By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar hit a record low against the euro and 26-year troughs against sterling on Tuesday, as investors fretted about a possible fallout from weakness in the U.S. subprime mortgage market.

The dollar also slumped nearly 1 percent against the yen, as risk-averse investors cut back on “carry trade” transactions funded by borrowing in the Japanese currency.

In carry trades, investors borrow in a low-yielding currency such as the yen to buy higher-yielding units such as the dollar.

“This is a combination of unwinding of carry trades and broad dollar weakness, mainly because of what S&P did,” said Ashraf Laidi, chief currency analyst, at CMC Markets in New York.

On Tuesday, Standard & Poor’s said it may cut 612 residential mortgage-backed securities backed by U.S. subprime loans, affecting $12 billion in debt. Subprime loans are extended to borrowers with poor credit.

The subprime news pushed down U.S. stocks, bond yields and the dollar across the board.

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