By Rika Otsuka TOKYO (Reuters) - The dollar struck a one-year low against a basket of currencies on Wednesday, staying vulnerable as investors moved to riskier assets on growing signs of an economic recovery. Market participants increased bets on stocks and commodities, encouraged by better-than-expected U.S. retail sales and New York manufacturing data, while Federal Reserve chairman Ben Bernanke said the U.S. recession was most likely over, though he also warned the recovery would be slow. "Market players feel comfortable about doing dollar carry trades as Bernanke said the U.S. economy has hit bottom, while global central banks are unlikely to end emergency steps anytime soon," said Tsutomu Soma, a senior manager of foreign securities at Okasan Securities. The dollar index, which measures the greenback's value against a basket of six major currencies, fell to a one-year low of 76.406 before inching up to 76.482, down 0.1 percent on the day. The index has shed more than 2 percent this month, below any Fibonacci support, and could fall to 2008 lows of around 70.70. The euro edged up 0.1 percent from late U.S. trade to $1.4675, in sight of its 2009 high of $1.4686 struck on trading platform EBS the previous day. The dollar held steady at 91.07 yen, staying above a seven-month trough of 90.18 touched earlier this week. "As the global recovery continues and risk diversification takes place we could see the U.S. dollar stay under pressure for the next six months," said Amber Rabinov, economist, foreign exchange and international economics at ANZ in Sydney. "We expect it to test its recent lows on the yen, and probably fall as low as 87 yen as talk of it replacing the yen as a funding currency gathers momentum." Until recently, the low-yielding yen was the currency of choice for investors who borrow cheap to buy riskier assets or high-yielding currencies. But with 3-month U.S. LIBOR rates falling below Japanese rates, the dollar is replacing the yen as the funding currency of choice. With broad dollar-selling picking up pace and showing little sign of abating, Tokyo traders are worried about the risk of a sharp fall in the dollar against the yen during Japan's three-day holiday period starting next Monday. Traders say some option dealers are staying close to Tokyo over the long weekend due to such worries. CHANGE IN JAPAN'S GOVERNMENT Democrat Yukio Hatoyama is set to take office as Japan's new prime minister and is expected to announce his cabinet members later in the day. Hatoyama has pledged to put more money in the hands of consumers, cut wasteful spending and reduce bureaucrats' control over policy-making. Although the change in the government is not expected to cause much volatility in exchange rates, traders said caution toward a higher yen persists as veteran lawmaker Hirohisa Fujii is expected to become finance minister.

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