Dollar dips as more Fed rate cuts loom

NEW YORK (Reuters) - The dollar fell against most major currencies on Monday, with dealers anticipating that the Federal Reserve will have to cut interest rates again this week to boost U.S. economic growth.

The Fed will announce its rate decision on Wednesday at the end of a two-day policy meeting. Last week, officials slashed benchmark lending rates unexpectedly by three quarters of a percentage point, weighing on the dollar.

Interest rate futures reflect a roughly 90 percent perceived chance of a half-point rate cut by the Fed this week, with data showing falling sales of new U.S. homes in December stoking fears of an imminent economic recession.

"A 50-basis-point rate cut is likely, but whether the Fed cuts by 25 or 50, the story is still the same: the U.S. dollar is rapidly losing interest rate support," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto.

There are 100 basis points in a percentage point.

A half-point cut would bring the federal funds rate to 3 percent, or 100 basis points below the euro zone's refinancing rate, making the dollar less attractive to global investors.

Midafternoon, the euro was up 0.7 percent at $1.4775, rising for the fourth session in the last five. Against the Swiss franc, the dollar was down 0.7 percent to 1.0895 francs.

The euro also gained 0.9 percent to 158.07 yen while the dollar rose 0.2 percent to 106.96 yen.

DOLLAR BECOMING A FUNDING CURRENCY

Short-term U.S. interest rates are already among the lowest in the developed world, encouraging investors to borrow in dollars and buy another currency to profit on the difference in yields, which would put pressure on the greenback.

The Fed has already cut rates by 175 basis points since September and could slash 50 more this week. That's prompted Brown Brothers Harriman strategists to argue that "the dollar has already become a financing currency, joining the ranks of the yen and Swiss franc."

Indeed, the Australian dollar, which carries a yield of 6.75 percent, was up more than 1 percent at US$0.8883.

In addition to the Fed policy meeting, investors will have to navigate this week a calendar chock-full of U.S. economic data, including gross domestic product for the fourth quarter on Wednesday and January's non-farm payrolls report on Friday.

December's new home sales data came in lower than expected on Monday, heaping more weight on the dollar.

"The housing data is not good. There's no other way to look at it," said Tu Packard, senior economist with Moody's Economy.com in West Chester, Pennsylvania. "The market is expecting more rate cuts, so there will be downward pressure on the dollar."

Also ahead is President George W. Bush's final State of the Union address. Bush and congressional leaders have been trying to thrash out a $150 billion stimulus package to help limit the economy's downturn this year from a reeling housing market.

If the plan helps spark an economic rebound, the dollar's fortunes could rise, although that could be months away.

"The euro will ultimately make another push toward $1.50 and we think it will get to $1.51 before you start to see a less hawkish European Central Bank," said Mike Moran, currency strategist at Standard Chartered in New York.

"But we haven't reached that saturation point yet and probably won't until the second quarter."

(Additional reporting by Kevin Plumberg; Editing by James Dalgleish)