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FOREX-Dollar slips as focus turns to expected US rate cut

(Adds quotes, updates prices)

NEW YORK, Dec 10 (Reuters) - The dollar slipped against most major currencies on Monday, reversing its recent strong gains ahead of a widely expected Federal Reserve interest rate cut this week.

Analysts are fully pricing in a quarter percentage-point easing in the Fed's benchmark rate to 4.25 percent when the central bank meets on Tuesday. But perceived chances of a bigger move have fallen to one-in-five from around 50-50 a week ago FEDWATCH.

“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 midday New York trading, the euro was up 0.3 percent at $1.4705 EUR=. 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.

Against the yen, the euro was up 0.4 percent at 164.30 yen EURJPY=.

“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 and not cut them,” he added.

Comments on Monday by ECB Executive Board Member Juergen 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. For more, click on [ID:nL10620494].

The dollar was little changed against the Swiss franc at 1.1280 francs CHF=, while sterling rose 0.7 percent to $2.0459 GBP=, boosted by strong UK data.

Against the yen, the dollar was flat at 111.71 JPY=. 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 Bank UBS UBSN.VX 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 half percentage-point rate cut.

Data on U.S. pending home sales for October, released on Monday, showed an unexpected gain and gave the dollar a modest boost. [ID:nN10407248]. Analysts said the report further backed the view of a modest rate cut on Tuesday.

Markets have recently pared back aggressive U.S. rate cut forecasts, with analysts citing considerably more optimism that Fed action will be enough to prevent a more severe fallout from market volatility.

A U.S. government plan unveiled last week to limit potential mortgage defaults also stirred hopes that the economy’s downturn will be contained.

“We believe this confidence may be misplaced. Fed action thus far has done little to reverse underlying weakness in U.S. housing markets or offset financial market stresses,” said CitiFX in its latest research note.

“Against this backdrop it may be difficult for the Fed to contain volatility and there is likely significant scope for policy-makers to disappoint markets.” (Editing by Andrea Ricci)

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