US dollar hits 2-1/2-month low vs euro before Fed

The U.S. dollar fell to a two-and-a-half-month low against the euro on Tuesday after more bad news from the housing sector and a record decline in consumer prices added to speculation that U.S. interest rates will fall closer to zero.

The Federal Reserve is widely expected to cut interest rates by at least 50 basis points from the current 1 percent at the end of its policy meeting later on Tuesday. The interest-rate futures market are also showing about a 64 percent chance the Fed could slash rates by 75 basis points.

"The record declines in U.S. inflation and housing data will prompt the Fed to cut one final time this afternoon before engaging in a campaign of 'quantitative easing' in the new year," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon in New York.

"While the market expects a 50-basis-point cut, the Fed may deliver the larger whisper number of 75 basis points to punctuate the end to the rate-cut cycle," he said. "Both developments are expected to be U.S. dollar negative."

In midday trading in New York, the euro was up 0.8 percent on the day against the dollar at $1.3824 after hitting a high of $1.3842, the highest level since early October. The euro had earlier come under pressure after purchasing managers' surveys painted a bleak outlook for the region's economy.

George Davis, senior currency strategist at RBC Capital Markets in Toronto, said the euro's break of its 100-day moving average around $1.3775 brought in new buyers.

"Now that we've chiseled above that level, you see the momentum players coming in and bidding the euro higher," he said.

YEN NEAR 13-YEAR HIGH

The ICE futures U.S. dollar index .DXY, which tracks the value of the greenback against a basket of six currencies, fell 0.8 percent to 81.473, after falling as low as 81.395, the worst level since mid-October.

The dollar fell below 90 yen as investors cut their exposure to risk after Goldman Sachs posted its first loss as a public company.

The yen's rise to near a 13-year high increased speculation that Japan may intervene to stem the currency's strength, which threatens the competitiveness of its exports.

The dollar fell 0.9 percent to 89.89 JPY, after dropping to session lows at 89.73, near a 13-year low of 88.10 yen reached last week.