2008.12.1508:13:00UTC+00Dollar Drifts Lower Versus Euro Monday Morning

The dollar remained on the defensive versus the euro and loonie Monday morning in New York as the Federal Reserve prepared to kick off its 2-day policy meeting, which is likely to produce another interest rate cut on Tuesday.

The central bank is widely expected to cut its key short-term interest rate by 50 basis points to 0.5 percent in order to help stimulate the slumping economy and facilitate lending.

On the economic front Monday, traders will be treated to a report on the nation's industrial activity. Economist expect that industrial activity to slowed in November, reversing October's gain.

Also, the Empire State Manufacturing Survey for December is due out ahead of the opening bell on Wall Street. Economists expect the headline indicator to decline to -27.0 from -25.4.

The dollar dropped to a new 8-week low of 1.3520 versus the euro Monday morning, with traders betting that that the interest rate gap between the US and Eurozone will widen. While the Federal Reserver will likely slash interest rates on Tuesday, signals from across the Atlantic have indicated that the European Central Bank will hold of on interest rate cuts for now.

The dollar was little changed versus the yen Monday morning, staying between 90 and 91. The buck consolidated its efforts to stabilize after last week's 13-year low of 88.15.

Large manufacturers in Japan saw sentiment fall off sharply, the Bank of Japan said on Monday in its quarterly Tankan report for December, posting a diffusion index score of -24 for a 34-year low. That was slightly worse than analyst expectations for a -23 following a -3 reading in the September quarter, setting up the largest quarterly decline since 1974.

The dollar was also range-bound versus the sterling Monday morning, holding near 1.5000 as traders weighed another troubling report on the the UK housing situation.

UK's property website Rightmove said in a report that house prices continued to fall in December and expects asking prices to bottom up by the end of 2009.

The dollar drifted lower versus the petro-linked loonie as the price of oil moved back above $48 a barrel on expectations of a big production cut from OPEC. The dollar slipping to 1.2260 versus its Canadian counterpart, down a penny from its overnight level.

With the loss, the dollar moved back toward last Thursday's multi-week low of 1.2156.

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