By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar retreated on Tuesday as a plunge in consumer confidence and declining home prices raised doubts about the Federal Reserve's ability to hike interest rates to stem inflation.

The dollar struggled as the Fed began a two-day monetary policy meeting on Tuesday, with analysts expecting the U.S. central bank to hold interest rates steady at 2 percent. But traders will pore over the Fed's accompanying statement for clues about possible hikes later in the year.

Analysts said Tuesday's data complicated matters for the Fed as it tries to prevent the economy from slipping into recession while grappling with rapidly rising food and energy prices.

"The real domestic data in the U.S. is really bad and this has pushed the dollar lower ... but still the Fed is stuck because inflation expectations have risen," said Benedikt Germanier, chief currency strategist in the U.S. at UBS AG in Stamford, Connecticut.

"The real economy would demand that the Fed cuts interest rates right now, but it's not that easy especially with rising inflation pressures, which were caused in part by higher energy prices and a weak dollar," he added.

The euro earlier hit a session high of $1.5621 after data showed high prices sapped Americans' confidence in June and pushed expectations of future prosperity to an all-time low. Meanwhile, the headline consumer confidence number sank to a 16-year low.

By late afternoon trading, the euro was still up 0.3 percent at $1.5569. The dollar fell slightly to 107.75 yen from sessions lows at 107.37.

The dollar fell 0.4 percent to 1.0410 Swiss francs, with the franc benefiting from market talk that Swiss bank UBS (UBSN.VX: Quote, Profile, Research) was a takeover target for HSBC (HSBA.L: Quote, Profile, Research).