Tue Jan 29, 2008 6:46am EST
(Changes byline, updates prices, adds quotes)
By Simon Falush
LONDON, Jan 29 (Reuters) - The dollar steadied against a basket of major currencies on Tuesday, with investors expecting further significant monetary easing this week from the Federal Reserve as it seeks to head off a U.S. recession.
The Fed lowered rates by 75 basis points to 3.5 percent in an inter-meeting move last week, and is expected to cut again by as much as 50 basis points when its two-day scheduled meeting ends on Wednesday.
Weaker than expected U.S. housing data on Monday backed the case for growth-boosting monetary easing.
Expectations of steep Fed cuts boosted equities on Tuesday -- as lower rates can make stocks a more attractive investment relative to bonds while lowering companies' borrowing costs.
But in currency markets the mood remained cautious, with relatively range-bound trading.
"It's in limbo at the moment with markets pricing in a 50 basis point cut which is stabilising the equity markets," said Chris Turner, head of FX strategy at ING.
"Interest rate differentials would point to the euro trading at $1.52 but this is not a normal environment. There's significant event risk with the Fed decision and payrolls on Friday, but once the dust settles the dollar will come a lot lower."
By 1118 GMT, the dollar was steady against a basket of major currencies .DXY. The euro was steady at $1.4775 <EUR=> and at 158.00 yen <EURJPY=>.
The dollar was buying 106.93 yen <JPY=>, having recovered from last week's near three-year low of 104.95 yen.
Markets showed little reaction to President George Bush's final State of the Union address on Monday in which he sought to ease concerns about the U.S. economy and urged Congress to pass a $150 billion stimulus package.
Worries about how hard a U.S. recession would hit the global economy have led investors to unwind risky positions such as carry trades, in which the low-yielding yen is used to fund holdings of higher-yielding assets and currencies.
Any more signs of weakness in reports on U.S. jobs and manufacturing due later this week are expected to sting the dollar, stocks and carry trades.
"There may be an expectation that enough has been done to stave off recession (but) numbers such as the non-farm payrolls on Friday could of course serve to derail this," CMC Markets said in a research note.
"Failure to meet with the modest expectations of analysts will again underline the fundamental flaws that the world's largest economy is currently experiencing."
Tuesday features December durable goods data at 1330 GMT and January consumer confidence at 1500 GMT.
(Editing by Ruth Pitchford)