NEW YORK (MarketWatch) -- The dollar fell against the Japanese yen and other major currencies Tuesday, weighed down by data showing that U.S. housing starts plunged to a record low and ahead of a widely expected interest-rate cut by the Federal Reserve this afternoon.
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 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, fell 0.5% to 81.90, down from 82.02 in North American trading late Monday.
The dollar lost 0.8% against the Japanese currency, retreating to 89.83 yen from 90.82 yen. The dollar touched a 13-year low below 89 yen last week.
Housing starts plunge
In economic news, housing starts plunged 18.9% to a seasonally adjusted annual rate of 625,000, the lowest since the Commerce Department began keeping records in 1959. See Economic Report.
Separately, U.S. consumer prices fell in November at the fastest rate since 1932, the Labor Department reported Tuesday.
The U.S. consumer price index fell by a seasonally adjusted 1.7%, the Labor Department reported Tuesday, the biggest drop since the government began adjusting the CPI for seasonal factors in 1947.
On a non-seasonally-adjusted basis, the CPI fell by 1.9%, the biggest decline since January 1932, at the nadir of the Great Depression. Read more.
The dollar has skidded in recent weeks, pressured by a renewed focus on the worsening outlook for the U.S. economy and the potential for aggressive Fed measures.
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 higher against the greenback to $1.3715 compared with $1.3679 late Monday.
Earlier Tuesday, the euro came under pressure 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.
The British pound gained 0.2% to $1.5335, up from around $1.5264.
