LONDON (MarketWatch) -- The. dollar steadied but remained in a fragile state as markets prepared for a widely expected interest-rate cut by the Federal Reserve later Tuesday.
Most Wall Street firms expect the U.S. central bank to slash its benchmark rate in half, to 0.5% from 1%, although many economists see scope for a prospective reduction all the way to 0.25%.
With rates already near zero, however, traders will be bracing for any signal the Fed is set to take extraordinary actions to boost the quantity of money in the world's largest economy. See full story.
A public statement from the Federal Open Market Committee, culminating a two-day meeting of the monetary-policy panel, is expected at 2:15 p.m. Eastern.
The dollar index a measure of the U.S. dollar against a trade-weighted basket of six currencies, improved to 82.28, up slightly from 82.02 in North American trading late Monday.
The dollar has skidded sharply in recent weeks. A renewed focus on the worsening outlook for the U.S. economy and the potential for aggressive Fed measures have served to keep the currency under pressure.
Meanwhile, the dollar's ability to rally on increases in risk aversion has faded, but some strategists said the potential for further declines in the greenback is limited.
"The harsh reality is that any perceived dollar weakness can't really be offset by switching into another currency as the likes of the euro and pound are both struggling too, while the threat of stagnation in Japan is also leaving the yen as a rather poor alternative," said James Hughes, a currency strategist at CMC Markets.
Strategists at UniCredit MIB in Milan, however, said other moves undertaken by the Fed, including plans to buy U.S. Treasurys in an effort to keep yields low, would likely spell further pressure for the dollar.
They see potential for the euro to test the $1.38 to $1.40 range, with room for the British pound to test the $1.55 area.
The euro edged lower ahead of the Fed meeting but remains near a two-month high against the dollar. The single currency traded hands at $1.3645, down from $1.3679 late Monday.
The euro added to losses after the Markit preliminary purchasing managers indexes for the euro zone's manufacturing and services sectors fell to record lows, signaling a deepening of the recession in the 15-nation region. See full story.
Meanwhile, sterling slipped back to $1.5211 from around $1.5264.
The dollar lost ground against the Japanese currency, retreating to 90.12 yen from 90.82 yen. The dollar touched a 13-year low below 89 yen last week.
