasting a recession.

His comments acknowledging the US economy's troubles contrasted sharply with those of European Central Bank President Jean-Claude Trichet, who emphasised an inflation-fighting stance and said its policy position was not neutral.

A half percentage point cut in overnight rates by the Fed this month would take US policy rates to 3.75 percent, below the ECB's target of 4.0 percent and eroding the allure of US assets for some investors.

Sean McGoldrick, head of forex trading at Morgan Stanley in Tokyo, said hedge funds and other investors seized on Bernanke's comments to step back into the market at the start of the year by selling the dollar.

"People are starting to trade central bank policy paths -- buying where central banks are on hold or going to raise rates and selling the dollar," McGoldrick said. "The fact that Bernanke went out and signalled it is a big thing."  - Reuters