LONDON, Jan 9 (Reuters) - The dollar inched up against major currencies on Tuesday ahead of keenly-awaited comments from the head of the Federal Reserve later this week, while sterling slumped as renewed fears about the British retail sector stoked expectations of UK interest rates.
Sterling hit a record low against the euro and nine-month trough against the dollar after Marks & Spencer (MKS.L: Quote, Profile, Research), Britain's largest clothing retailer, reported a 2.2 percent fall in like-for-like sales in the three months to Dec. 29.
M&S shares tumbled as much as 20 percent, and UK rate futures tilted toward pricing a 60 percent chance from around 50-50 that the Bank of England will cut rates a quarter point to 5.25 percent on Thursday.
The dollar crept up against a basket of major currencies as traders covered some of their short dollar positions ahead of Fed chief Ben Bernanke's speech on Thursday.
It will be Bernanke's first public remarks on the economy this year. Grim U.S. manufacturing and employment data recently have intensified the threat of recession and likelihood the Fed will cut rates by half a percentage point later this month.
"If the dollar can't weaken on dovish or pessimistic comments from Bernanke, then I think that would be a very important price signal," said Paul Mackel, senior currency strategist at HSBC in London.
"You should be cautious about getting overly short the dollar at current levels. Maybe short-term dollar positions are (ripe) for squeezing."
At 1155 GMT the dollar was up 0.1 percent against a basket of six major currencies at 76.18 .DXY, in large part thanks to a 0.5 percent rise against the yen to 109.45 yen <JPY=>, pulling away from a six-week low of 107.86 yen on Friday, according to Reuters data.
The euro was steady against the dollar at $1.4710 <EUR=>, but was up almost 0.5 percent against the UK pound at 74.90 pence <EURGBP=>, having reached a record post-1999 launch peak of 74.99 pence.
Sterling fell 0.4 percent against the dollar to $1.9640 <GBP=>, trading as low as $1.9620, a low not seen since April.
A report in the Wall Street Journal that the Bush administration is considering a tax break plan for households and businesses [ID:nT247580] also lent the dollar some support.
The dollar has been held back so far this year by worries of a U.S. economic slowdown and market expectations for further Fed easing. Renewed fears over the housing market and spillover into the financial sector sent U.S. shares sharply lower on Tuesday.
Markets are pricing in as much as a 70 percent chance that the Fed will slash interest rates by a hefty half-point later this month to 3.75 percent. They see rates down to 3 percent or lower by the end of the year.
With no first-tier data due on Wednesday, the immediate focus will be on a speech by St Louis Fed president William Poole at 1430 GMT.
Sterling, meanwhile, came under renewed pressure one day ahead of the Bank of England's rate decision.
"There are sound reasons for believing the BoE could move again this week," said Michael Gallagher, head of strategy at research firm IDEAGlobal.
"The economic ill winds blowing from across the Atlantic are intensifying," he said, noting that UK credit conditions are deteriorating, the housing market is softening and the manufacturing sector is slowing noticeably.
The ECB also sets interest rates on Thursday, and is widely expected to leave its refi rate on hold at 4 percent and stick to its hawkish tone.
The other notable mover among major currencies on Tuesday was the Australian dollar, which rallied to a one-month high of $0.8858 <AUD=> after surprisingly strong Australian retail sales figures and another record high in gold just shy of $900 an ounce <XAU=>. (editing by David Christian-Edwards)
Reuters journalists are subject to the Reuters Editorial Handbook which requires fair presentation and disclosure of relevant interests.
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