FOREX-Dollar weighed down by rate expectations

(Recasts, updates prices)

SYDNEY, Jan 2 (Reuters) - The dollar gave ground to the euro on the first trading day of the new year with investors inclined to bet that coming U.S. economic news would be soft enough to argue for more interest rate cuts there.

The euro had crept back up to $1.4643 EUR= late in the Asian session from an early $1.4590 low. It had got as high as $1.4747 on Monday before the dollar bounced when figures on U.S. existing home sales proved not nearly as weak as bears expected. Still, expectations were that key U.S. data this week would be grim, reinforcing the case for more rate cuts from the Federal Reserve.

"It's always hard to determine clear trends when markets are so thin and volatile, but our sense is that investors are still looking for more U.S. rate cuts and thus inclined to short the dollar," said John Kyriakopoulos, currency strategist at NAB.

The dollar was also hovering at 111.65 yen JPY=, having finished at 111.52 in New York on Monday after falling from a 114.65 peak in just three trading sessions.

Against a basket of major currencies .DXY, the dollar dipped 0.27 percent to 76.434. Volumes were light, though, with Tokyo off on holiday until Friday.

"The problem is that the market is priced for weak data, so any sign of unexpected strength could squeeze people out of their short positions," cautioned Kyriakopoulos. "There are some major figures coming in the next few days and they could well set the dollar's direction for some time to come."

The U.S. Institute for Supply Management index for December is due later on Wednesday. Forecasts are for a slight dip to 50.5, from 50.8 in November, but estimates range from 49.0 to 52.0.

The market will also be interested in the minutes of the Federal Reserve's December policy meeting, when it decided to cut the funds rate by 25 basis points. That cut had been criticised by many in the market as too small and analysts will be keen to see the Fed's reasoning.

Thursday has figures on U.S. auto sales for December, a key barometer of consumer demand, while Friday sees the release of the December payrolls report. Median forecasts are for a modest rise of 70,000 in payrolls and anything weaker would tend to weigh down on the dollar. Traders were also keeping a wary eye on money markets to see if funding pressures had eased now that year-end had passed. Early signs were that interbank rates LIBOR had indeed dipped and risk spreads had narrowed somewhat, but analysts emphasised it was early days. "Financial markets appear to have got on top of the problem in the money market, at least for the moment," said Matthew Johnson, a senior economist at ICAP. "That's allowed swap rates to slip a little lower, as floating rates have fallen."

"But we'll only find out if the trouble is gone as the special year-end measures from the central banks run off," he added.

Both the Fed and the European Central Bank pumped huge amounts of cash into markets ahead of year-end but much of that will have to be repaid in coming weeks. (Reporting by Wayne Cole; Editing by James Thornhill)