Dollar Edges up But Fed Cut Looms

The dollar edged up against the yen and steadied against the euro Friday after soft data on U.S. consumers left traders scaling back currency bets ahead of an expected U.S. interest rate cut next week.

Investors expect the Federal Reserve to trim benchmark interest rates by at least a quarter percentage point on Tuesday but they pared bets on a heftier half-point cut.

"The question has been will a quarter-point or half-point cut from the Fed be adequate, and it looks as if markets are concluding that it will be," said Naomi Fink, senior currency strategist at BNP Paribas in New York.

Demand for the dollar has eroded recently as weak U.S. employment and housing data stoked fears that a credit squeeze sparked by losses on risky U.S. mortgage debt was putting the brakes on U.S. growth.

That set up a Fed rate cut and sent the dollar to a record low against the euro and a 15-year trough against a basket of currencies earlier this week.

Lackluster retail sales data initially weakened the dollar again on Friday but it recovered on a Reuters/University of Michigan report showing consumer confidence inched up in September.

"It's good to know that the U.S. consumer has not moved into hibernation yet," said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.

He said the data and a slew of options-related barriers helped slow the dollar's fall, prompting traders to move to the sidelines ahead of next week's Fed decision.

Midafternoon, the euro was unchanged at $1.3865. It hit an all-time record of $1.3927 on Thursday.

The British pound also fell 0.7 percent to $2.0085, battered after the Bank of England propped up British mortgage lender Northern Rock, the latest victim of tighter global liquidity.

Traders said the news provided a modest safe-haven flow into dollars as investors shed the British currency, which also hit a 14-month low against the euro.

Against the yen , the dollar rose 0.2 percent to 115.25. On the week, the dollar was up about 2 percent against the yen, which has been weighed down by speculation that weaker Japanese growth will keep interest rates stuck at 0.5 percent.

High oil prices and expectations of lower U.S. rates pushed the dollar to a 30-year low against its Canadian dollar counterpart at C$1.0284.

Analysts said the market was still broadly bearish on the dollar, especially with the European Central Bank seen as likely to lift euro-zone interest rates again by year end.

Rising rates in Europe and falling interest rates in the United States, where growth shows signs of sputtering, diminishes the appeal of dollar-denominated assets compared to those issued in euros.

"We are still on the bearish side of consensus and expect the Fed to cut rates by 50 basis points in what will be the start of an aggressive rate cutting regime," said Fink.

Whether the euro sets a new high en route to $1.40 next week will depend largely on what the Fed says about its interest rate move next week, said Brown Brothers' Chandler.

"The market still wants to take the dollar down, so as long as the Fed doesn't preclude another rate cut after September, the dollar sells off," he said. "If they cut by 25 basis points and say it's a one-off insurance policy, that would be more dollar positive."