* Dollar hits 7-wk low vs yen, 6-wk trough vs euro
* U.S. economic data weighs on dollar
* U.S. auto deal makes progress, rocky road seen in Senate (Updates prices, adds quotes)
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 11 (Reuters) - The U.S. dollar fell broadly on Thursday, undermined by the market's improved appetite for taking risk in other currencies again as short term U.S. yields fall closer to zero.
The U.S. currency, which hit a seven-week low versus the yen and a six-week trough against the euro on Thursdsay, was also burdened by data suggesting a further rise in U.S. unemployment in the world's largest economy.
"I do think people are having a lot of questions about the Federal Reserve's balance sheet -- the fact that they have created so much liquidity," said Ken Landon, a currency strategist at JP Morgan Chase in New York.
"Since dollar funding pressures have come off somewhat, there are excess dollars right now. This could be one of the big macro causations at this point," he added.
The rates banks charge each other for dollar, euro, and sterling funds fell again on Thursday, with three-month dollar rates below 2.0 percent for the first time since late 2004.
Despite easing credit conditions, investors remained apprehensive about the U.S. auto sector, even though the House of Representatives approved a rescue package late Wednesday. The deal, which would provide up to $14 billion in loans to troubled car markers, could face challenges in the Senate.
Having climbed on a wave of risk aversion in recent months in tandem with the low-yielding yen, some analysts also said further dollar demand into the year-end from de-leveraging flows might be showing signs of cooling.
In midday New York trading, the dollar fell as low as 91.18
A fall in volatility also indicated that extreme risk aversion may be easing. Implied volatility on one-month dollar/yen currency options fell to 17 percent on Thursday, compared with 38.55
TECHNICALS, U.S. DATA WEIGH ON DOLLAR
The euro rose to $1.3292
Analysts said technical factors also weighed on the dollar. The greenback has breached an important technical level against the euro around $1.3150 but it was unclear whether the single euro zone currency has hit a bottom.
The ICE Futures' dollar index was down 1.6 percent at 84.080 .DXY, its lowest since early November.
U.S. economic reports on Thursday were also not supportive of the dollar.
Initial claims for state unemployment insurance benefits jumped to a seasonally-adjusted 573,000 in the week ended Dec. 6, the highest since November 1982, when 612,000 workers submitted new claims for unemployment benefits.
"These jobless claims numbers reflect the massive layoffs that we have heard in the past weeks from companies like AT&T, Viacom and Sony," said Kathy Lien, director of currency research at GFT Forex in New York. "The (data) will add pressure on the Federal Reserve to cut interest rates by 75 basis points next Tuesday."
The U.S. trade deficit, meanwhile, widened unexpectedly in October, with imports from China rising to a new high, while U.S. import prices fell 6.7 percent last month after a 5.4 decline in October.
In other asset markets, global stocks as measured by MSCI's all-country index have risen 2.1 percent so far in December, while the dollar index has fallen 2.5 percent on the month.
Implied rate spreads also moved in the euro's favor after European Central Bank Executive Board member Juergen Stark said late on Wednesday the bank did not have a lot of room to maneuver on rates after its cut last week.
In Switzerland, the Swiss National Bank became the latest leading central bank to cut interest rates, but its impact was limited as the 50 basis point move paled in comparison to more dramatic reductions from other central banks last week.
The dollar fell 0.8 percent against the Swiss franc to 1.1888 francs
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