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By Toni Vorobyova
LONDON Dec 31 (Reuters) - The dollar fell versus a basket of major currencies on Monday, keeping it on track for its worst annual performance in four years, as investors speculated that 2008 could bring slower U.S. economic growth and lower interest rates.
Following Friday's weaker than expected U.S. new home sales data, futures markets are now pricing in a 90 percent chance of a quarter percentage point Federal Reserve rate cut to 4.0 percent in January FEDWATCH.
In total, they have priced in nearly 100 basis points of cuts over the next nine months, making the dollar a much less attractive bet for yield-hungry investors.
The latest data from the Commodity Futures Trading Commission showed speculators reducing their net short dollar position to its smallest since June, suggesting there is plenty of scope for more dollar selling in the future.
"It's not looking particularly pleasant (for the U.S. economy) and it does mean that this dollar-bearish story is starting to re-establish itself," said Sebastien Galy, FX analyst at Dresdner Kleinwort.
"If you look at the IMM positioning you'll see that dollar shorts have been reduced ... so the potential for the dollar to continue to weaken has increased into next year," he added.
Against a basket of currencies the dollar was down 0.15 percent at 76.108, near an earlier three-week low of 75.962 .DXY and down over 9 percent for 2007 as a whole -- on track for its biggest annual fall since 2003.
By 1115 GMT, the euro was steady at $1.4714, having earlier hit a three week high of $1.4747 <EUR=>.
Credit concerns and geopolitical jitters -- related to instability in nuclear-armed Pakistan -- also kept investors away from carry trades, where they borrow at low rates in yen and Swiss francs to buy higher-yielding currencies.
The yen was up around half a percent versus both the euro and the dollar at 164.87 yen <EURJPY=> and 112.05 yen <JPY=>, respectively.
U.S. DATA WATCH
Thin liquidity exaggerated market moves, with Japan and several European countries shut on Monday and all major financial centres on holiday on Tuesday.
Any weakness in U.S. existing home sales at 1500 GMT -- the highlight of an otherwise bare new year's eve data calendar -- could give investors a further excuse to sell the dollar.
Median forecasts are for an unchanged annual rate of 4.97 million in November, but this is a volatile series and prone to large revisions.
"Recent soft U.S. economic figures, including home sales, jobless claims, consumer confidence and regional producer surveys have highlighted downside risks to the first tier economic releases out this week, including today's existing home sales data and the December non-farm payrolls and ISM (Institute for Supply Management) reports released after the New Year's Day holiday," Tullett Prebon said in a research note.
(editing by David Stamp)