Dollar gains on ECB rate cut hopes

By Daniel Bases

NEW YORK (Reuters) - The U.S. dollar extended a one-month high against the euro on Tuesday ahead of an expected interest rate cut by the European Central Bank and on news of the biggest contraction in the U.S. trade deficit in 12 years.

U.S. stocks were mixed, with gains in energy-related shares providing support after oil prices rebounded on Saudi Arabia's decision to cut output and cold weather hit the United States, although profit taking hit oil and shares later slipped a bit.

European stocks fell for a fifth straight session on intensifying concerns about the global economic slump that is expected to lead the ECB to cut its benchmark interest rate half a percentage point to 2.0 percent at Thursday's meeting.

"The euro should spend the day trying to resist the negative sentiment being placed upon it, however the current trend suggests this will be a difficult task," said Sacha Tihanyi, currency strategist at Scotia Bank in Toronto, in a research note.

ECB President Jean-Claude Trichet said on Tuesday the euro zone economy faces pressing challenges and cannot afford to let down its guard, adding "a lot of work remains to be done" to address the financial crisis.

Hopes that Washington would work speedily on a plea by U.S. President-elect Barack Obama for the remaining half -- $350 billion (240 billion pounds) -- of financial rescue funds to stabilise credit markets helped underpin U.S. stocks.

"Obama is in a much better position to work with Congress than the previous administration," said Gail Dudack, chief investment strategist at Dudack Research Group in New York. "The market wants to see some very pragmatic action, and Obama is trying to do that."

MARKETS