Data pushes dollar to record low vs euro

By Lucia Mutikani

NEW YORK (Reuters) - The dollar fell to a record low against the euro on Tuesday as an unexpected plunge in U.S. consumer confidence to near two-year lows raised expectations of another Federal Reserve interest rate cut next month.

This was the fourth straight session that the dollar tested all-time lows against the euro. Investors' perceptions of more monetary easing, a step that would further reduce the dollar's global yield appeal, were also supported by another report showing more weakness in the housing market.

"The drop below 100 (in consumer confidence) was just an ugly psychological number for the market and that pushed the euro way above the 1.40 level," said Boris Schlossberg, strategist at Forex Capital Markets in New York.

The Fed's quarter point cut in its benchmark overnight lending rate last Tuesday left the dollar on the defensive.

Interest rate futures are pricing in a roughly 95 percent perceived chance of a 25 basis point rate cut at the Fed's October meeting, up from 72 percent at Monday's close. The fed funds rate is at 4.75 percent.

The euro jumped to a record high of $1.4153 and was last trading at $1.4130, up about 0.3 percent on the day, according to Reuters data. The dollar also fell against the yen, trading at 114.38 yen, down 0.4 percent on the day.

"Underlying dollar weakness is still there, but I think the fact that the market corrected overnight also gave the euro a little more strength on the upside," said Meg Browne, a senior currency strategist at Brown Brothers Harriman in New York.

Earlier, the euro was unfazed by a report showing German Ifo business confidence survey surprised on the weaker side.

Analysts said the Ifo survey was yet another sign of a softening in the euro zone economy, a situation that hinted at steady interest rates there for the rest of 2007 and possible monetary easing early next year.

"We might see a cut starting early next year, but the market hasn't come to that idea, and that is helping to give the euro some support," said Browne.

Given this risk of an interest rate cut by the European Central Bank, analysts said the euro's rally against the dollar could be close to an end, but cautioned that much depended on U.S. economic data.

"It's not inconceivable for the euro to make a run to an all-time high around $1.4500, but should it reach those levels there will be so much rhetoric coming out of the euro zone," said Schlossberg.

On Monday, the government of French President Nicolas Sarkozy repeated its complaints that the euro's strength was eroding the competitiveness and productivity of firms.

"The euro rally is getting a little long in the tooth at this point. The euro strength itself is causing a tremendous amount of problems back home. At these levels it is trading on momentum and not so much on interest rate differentials," said Schlossberg.

The dollar rose against sterling, however, after a report in a British newspaper sparked worries over troubles in the UK financial sector arising from the credit crisis. Sterling traded at 2.0166, down 0.3 percent on the day.

The U.S. Conference Board's index of consumer sentiment fell to 99.8 in September, the lowest since November 2005 and down from 105.6 in August. The median forecast of economists polled by Reuters was for a slip to 104.0.