SYDNEY, Sept 17 (Reuters) - The U.S. dollar was mostly steady on Monday, but remained uncomfortably close to record lows versus the euro on expectations of an imminent cut in U.S. interest rates, with more to come in the months ahead.
Early on Monday, the euro <EUR=> was standing at $1.3858, a little below New York's late $1.3877 but within striking distance of last week's all-time highs around $1.3927.
Traders reported good support around $1.3845, which should hold while investors waited to see what the Federal Reserve would deliver at its policy meeting on Tuesday.
Expectations are high it will cut the 5.25 percent funds rate by at least 25 basis points to help cushion the economy from the impact of the credit squeeze and housing slump. "With key U.S. economic data printing softer and with inflation having eased in the past few months, the case for a lowering of the Fed funds rate would be building even in the absence of the recent strains in the financial system," said Darren Gibbs, chief economist at Deutsche Bank.
"When these strains are factored in, the case for a 50 basis point cut appears quite persuasive," he added.
Still, Gibbs noted that Fed officials had sounded less than unanimous on how much of an easing was warranted, suggesting a more cautious 25 basis point move was a real possibility.
Former Fed Chairman Alan Greenspan added to the mixed message on Sunday, saying the U.S. housing slump was set to be worse than anyone currently expected, while also cautioning the present Fed chief not to ease too aggressively because of the increasing threat of future inflation.
"If we were to see a smaller cut, the recent improvement in risk sentiment would likely come under some pressure, especially if the statement were to contain less dovish tones," concluded Deutsche's Gibbs.
Tentative signs of a revival in risk appetite last week helped equities rally across the globe, while hurting the yen as investors re-established carry trades.
Carry trades -- borrowing in yen to buy higher yielding currencies -- saw the Japanese unit hit a one-month low on the Australian dollar <AUDJPY=R> last week.
On Monday, the U.S. dollar was buying 115.25 yen <JPY=>, steady from New York's close on Friday but well above last week's 112.58 trough. Activity was very light with Tokyo on holiday on Monday for respect the aged day.
Sterling was still nursing losses after falling sharply late last week when the Bank of England was forced to bail out British mortgage lender Northern Rock. The pound stood at $2.0058 <GBP=> on Monday, having slid from a $2.0365 peak in the wake of the news.
Nevertheless, analysts felt the broader trend was still for a weaker U.S. dollar given the risks to the U.S. economy were seen as greater than for the eurozone and Asia.
Measured against a basket of major currencies, the dollar <=USD> touched a 15-year low of 79.30 last week before bouncing modestly to 79.72.
"We would expect the dollar to come under renewed selling pressure and stretch towards the 1992 lows of 78.20," said Besa Deda, a senior strategist at Commonwealth Bank.