Dollar falls on consumer confidence report

NEW YORK (Reuters) - The dollar slipped lower on Tuesday, weighed down by a softer-than-expected data on U.S. consumer confidence and persistent worries about a slowing U.S. housing market that could lead to interest rate cuts in 2007.

By contrast, a strong German business survey reinforced expectations euro zone rates are headed higher. The benchmark euro zone rate is currently 3.75 percent, while the Fed's federal funds rate is 5.25 percent.

The divergence in U.S. and euro zone monetary policy has undermined overall sentiment on the dollar, analysts said.

With U.S. data out of the way, investors are now turning their focus to Fed Chairman Ben Bernanke's congressional testimony on Wednesday. Of particular interest will be his view about the wider economic impact of the subprime mortgage problems.

"Consumers are facing a lot of headwinds right now but consumer confidence could have been a lot worse," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "We're now waiting for Bernanke tomorrow to see if the Fed tries to correct the impression from last week's statement that the first move will be to ease."

Mid afternoon in New York, the euro was up 0.1 percent at $1.3346 EUR=, following the weaker-than-expected consumer confidence report.

This followed Monday's unexpected fall in U.S. new-home sales data, which underscored concerns the housing sector has yet to stabilize.

The euro was bolstered by the Ifo headline index and upbeat comments from ECB Governing Council members Nicholas Garganas and Klaus Liebscher.

"We have the ECB looking for a hike and the market is pricing in euro zone rates of 4.0 percent by end-2007, while U.S. rates are seen falling to 4.5 percent. That is going to drive euro/dollar higher," said Rafael Martorell, chief dealer at BNP Paribas in New York.

Earlier, Garganas said euro zone rates do not seem to have peaked and the ECB may need to act if upside inflation risks appear.

Liebscher, echoing the same sentiment, said the euro zone faced inflation clouds at the end of 2007 and close monitoring of the situation was important.

EURO STILL TO GET PAST KEY LEVEL

Despite gains in the euro, the single currency failed to get past a key technical hurdle. "The euro has to get above the $1.3355/60 level in order to make headway. The fact that the euro is getting stale tells me that the market is well-positioned for a weaker dollar," said Manfred Wolf, director of corporate FX sales at HVB Bank in New York.

The dollar slipped against the yen to 117.93 JPY=. Against the Swiss franc, the dollar was down at 1.2139 CHF=.

The Canadian dollar pushed the greenback down 0.4 percent to C$1.1567 CAD=, as an election in Quebec knocked the separatist opposition to third place.

In the United States, views have increased that the Fed will cut rates in June, particularly after the central bank's statement following its policy-setting meeting last week.