Dollar dips as consumer confidence hits 16-year low

By Steven C. Johnson

NEW YORK (Reuters) - The dollar fell on Tuesday as U.S. consumer confidence plunged to a 16-year low, heightening concerns about the economy and doubt about the Federal Reserve's ability to hike interest rates to combat inflation.

The euro hit a session high of $1.5621 after data showed high prices sapped Americans' confidence in June and pushed expectations of future prosperity to an all-time low.

Analysts said the data complicates matters for the Fed as it tries to prevent the economy from slipping into recession while also grappling with rapidly rising energy and food prices.

The Fed begins a two-day policy meeting on Tuesday and is expected to hold interest rates at 2 percent, but markets will be looking for clues about possible hikes later this year.

"No doubt, this complicates life for the Fed," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York. "If the U.S. consumer is indeed crumbling, does the Fed really have the power to raise interest rates at what looks like the beginning of a nasty little recession?"

Late morning in New York, the euro was up 0.4 percent at $1.5590, while the dollar edged down 0.1 percent to 107.70 yen JPY= after earlier slipping to 107.37 yen, a session low.

The dollar fell 0.6 percent to 1.0385 Swiss francs, with the Swissie benefiting from market talk of Swiss bank UBS (UBSN.VX) being a takeover target for HSBC (HSBA.L).

U.S. short-term interest rate futures trimmed the chances of a rate hike in August to 70 percent from 74 percent after the confidence data, and analysts said that could retract further if the economy continues to show weakness.

Earlier on Tuesday, the S&P/CaseShiller house price index showed prices in 20 major metropolitan areas declined by 15.3 percent in the year to April.

Profits at U.S. S&P 500-listed companies were expected to fall at a 10.2 percent rate in the second quarter, according to Thomson Reuters data, from an earlier 9.6 percent estimate.

"People had expected the tax rebates to lift the U.S. economy and lead it into a sustained recovery, but that story is running into some stiff headwinds," said David Watt, currency strategist at RBC Capital Markets in Toronto.

If the Fed uses more neutral language on the balance of risks between inflation and growth in its post-meeting policy statement on Wednesday, dollar losses will accelerate, Schlossberg said.

CLEAR PICTURE FOR THE ECB

The outlook for euro zone interest rates is clearer, with markets widely expecting the European Central Bank to hike its refinancing rate to 4.25 percent in July to combat inflation.

That view was advanced on Tuesday after data showed French consumer confidence posted its biggest monthly rise in four and a half years in May. The data helped ease concerns sparked on Monday by reports showing the 15-country euro zone's manufacturing and service sectors contracted in June.