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By Veronica Brown
LONDON, Aug 6 (Reuters) - The dollar weakened across the board on Monday, hitting a 15-year low against a basket of currencies as investors speculated rising credit market risk and softening U.S. data could force a cut in U.S. interest rates.
The dollar index (.DXY: Quote, Profile, Research) fell below the psychologically key 80.0 level, while the euro rose to within sight of its record high above $1.3850 struck two weeks ago.
The deepening malaise in global credit markets sent U.S. stocks tumbling on Friday, a move encouraged by a weaker-than-expected U.S. July employment report.
The spillover continued into the weekend with the resignation of the president of Bear Stearns which had said on Friday fixed income markets were going through their roughest patch in over 20 years.
European equities posted early losses on Monday after falls in Asia overnight, while government bonds were flat after rising early.
Broad-based dollar selling in currency markets was accompanied by unwinding of some carry trades, where investors sell low-yielding currencies for riskier, higher-yielding units. The yen and Swiss franc rallied.
"The dollar went into the weekend with already a soft tone and people are a little bit concerned that due to the credit market crisis maybe the Fed could cut rates," CBCM currecny strategist Antje Praefcke said.
"We have yen and Swissie stronger on some kind of risk aversion but the credit issue is still the underlying concern of the market," she added.
At 0945 GMT, the dollar index was down a touch on the day at 80.09, having earlier traded as low as 79.957, according to Reuters data.
The dollar pared some of its losses against the yen to stand 0.25 percent lower on the day at 117.76 yen <JPY=>, having hit a earlier four-month low around 117.20 yen.
The euro was up 0.3 percent at $1.3818 <EUR=>, while the dollar was also down 0.4 percent against the Swiss franc at 1.1853 <CHF=>, having earlier fallen to 1.1820 francs, a level not seen since April 2005.
"The dollar's under pressure and carry's under pressure," said Laura Ambroseno, currency strategist at Morgan Stanley.
"Investors are taking risk off the table," she said, adding that Morgan Stanley is recommending that its clients sell dollars for Japanese yen and Swiss francs.
While credit market jitters are the dominant drivers of financial markets, the Federal Reserve's policy meeting on Tuesday will be closely watched for the accompanying statement.
The Fed is widely expected to leave rates on hold at 5.25 percent. Analysts also generally expect it to reiterate that inflation remains its primary concern, but also to give a nod to the recent financial market volatility.
But fed funds futures are now pricing in around a 40 percent chance of the Fed cutting rates by 50 basis points before the end of the year. A month ago, the Fed was seen on hold for the rest of the year.
Fifty basis points of easing by the end of March is now almost fully priced in. A month ago, markets barely attached any likelihood to any rate cuts at all.
After July's non-farm payrolls report on Friday, which showed the slowest pace of job creation since February and a tick up in the unemployment rate, Barclays Capital abandoned its call for a Fed rate hike by the end of the year.