The dollar hit a record low against the euro and fell back towards a 12-year low versus the yen on Friday as rumours of more hedge fund failures stoked concern about damaged credit markets and drove Asian stocks lower.

The dollar was also beaten down after data showing a surprise drop in US retail sales for February, which deepened worries that the economy had slid into a recession.

The dollar fell 0.4 percent from late US trade to 100.30 yen and sank as low as 99.84 yen close to the 12-year low of 99.77 yen hit on Thursday. So far this year, the dollar has shed 10 percent against the yen.

Investors have dumped the dollar on doubts about the Federal Reserve's ability to stem a broadening crisis in the massive US mortgage bond market, which is tightening credit conditions and offsetting its efforts to help the economy by slashing rates.

Among the hedge fund victims this week, Carlyle Capital Corp said it expected its lenders to seize its remaining assets after failing to reach a deal with creditors. Drake Management told investors it was considering liquidating all three of its hedge funds with $5 billion of assets.

"Investors would be more surprised if they don't see more failures at hedge funds or even some smaller financial firms because the credit problems have worsened that much," said Tsutomu Soma, senior manager at the foreign assets department at Okasan Securities.

A fall in Asian stocks also boosted the yen, which benefits from heightened investor caution. Tokyo's Nikkei share average fell 1.5 percent.

Thursday's tumble took the dollar below the 100 yen mark for the first time since late 1995, prompting Japanese officials to express worries about the pace of the yen's surge.

Policymakers including Finance Minister Fukushiro Nukaga and Economics Minister Hiroko Ota said on Friday that excessive currency movements are undesirable, but that recent currency moves reflect dollar weakness rather than yen strength.

An influential ruling party lawmaker in Japan said on Friday it would be difficult to intervene alone in foreign exchange markets, adding to views that Japan is unlikely to undertake yen-selling intervention to help protect the country's exporters.

Analysts said the dollar could fall as low as 98 yen and even 95 yen was possible in coming weeks. The euro hit a fresh peak of $1.5652 but then retreated to $1.5631 little changed.

The market showed little reaction to US Treasury Secretary Henry Paulson saying twice on Thursday that a strong dollar was in the national interest.

Standard & Poor's said on Thursday that subprime writedowns could reach $285 billion but noted that the end of the writedowns "was now in sight" for large financial institutions, which also helped U.S. stocks to rebound sharply.

Kengo Suzuki, a currency strategist at Shinko Securities, said the rating agency's opinion had eased some worries about the financial system's health. But Suzuki said investors would remain cautious until the market sees quarterly earnings reports from major US investment banks.

Major US investment banks such as Goldman Sachs, Lehman Brothers, and Bear Stearns are scheduled to report first quarter earnings next week.

The dollar's sharp slide came after the Fed expanded the amount of Treasury securities it lends to investment banks and accept a wider array of mortgage debt as collateral, trying to alleviate the sell-off in mortgage securities. The latest strains in financial markets and signs of a shrinking economy have investors bracing for more hefty Fed rate cuts this year.

Investors now see a 90 percent chance of another 75 basis point rate cut to 2.25 percent at the Fed's meeting next week. - Reuters