(Recasts; updates prices, adds quote, byline)
By Kevin Plumberg
NEW YORK, Oct 30 (Reuters) - The dollar fell to a record low against the euro on Tuesday for the third consecutive session as the market looked ahead to the outcome of a Federal Reserve meeting with most expecting an interest rate cut.
Dealers seemed intent on heading into the meeting with hefty bets against the greenback, forecasting the Fed would signal that additional policy easing might be needed to stave off an economic recession.
Some analysts warned that in the near term, investors should be wary of a cloudy outlook in the Fed's post-meeting statement, which would leave the U.S. central bank's options open as to how to react to the economic situation.
"We anticipate that a 'hawkish' surprise could trigger a dollar-positive bout of risk aversion," Citigroup foreign exchange strategists said in a research note. "Conversely, a 'dovish' outcome could undermine the dollar."
The euro <EUR=> rose to a fresh record high of $1.4441, according to Reuters data, before settling at $1.4432. The euro has risen around 10 cents since mid-August, when a crisis in the U.S. subprime mortgage market began to spread to other areas of the economy.
The dollar index (.DXY: Quote, Profile, Research), a gauge of the greenback's value against a basket of major currencies, fell to a new low of 76.719 ahead of the Fed's decision on rates.
Against the Swiss franc <CHF=>, the dollar fell to the lowest in 2-1/2 years, at 1.1583 francs.
Sterling <GBP=> rose to a 26-year high of $2.0695 before backtracking to $2.0670, up 0.2 percent on the day.
While the chances of a half-percentage point rate cut by the Fed on Wednesday have largely evaporated in the last few weeks, the futures market still reflects expectations for about 40 basis points of policy easing by the end of January 2008.
A sliver of doubt that the Fed would reduce its benchmark interest rate for the second meeting in a row entered the market after an article in The Wall Street Journal earlier on Tuesday made the case that policy easing this week is not a sure thing.
Expectations seemed to gel, however, after a U.S. consumer confidence index hit its lowest level in two years, causing the dollar to cut its small gains on the day.
"Though the (consumer confidence) data will have little influence on the Fed, it will have some impact on market psychology, denting press-inspired incipient thoughts that the Fed might not cut rates" on Wednesday, said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.
The overall negative trend in the dollar is intact heading into the Fed meeting, analysts said.
"Now you're starting to see positions put back on ... where (investors) are buying euros and generally just selling the dollar," said Adam Fazio, currency strategist, at CIBC World Markets in New York.
Though commodity-related currencies have been the biggest gainers on the dollar this year, they took a breather on Tuesday as oil prices fell from record lows.
The U.S. dollar was virtually flat against the Canadian dollar <CAD=>, trading at C$0.9525 after touching a 47-year low of C$0.9513 on Monday. The Australian dollar <AUD=> dipped 0.1 percent to $0.9192.