* Dollar falls vs yen, euro as risk appetite recedes
* Euro on track for 1.4 pct fall vs dollar on week
* Greek deficit, Chinese tightening still weigh on market
(Updates prices)
By Michael O'Boyle
NEW YORK, Jan 22 (Reuters) - The dollar fell against the euro and yen on Friday as investors exited risky trades, unnerved by U.S. President Barack Obama's proposals to limit risk-taking by U.S. banks.
The yen, which often benefits when investors grow nervous, touched a five-week high against the dollar and hit a nine-month peak against the euro, while global stock markets slumped for a second day. The euro rebounded from Thursday's near six-month low against the greenback.
"Since there is no U.S. data today, the market is still focused on the impact of the proposed banking legislation," said Kathy Lien, director of currency research at GFT in New York. "Whenever there is political uncertainty, traders always sell first and ask questions later," Lien added.
The dollar hit a session low of 89.78 yen
The euro hit a session low against the yen of 126.55 yen,
before rebounding to 127.80 yen
Sterling fell 0.3 percent to $1.6144
The euro has been under steady pressure so far this year as investors worried about euro zone member Greece's ability to rein in its fiscal deficit. The currency was down 1.4 percent against the dollar this week.
But with uncertainty about the impact of Obama's bank proposals, investors sought to go into the weekend squaring out dollar positions after the U.S. currency's recent strong gains, analysts said.
The proposals, which require congressional approval, would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund. [ID:nN21658127]
"Although the impact of Obama's proposed banking regulation changes is clear enough on equities, currency markets seem to see the implications as ambiguous," said Adam Cole, global head of currency strategy at RBC Capital Markets.
On Thursday, U.S. stocks suffered their worst one-day percentage drop since October following Obama's announcement of tough restrictions that would squeeze banks' profits.
U.S. stock indices fell as the VIX <.VIX>, viewed as gauge of investor apprehension, jumped over 6 percent.
Obama's proposals were the latest setback in a market hampered by fiscal concerns in some euro zone economies and by speculation China would take more steps to withdraw liquidity to stem inflation.
"Taken together the three issues add considerably to uncertainty about prospects for the global recovery, with the possibility of a serious restriction of Chinese credit the most important factor," Barclays analysts said in a note. (Additional reporting by Tamawa Desai in London; Editing by Kenneth Barry)