FOREX-Dollar drifts lower on US rate outlook; sterling up

(Changes byline, dateline; previous LONDON, adds quotes, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 21 (Reuters) - The dollar slipped on Thursday, still weighed down by minutes from the Federal Reserve's January policy meeting, which affirmed expectations of further U.S. interest rate cuts.

Markets have priced in the risk of another half percentage point rate cut at the Fed's March meeting, which would further erode the dollar's appeal to global investors. The perceived chances of a 50 basis point easing stood at 82 percent on Thursday, slightly down from previous sessions after data on Wednesday showed accelerating U.S. inflation. FEDWATCH

In Britain, stronger-than-expected UK retail sales data gave sterling a boost as investors scaled back the likely extent of interest rate easing by the Bank of England this year.

In contrast, the Fed said in its minutes on Wednesday that 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.

"The market is in a consolidation mode since the dovish Fed minutes, although the dollar is still weaker," said Shane Enright, a currency strategist at CIBC World Markets in Toronto.

"Moves overnight have been reasonably minor and markets are awaiting fresh news for direction," he added.

In early Mew York trading, the dollar was down nearly 0.2 percent against a basket of major currencies at 75.959 .DXY. The euro edged up against the dollar to $1.4739 EUR=.

Investors are scaling back expectations for European Central Bank rate cuts this year as French inflation rose to its fastest annual pace in at least 11 years,

Futures market are now pricing in only a 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.

Against the Japanese currency, the greenback was down slightly at 108.09 yen JPY=, while the euro reached a roughly five-week high near 159.60 yen EURJPY=.

STERLING SHINES

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

The pound gained 0.8 percent to $1.9581 GBP=.

"Today's strong retail sales report follows the better than expected employment report last week and is further encouraging the market to reconsider how aggressive the BOE will be in cutting interest rates, especially given the elevated price pressures," said Brown Brothers Harriman in a research note.

Markets are awaiting the Philadelphia Fed's business activity survey later on Thursday. Economists expect the index to come at -11.0 in February, after a plunge to -20.9 in January sparked fears recession had taken hold nationally.

Soaring commodity prices are also on traders' radar screens on Thursday. Gold and platinum hit historic highs, while silver hit a 27-year high, extending their recent rallies.

U.S. crude oil held near $100 a barrel CLc1, having hit a record high above $101 on Wednesday.

"I would watch oil. If it continues its upward trajectory, that will have people concerned about the impact of high oil prices on the U.S. economy and that could be negative for the dollar," said CIBC's Enright.

(Editing by Andrea Ricci)