The dollar fell to a record low against the euro on Friday and was on track for its sixth straight weekly decline, weighed down by fears that losses in risky mortgage debt would hurt consumers and slow U.S. growth.

The greenback also tumbled against the yen as investors unwound bets on risky assets such as stocks and emerging market debt, prompting a slide in U.S. share prices and a broad bid for U.S. Treasury debt that sent yields near six-week lows.

Defaults on subprime mortgages, made to borrowers with weak credit, and mounting losses on bonds backed by such debt have rattled financial markets and soured general dollar sentiment.

St. Louis Federal Reserve Bank President William Poole emboldened dollar bears on Friday when he said losses in the non-prime mortgage market, which includes subprime, were large enough to affect home building and consumer spending.

It's just a story of general dollar weakness, and though nothing has really changed on housing, that's being used as a catalyst to sell, said Dixon Fung, currency strategist at MG Financial in New York.

Late afternoon, the dollar was trading at $1.3824, down 0.2 percent from late on Thursday and near a record peak of $1.3844 hit earlier in the session.

Sterling hit a 26-year high at $2.0587 before easing to $2.0546. The dollar index, which measures the greenback against a basket of major currencies hit a 12-year low.

The dollar also fell to a six-week low at 120.87 yen before edging back to 121.18 yen, down 0.7 percent on the day.

That sparked speculation that carry trades, which involve borrowing yen at low interest rates to buy higher-yielding currencies and assets, may be veering into shaky territory.

The yen's sharp rise on Friday is not too special yet but be aware, the bigger the yen bid the more tension there is for carry trades, said Lou Brien, strategist at DRW Holdings in Chicago.

CARRY IN QUESTION?

The yen also attracted a bid after the Chinese central bank, in a widely expected move, raised one-year benchmark deposit and lending rates overnight.

The yen is often used as a proxy for the tightly controlled Chinese yuan, and reports on Thursday that Chinese growth surged to an 11-1/2-year high in the second quarter had primed the markets for Friday's 27-basis-point rate hike.

Analysts said the yen's rise was also helped by a broader increase in risk aversion amid the U.S. subprime crisis and the resulting slide in U.S. stocks on Friday.

That credit is having some currency impact today is in part because the more transparent equity and Treasury markets are responding, said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

However, he said yen-financed carry trades that target high-yield emerging market currencies have held up well and added that it would take a sustained slide in equities to shake out these positions. In addition, the high-yielding New Zealand dollar was still up 0.6 percent against the yen at 97.07 yen.

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