FOREX-Dlr firm before US retail data, pound slips

(Changes dateline, byline, adds quotes, updates prices)

By Veronica Brown

LONDON, May 13 (Reuters) - The dollar firmed against a basket of currencies but gains were contained by the risk that U.S. retail sales data due later on Tuesday may cloud expectations for a pause in the U.S. rate cut cycle.

Sterling lost the most ground against the U.S. currency as domestic factors came in to play, with housing and retail sales data weighing on sentiment.

British consumer price figures due on Tuesday are expected to reflect rising inflationary pressures, deepening the Bank of England's policy dilemma as it struggles to balance slowing growth with rising inflation.

The U.S. central bank, having slashed borrowing costs by 325 basis points since September to 2 percent, is expected to pause the easing campaign aimed at limiting damage caused to growth by the ongoing credit crunch.

Nagging doubts remain however on whether enough has been done by the U.S. government and Federal Reserve to get the ailing U.S. economy back on track. Retail sales data due at 1230 GMT could well reflect that, analysts said.

A slew of Federal Reserve officials, including Fed Chairman Ben Bernanke, will also speak on credit markets and the economic outlook later in the day and could flesh out thinking on the prospect of a pause in cutting rates.

"The range of expectations (for U.S. retail sales) is pretty wide as people weren't quite sure what to do with (the impact of an early) Easter, so they may be bracing themselves for a bit of a surprise on which way it's going to go," ING head of currency strategy Chris Turner said.

"You have to look at things in terms of what the market is pricing in for the June rate meeting which is pretty much nothing ... so on balance we think the risk might be skewed towards a slightly weaker dollar," he added.

U.S. retail sales are expected to show a dip of 0.1 percent in April due to a big drop in auto sales. Excluding autos, sales are forecast to rise 0.2 percent, slightly higher than in March.

The dollar was up 0.1 percent on the day against a basket of six major currencies at 73.010 .DXY, while the euro fell almost 0.2 percent to $1.5520 EUR=, with the single European currency now down roughly 3 percent from last month's record high struck at $1.6018.

Traders said the dollar was also benefitting from an improved risk environment as stock markets rallied in Europe .FTEU3, taking a lead from a strong Nikkei close in Tokyo .NN25.

STERLING WOES

The dollar dipped 0.2 percent to 103.54 yen JPY=.

Sterling was the biggest loser versus the greenback, falling almost 0.5 percent to $1.9486 and nearing the previous session's 2-1/2 month lows GBP=, while the euro rose to a three-week high at 79.68 pence EURGBP=.

Data showing a fall in UK housing and retail sales underlined economic weakness spilling over from the credit crunch amid rising inflationary pressures.

The grim figures precede a report on UK inflation on Tuesday and analysts said that while an expected price climb may stall the Bank of England's interest-rate cutting cycle, economic weakness stemming from a housing downturn would prompt more rate cuts in the future, pushing sterling lower.

"Rate cuts are a matter of time ... The bank realises that economic activity and demand are slowing and could cuts rates right now but of course they're worried about inflation," said Paul Robson, currency strategist at RBS Global Banking. (Additional reporting by Naomi Tajitsu; Editing by Ruth Pitchford)