The dollar fell to two-year lows against the euro and seven-month lows against the yen on Friday, bowed by ongoing concern over the U.S. current account gap and by weak U.S. stocks. 

The greenback has fallen 8.5 percent against the euro this year, declining four cents in just a month. It has lost nearly seven percent against the yen, raising concern that Japan could sell its currency again in a bid to help its exporters. 

"We're seeing further evidence that sentiment on the dollar has changed. We see parity (against the euro) by the end of the year," said Ryan Shea, senior international economist at BankOne. 

"The U.S. is still heavily reliant on overseas capital and this is turning fairly negative." 

At 1128 GMT, the dollar was trading at $0.9644 per euro, off a two-year low of $0.9669 as dealers booked profits on the single currency's sharp gains this week. 

The dollar fell more than three quarters of a percent to 122.27 yen, its lowest since November. 

The greenback was trading a touch above Thursday's 2-1/2 year lows against the Swiss franc of 1.52, even though the Swiss National Bank lowered its money market rate back below 1.0 percent only days after raising it. 

"Dollar weakness is still the flavor and there's no sign of the weak trend ending yet," said Russell Jones, head of foreign exchange research at Lehman Brothers 

The euro also succumbed to profit-taking against the yen, dipping to 118.12 yen after rising to a five-month high of 119.46 in Tokyo trade. 

MASSIVE DEFICIT 

Data on Thursday showed the U.S. current account deficit reached record levels in the first quarter, and U.S. stocks tumbled to new lows for the year following continuing tension in the Middle East and a number of corporate profit warnings. 

The fortunes of the dollar have been closely linked to those of ailing U.S. stocks in recent weeks, as investors lost their faith in the value of U.S. assets. 

"Everything is trading off equities now. European investors are buying less U.S. assets and it's enough to put pressure on the dollar because of the current account deficit," said Jesper Dannesboe, head of foreign exchange research at Dresdner Kleinwort Wasserstein. 

The dollar also hit 17-month lows against sterling of $1.5017. 

Dollar weakness was also pushing the London stock market lower as UK multinationals with big dollar earnings faced selling pressure. 

Traders said market conditions were thin in the aftermath of Brazil's win against England in the World Cup soccer quarter-final, and as the match between Germany and United States kicked off. 

TWITCHY ABOUT BOJ 

Sudden sharp upward moves in the dollar against the yen in both Tokyo and European trade sparked speculation that Japanese authorities may have conducted dollar-buying intervention, but traders put the moves down to nerves. 

Japan has sold yen on at least four days in the past few weeks to curb the currency's export-harming strength, most recently on June 4. 

But the dollar lost ground as dealers questioned Japan's willingness to intervene. 

"People want to sell the dollar because it is weak, but are very nervous about the Bank of Japan so they are getting very jittery," said a trader at a U.S. bank. 

Japan's top financial diplomat Haruhiko Kuroda said he was closely monitoring the forex market while Finance Minister Masajuro Shiokawa said he had a "bad feeling" about yen strength. 

Bank of Japan Governor Masaru Hayami said it was the dollar's broad-based decline that was behind the yen's rise. 

Earlier, senior Finance Ministry official Zembei Mizoguchi also said the ministry had not intervened in the market on Friday. 

"Interestingly the BOJ hasn't intervened where it last intervened and that confirms our view that they haven't drawn a line in the sand and they want to slow the pace of appreciation," said Dannesboe.