Dollar Slips Ahead of Fed Rate Decision

The dollar retreated against most major currencies, reversing some recent strong gains ahead of an expected Federal Reserve interest rate cut this week.

Analysts are fully pricing in a 25-basis-point easing, from 4.50 percent, when the Fed meets Tuesday. But chances of a bigger move have fallen to one-in-five from around 50-50 a week ago.

"The market is front-running the expectation that the Fed is going to cut and we expect the dollar to remain pretty much weak before the FOMC (Federal Open Market Committee) decision," said Boris Schlossberg, senior currency strategist, at DailyFX.com in New York.

In New York trading, the euro was up 0.4 percent at $1.4712. It got a boost last week as comments by European Central Bank President Jean-Claude Trichet left open the possibility of higher rates next year and added to those gains on Friday despite a fairly solid U.S. payrolls number.

Against the yen, the euro was up 0.4 percent at 164.33 yen.

"The ECB has fairly laid out that they're not turning dovish any time soon," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.

"We had some expectations the previous week that rate cuts will actually be bullish for the U.S. dollar, but that seems to be evaporating now that the ECB may at least try to keep rates on hold," he added.

Comments on Monday by ECB Executive Board Member Jurgen Stark saying euro zone inflation could be higher in 2008 than indicated in the ECB's latest projections last week also bolstered the view that the bank is not likely to ease any time soon.

The dollar fell 0.1 percent against the Swiss franc to 1.1271 francs, while sterling rose 0.7 percent to $2.0452, boosted by strong U.K. data.

Against the yen, the dollar was flat at 111.71. Earlier, it hit a one-month high around 111.88 yen, according to Reuters data, but came back down after a $10 billion subprime write-down by Swiss BankUBS fanned concerns about the health of the global financial sector.

Nonetheless, the dollar remained on relatively firm footing -- about four yen above last month's 2-1/2 year lows near 107.20 -- after stronger-than-expected U.S. jobs data on Friday dampened expectations of a 50-basis-point U.S. rate cut.

Data on U.S. pending home sales for October, released Monday, showed an unexpected gain and gave the dollar a modest boost.

"The pending home sales data are supportive of the dollar on the view that perhaps the worst of the housing slowdown is behind us. I think the market just wants to see that the housing market will no longer continue to drag the U.S. economy further down," said DailyFX's Schlossberg.

In recent sessions, the dollar had recovered against other major currencies as central banks in Canada and Britain have followed the Fed in cutting rates. A U.S. government plan to limit potential mortgage defaults has stirred hopes that the economy's downturn will be contained.