FOREX-Dollar near lows vs euro on benign US inflation

(Recasts, updates prices, adds quotes, U.S. data, changes byline; dateline; previous LONDON)

By Gertrude Chavez-Dreyfuss

NEW YORK, March 28 (Reuters) - The dollar edged toward record lows against the euro after U.S. data showed inflation pressures were tame in February, affirming expectations of further interest rate cuts by the Federal Reserve to boost a weakening economy.

The dollar did get a brief boost on a rise in personal income. But this was offset by the slight increase in spending, the smallest since September 2006, which suggested consumption -- normally the buttress of the U.S. economy -- was not providing its usual support.

On a month-over-month basis, core PCE (personal consumption expenditure) was as expected and no impact there," said George Davis, chief technical strategist at RBC Capital Markets in Toronto.

"On a year-over-year basis, the outcome was slightly weaker than expected and the same thing for the deflator. So from that aspect, it points to a more benign outlook for inflationary pressures. Perhaps a small negative for the dollar but fairly small," he added.

For story on the U.S. data, see [ID:nN28288464].

In early New York trading, the euro was up 0.2 percent at $1.5818 EUR=, less than a cent below last week's historic peaks at $1.5904. Against the yen, the euro rose to 157.48 EURJPY=.

The euro was also boosted by inflation-focused comments from a euro zone policy-maker, which strengthened the view that the European Central Bank is unlikely to cut rates any time soon.

Speaking after data from four German states pointed to a likely inflation pick-up in the euro zone's biggest economy and thus in the 15-nation bloc as a whole, ECB Governing Council member Axel Weber said price pressures were alarmingly high.

Against the yen, the dollar was up 0.2 percent at 99.78 yen JPY=, helped by gains in euro/yen after Weber's tough inflation talk.

Traders were also on high alert for rumors of more troubles at U.S. investment banks as the fallout from the credit crisis continues.

The U.S. currency had slipped in Asian trade on chatter that Lehman Brothers LEH.N could suffer a fate similar to the near collapse of Bear Stearns BSC.N, which hurt sentiment. Lehman called the rumors "totally unfounded." (Additional reporting by Nick Olivari; Editing by Andrea Ricci)