* U.S. housing starts fall but single-family housing gains * Japan PM Abe backtracks on foreign bond buying * Sterling drops sharply after dovish BoE minutes * RBNZ governor says New Zealand dollar overvalued By Gertrude Chavez-Dreyfuss NEW YORK, Feb 20 (Reuters) - The euro fell against the U.S. dollar, while the Australian, Canadian and New Zealand currencies all slid on Wednesday, weighed down by weakness in global stocks and commodities. Market participants cited talk of a hedge fund selling assets as a factor for the decline in risk appetite, which drove the dollar higher across the board. The dollar index last traded up 0.3 percent at 80.741. "Risk has been taken off the table with the fall in stocks and commodities. That has pressured the euro and commodity currencies," said Vassili Serebriakov, currency strategist at BNP Paribas in New York. Investors tend to sell higher-risk currencies such as the euro and commodity-linked units like the Aussie and Canadian dollars in times of increased aversion to risk. The euro fell 0.3 percent against the U.S. dollar to $1.3351 , while the Australian dollar dropped 0.7 percent to US$1.0287 and the greenback rose 0.6 percent against the Canadian dollar to C$1.0170. Global stocks dropped while commodities led by oil retreated as U.S. Treasuries drew safe-haven bids, underscoring markets' sensitivity to any talk of distress in the financial sector. The fall in investor risk appetite overshadowed the upbeat mood earlier in the session following a generally positive U.S. housing report. U.S. housing starts declined last month, but the fall was due to the more volatile multi-family component, while the single-family category rose to its highest since July 2008. Building permits also increased at their quickest pace since June 2008. "Housing starts may have missed but they are still relatively high compared to where we are in the cycle," said Brian Kim, currency strategist, at RBS Securities in Stamford, Connecticut. "Overall, I would say housing starts and building permits were generally constructive." The dollar rose against the yen following the U.S. housing data. The report's impact on the dollar/yen was a bit of a surprise, as for the past few months, the currency pair has been driven by Japanese monetary policy despite major U.S. data. The yen had gained on Tuesday on signs of a rift between Japan Prime Minister Shinzo Abe and Finance Minister Taro Aso with respect to foreign bond purchases. Aso had said that he was not considering foreign bond buying, while Abe had indicated that was an option. The disagreement suggested Japan's supposedly aggressive monetary policy was less clear cut than before, which could slow the pace of yen selling. On Wednesday, however, both Japanese officials seemed to be on the same page. Abe mirrored Aso's stance, saying the need to establish a public-private sector fund to buy foreign bonds has diminished. Foreign bond purchases would have helped push the yen lower, so suggestions that Japan is no longer considering this helped the currency. The dollar fell as low as 93.11 yen after Abe's remarks, before recovering to trade at 93.50, flat on the day, helped largely by the U.S. housing data. The greenback was still below a nearly three-year high of 94.42 hit on Feb. 11. The euro, meanwhile, was 0.1 percent higher at 125.39 yen. Sterling, however, stole the limelight in the European session, tumbling to its lowest in more than eight months against the dollar and a 16-month trough against the euro after minutes from the latest Bank of England meeting showed policymakers were willing to ease policy further. The pound last traded down 0.8 percent at $1.5301, while the euro last changed hands at 87.30 pence, up 0.6 percent on the day. Investors will now turn to the release of minutes from the U.S. Federal Reserve's latest policy meeting. Any hint the Fed is getting closer to paring back its asset purchase scheme could help lift the dollar broadly. Also on Wednesday, Reserve Bank of New Zealand governor Graeme Wheeler said global imbalances and a weak U.S. dollar were driving up the New Zealand dollar and had left the currency overvalued compared to economic fundamentals. As a result, the New Zealand dollar dropped 1.2 percent to US$0.8376 in midday trading. The fall in the kiwi was also due to speculation about a hedge fund collapse.