FOREX-Dollar cruises toward best month in 2-1/2 years

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NEW YORK, April 25 (Reuters) - The dollar headed for its best monthly performance in 2-1/2 years against a basket of major currencies on Friday, boosted by a growing view that the Federal Reserve may stop cutting interest rates.

U.S. economic data this week showing resilience in some sectors, such as the labor market, contrasted with a sharp drop in business sentiment in Germany.

That news, combined with European Central Bank policy-makers' comments highlighting worries about excess volatility in foreign-exchange trading, dampened expectations for a rate hike in the euro zone and hurt the euro.

"It's a major shift in sentiment regarding the outlook of interest rates and we may see the dollar strengthening until the next Fed meeting," said Mark Meadows, a market analyst at Tempus Consulting in Washington.

The perceived odds of the Fed keeping its benchmark interest rate unchanged at 2.25 percent at its meeting next week rose to about 26 percent, futures trading shows FEDWATCH. Just over a week ago, futures were evenly split between a 25- and a 50-basis-point cut.

Meanwhile, traders are paring bets that the ECB's next move will be a hike in benchmark interest rates.

"Europe is really not insulated and its economy is beginning to show signs of a slowdown," Meadows said. "While most people now believe the Fed is about to end its easing cycle, a growing number of investors believe the ECB may have to start cutting rates really soon."

In late trading in New York, the euro was down 0.6 percent at $1.5598 <EUR=>, after dropping as low as $1.5555 earlier, a three-week low.