July 11 (Bloomberg) -- The dollar dropped to within a cent of the all-time low against the euro on concern losses at Fannie Mae and Freddie Mac may deepen even after policy makers said the companies aren't facing a government takeover.

Treasury Secretary Henry Paulson said the government is supporting the two largest buyers of U.S. home loans in ``their current form.'' The euro touched a record versus the yen as stock markets pared losses.

``The concerns about Fannie and Freddie just highlight how bad things are and how vulnerable the financial system is,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``It's not supportive for the dollar.''

The dollar fell 0.9 percent to $1.5933 per euro at 4:28 p.m. in New York, from $1.5788 yesterday. It touched $1.5947, the weakest since April 23. The dollar reached the all-time low of $1.6019 the previous day.

The euro increased 0.2 percent to 169.30 yen, from 169.05, after touching the all-time high of 169.63. The U.S. currency dropped 0.8 percent to 106.24 yen, from 107.07. The Australian dollar rose as much as 1 percent to 97.18 U.S. cents, the strongest level since 1983.

The U.S. currency posted a 1.5 percent weekly decline against the euro, the third drop in four weeks. The dollar decreased 0.8 percent versus the yen, which declined 0.9 percent against the euro.

The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six U.S. trading partners, dropped as much as 1 percent to 71.795, the lowest level since April 23. The gauge is down 0.9 percent this week.

`Dollar Cracked'

``The dollar cracked given the concern Fannie and Freddie are under heavy pressure,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``It's only a matter of time that the government either takes over or backstops them.''

Fannie and Freddie fell to the lowest level in more than 17 years today in New York trading on concern the companies don't have enough capital to survive the housing slump. Treasury Secretary Paulson said in a statement that ``we are maintaining a dialogue with regulators'' and with Fannie and Freddie.

The euro touched a record against the yen as stocks pared losses on a Reuters report that Federal Reserve Chairman Ben S. Bernanke told Freddie Chief Executive Officer Richard Syron yesterday that his company and Fannie can use the central bank's discount window.

Fed spokeswoman Michelle Smith said the central bank had no discussions with Fannie and Freddie about the use of the discount window.

Carry Trade

The paring of stock losses encouraged some investors to buy higher-yielding assets funded by loans in Japan. In the carry trade, investors get funds in countries with low borrowing costs and invest where returns are higher. Japan's target lending rate of 0.05 percent compares with 4.25 percent in the countries that use the euro. The Standard & Poor's 500 Index dropped 1.1 percent after falling as much as 2.2 percent.

A government takeover of Fannie and Freddie is among options that may be weighed by the Bush administration, said Joshua Rosner, a New York-based analyst at Graham Fisher & Co., who met with officials in Washington yesterday.

Crude oil rose more than $5 to a record above $147 a barrel on the New York Mercantile Exchange on concern Israel may be preparing to attack Iran and supplies from Brazil and Nigeria may be disrupted.

Oil Correlation

A 10 percent increase in oil prices leads to a 1 percent appreciation of the euro against the dollar, according to a study by David Woo, London-based global head of currency strategy at Barclays Capital.

``The correlation reached the highest level this decade,'' he said in a Bloomberg Television interview. ``The balance of risk is still to the upside for the euro-dollar.'' The 15-nation euro will appreciate to a range of $1.62 to $1.63 in the next several months, Woo predicted.

South Korea's won posted a 4.5 percent weekly gain versus the dollar, the biggest drop since March 1998, as policy makers pledged to shore up the currency and tame inflation. The won rose as much as 0.5 percent to 997.95 against the U.S. currency today before trading at 1,002.70.

To contact the reporters on this story: Ye Xie in New York at Yxie6@bloomberg.net; Candice Zachariahs in New York at Czachariahs1@bloomberg.net.

Last Updated: July 11, 2008 16:35 EDT