FOREX-Dollar subdued as U.S. worries weigh

(Changes byline, adds quotes, updates prices)

By Ian Chua

LONDON, Feb 21 (Reuters) - The dollar was a touch weaker against a basket of major currencies on Thursday after minutes from the Federal Reserve's January policy meeting cemented expectations of further U.S. interest rate cuts.

But stronger-than-expected British retail sales data gave sterling a shot in the arm as investors scaled back the likely extent of interest rate cuts by the Bank of England this year.

In the minutes, the Fed said it was worried the U.S. economy would face further setbacks even after a series of aggressive rate cuts and sharply lowered its forecast for U.S. growth in 2008. [ID:nN20383289]

"The Fed minutes yesterday were pretty much in line with expectations ... it's clearly kept the door open for easings," said David Pais, currency strategist at Citigroup.

"Now it's just a question of watching how the real economy plays out going forward."

Markets are pricing in the risk of another 50 basis point rate cut at the March meeting, which would further erode the dollar's yield appeal. FEDWATCH

At 1120 GMT, the dollar was down nearly 0.1 percent against a basket of major currencies at 76.064 .DXY. The euro edged up a tad to $1.4719 EUR=, near an earlier a two-week high of $1.4759.

Against the Japanese currency, the greenback climbed 0.2 percent to 108.27 yen, while euro reached a one-month high near 159.60 yen EURJPY=.

Better risk appetite, boosted by further U.S. rate cut hopes, was keeping the low-yielding yen under pressure and lifting stocks. The FTSEurofirst 300 index .FTEU3 of top European shares climbed 1.6 percent.

In contrast to Fed expectations, investors are scaling back the extent of European Central Bank rate cuts this year, giving the euro a helping hand.

Futures market are now pricing in only 1-in-4 chance of a rate cut from 4 percent by June FEIM8. Just last week, a June rate cut had been fully priced in.

Data showing French inflation rising to its highest annual level in at least 11 years suggests that the hawks on the ECB will be less willing, at least for now, to significantly change their tone, said Stuart Bennet, senior fx strategist at Calyon.

STERLING SHINES

Sterling was among the best performing major currencies on the day, thanks to an unexpectedly strong retail sales report which helped ease concerns about the health of the UK economy.

British retail sales rose 0.8 percent last month, recovering from a 0.2 percent fall in December, and at four times the rate predicted by analysts. See [ID:nL21452295]

"Today's report shows that the UK consumer sector is not dead and buried yet, with large discounts enough to keep appetite in the retail sector, for now," said Audrey Childe-Freeman at CIBC.

The pound gained 0.7 percent to $1.9561 GBP=.

On the U.S. data front, weekly jobless claims as well as the Philadelphia Fed's February business activity survey are due later in the day.

Economists expect factory activity index in the U.S. mid-Atlantic region to come at -11.0 in February, after a plunge to -20.9 in January sparked fears that recession has taken hold nationally. (Editing by David Christian-Edwards)