Dollar drifts lower on U.S. rate outlook; sterling up

Markets have priced in the risk of another half percentage point rate cut at the Fed's March meeting, which would further erode the dollar's appeal to global investors. The perceived chances of a 50 basis point easing stood at 82 percent on Thursday, slightly down from previous sessions after data on Wednesday showed accelerating U.S. inflation.

In Britain, stronger-than-expected UK retail sales data gave sterling a boost as investors scaled back the likely extent of interest rate easing by the Bank of England this year.

In contrast, the Fed said in its minutes on Wednesday that it was worried the U.S. economy would face further setbacks even after a series of aggressive rate cuts and sharply lowered its forecast for U.S. growth in 2008.

"The market is in a consolidation mode since the dovish Fed minutes, although the dollar is still weaker," said Shane Enright, a currency strategist at CIBC World Markets in Toronto.

"Moves overnight have been reasonably minor and markets are awaiting fresh news for direction," he added.

In early Mew York trading, the dollar was down nearly 0.2 percent against a basket of major currencies at 75.959 .DXY. The euro edged up against the dollar to $1.4739.

Investors are scaling back expectations for European Central Bank rate cuts this year as French inflation rose to its fastest annual pace in at least 11 years,

Futures market are now pricing in only a 1-in-4 chance of a rate cut from 4 percent by June. Just last week, a June rate cut had been fully priced in.

Against the Japanese currency, the greenback was down slightly at 108.09 yen, while the euro reached a roughly five-week high near 159.60 yen.