Dollar plumbs 15-year low

NEW YORK (Reuters) - The dollar hit a 15-year low against a basket of currencies on Monday as investors braced for the Federal Reserve to cut interest rates next week to stimulate a U.S. economy showing signs of fatigue.

Euro-zone interest rates, meanwhile, are seen rising before the year is out, diminishing the dollar's yield advantage and sending it to its lowest against the euro in a month.

Demand for the dollar fell sharply on Friday after data showed U.S. employers cut jobs in August for the first time in four years.

That sparked fear that deepening housing and credit crises were starting to cost American jobs, leading investors to position for the Fed to trim a half percentage point from the 5.25 percent benchmark federal funds rate at its policy meeting on September 18.

Before the jobs data, markets were expecting the Fed to cut by 25 basis points. But one in five primary dealers polled by Reuters now expects a bigger cut.

"This is a no-win situation for the dollar," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut. "A 25-basis-point cut and the Fed looks out of tune, leaving asset markets to extract an extra pound of flesh. A 25-basis-point cut and rate differentials do the dollar damage. The negative dollar views seem universal."

The euro was up 0.2 percent at $1.3795, near a one-month high of $1.3816 hit earlier. The dollar index, a gauge of the greenback against a basket of currencies, was last at 79.862, near a 15-year low at 79.788.

"With the last remaining holdouts abandoning their views that the Fed will not lower interest rates, the euro's interest rate advantage over the dollar continues to grow," said Camilla Sutton, a currency strategist at Scotia Capital in Toronto.

Analysts expect the Fed to ease monetary policy to help restore confidence among banks that have become reluctant to lend to each other, leading to strains in money and credit markets.

Atlanta Fed President Dennis Lockhart said on Monday signs of a softer job market must be taken seriously but added retail sales data has remained strong. Analysts say the true measure of the economy's health lies with consumers' ability to keep spending despite falling home prices. The August retail sales report is due on Friday.

The European Central Bank held euro-zone rates steady, at 4 percent, last week, as did central banks in Britain, Australia and Canada. But President Jean-Claude Trichet said inflation remains a concern, suggesting rate hikes may soon resume.

A report on Monday showed French industrial production rose more swiftly than expected in July, helping support the euro.

YEN SLIDES, SWISS FRANC IN FOCUS

The yen, though, fell 0.25 percent to 113.65 per dollar after data showed Japan's economy shrank 0.3 percent in the second quarter, reinforcing views that Japanese interest rates will stay at 0.5 percent, the lowest in the developed world.

Traders said short dollar/yen trades, put on after Friday's jobs data, were being squeezed out, helping the dollar reverse some of Friday's 1.7 percent plunge against the yen.

Ruskin said that means the dollar's rate against the Swiss franc, another low-yielding currency that benefits from safe-haven flows, will be a key barometer of dollar sentiment.

The greenback hit a one-month low at 1.1841 francs on Monday, according to electronic trading platform EBS, while CurrencyShares Swiss Franc Trust ETF touched a 52-week high on the New York Stock Exchange on Monday.

A close below 1.18 would be "the most likely signal that another dollar run lower is upon us," Ruskin said.