LONDON (AFP) — The dollar fell on Tuesday to a fresh two-month low against the euro as traders took the view that the US Federal Reserve would cut interest rates again later in the day.
The euro rose as high as 1.3738 dollars in earlier Asian deals, but in late morning trading in Europe it stood at 1.3643 dollars, down from 1.3695 dollars late in New York on Monday.
Against the Japanese currency, the dollar dipped to 90.31 yen from 90.63 yen.
Later on Tuesday, the US Federal Reserve was expected to cut its base rate by at least 50 basis points to 0.50 percent, which would be an all-time low, although some analysts forecast a steep 0.75 percentage point cut.
Falling interest rates tend to dampen currencies because they make them a less attractive investment in terms of yields.
"Today's Fed decision will probably bring an interest rate cut of 50 basis points," said Commerzbank analyst Ulrich Leuchtmann.
"That is likely to engender a general sense that the Fed will be done on rates.
"For the dollar, the rate cut therefore does not necessarily have to become an additional downside factor."
The Fed is widely forecast to trim its key lending rate from the current level of 1.0 percent, following a raft of gloomy economic data.
"I think they will go for a cut of at least 0.5 percentage points," said Saburo Matsumoto, chief forex strategist at Sumitomo Trust and Banking.
Matsumoto said it would be possible for the US central bank to slash rates by as much as 0.75 percentage points to 0.25 percent, which would be even lower than Japan's rock-bottom official borrowing costs of 0.3 percent.
"The market has already factored a cut in," he said, while arguing it was questionable what impact another rate cut would have on the economy.
Market sentiment is improving for the euro as investors expect the gap between European and US interest rates to widen, he added.
The European Central Bank's benchmark rate currently stands at 2.50 percent following three successive cuts since early October and most analysts have forecast another reduction in mid-January.
The British pound pulled back to 1.1168 euros, after slumping on Monday to a record low of 1.1085 euros on mounting economic gloom. That was the lowest level since the creation of the European single currency in 1999.
British 12-month inflation fell by less than expected to 4.1 percent in November from 4.5 percent in October as fuel prices sank, official data showed on Tuesday. Market expectations had been for a sharper drop to 3.9 percent.
In trading in London on Tuesday, the euro changed hands at 1.3643 dollars against 1.3695 dollars late on Monday, at 123.16 yen (124.14), 0.8958 pounds (0.8951) and 1.5792 Swiss francs (1.5871).
The dollar stood at 90.31 yen (91.63) and 1.1581 Swiss francs (1.1586).
The pound was at 1.5226 dollars (1.5302).
On the London Bullion Market, the price of gold firmed to 833.20 dollars an ounce from 826 dollars late on Monday.
