The dollar slid to a 15-year low against a basket of currencies on Monday after data showing U.S. employers cut jobs for the first time in four years stoked expectations for a hefty Federal Reserve rate cut this month.

Friday's data showing companies cut 4,000 jobs last month, the first such decline since August 2003, leading investors to see a bigger chance the Fed will cut rates by 50 basis points next week to protect the economy from the housing market crisis.

One in five primary dealers polled by Reuters now expect such a cut to 4.75 percent on September 18, while Fed fund futures put the likelihood above 80 percent in the aftermath of the jobs data.

There's a focus on how much the Fed will cut on September 18 and cyclical support for the dollar is collapsing, said Niels From, currency strategist at Dresdner Kleinwort.

From a technical perspective there's plenty of space to push (the dollar) lower and it could easily breach its all time low (versus the euro).

The dollar's trade-weighted index against six major currencies fell to 79.826, setting a 15-year low for a second session in a row. The euro was up 0.2 percent to $1.3790, moving back towards record highs above $1.3850 struck in July.


However the dollar strengthened a quarter of a percent to 113.63 versus a broadly weaker yen as weak data from Japan reinforced views that the Bank of Japan is unlikely to raise interest rates from 0.5 percent next week.

Data showed Japan's economy shrank 0.3 percent in April-June from the previous quarter, against an initial estimate of 0.1 percent growth.

If signs emerge that the global market turmoil has a negative effect on the real economy, the BOJ might be forced to put off a rate hike this year, said Takeshi Minami, chief economist at Norinchukin Research Institute.

Traders said short positions in dollar/yen, put on with tight stops in the wake of payrolls on Friday, were being squeezed out. This enabled the dollar to reverse some of Friday's 1.7 percent slump against the Japanese currency.

The yen also fell 0.4 percent versus the euro to 156.74.


Analysts believe the Fed may opt for an unusually big cut in rates from the current 5.25 percent to help restore confidence among banks that have become reluctant to lend to each other, leading to strains in money and credit markets.

Monday features U.S. consumer credit data at 3:00 p.m. EDT, as well as speeches by Fed policymakers including San Francisco Fed President Janet Yellen and Dallas Fed's Richard Fisher.

Investors will look to comments from ECB President Jean-Claude Trichet who is due to speak in Basel at 1145 GMT at the Bank of International Settlements bi-monthly meeting for clues on the outlook for euro zone interest rates.

Most probably Trichet will just reiterate that central banks are watching the situation closely and will try to offer some comforting words about the health of the global economy and bank's readiness to act, said Bear Stearns in a note to clients.