* Dollar supported by prospects of rate cuts outside U.S.
* Sterling falls to 2-year low on recession worry
* Weaker oil continues to lend support to dollar
By Chikako Mogi
TOKYO, Aug 25 (Reuters) - The dollar rose to a two-year high
against sterling on Monday after data last week showing Britain's
economy was stalling raised prospects of an interest rate cut by
the Bank of England.
Britain's gross domestic product was revised to show it was
unchanged in the second quarter from an initial estimate of 0.2
percent quarterly growth, the worst quarterly performance since
the second quarter of 1992.
The British data added to a gloomy economic outlook in the
euro zone, reinforcing views that the European Central Bank could
lower interest rates in the coming months.
"The market's near-term focus is sterling and oil, both of
which could keep the dollar firm," said a senior dealer at a
European bank.
"There is caution before this week's housing data, and that
may keep the dollar's gains limited, but there's also no reason
to actively sell the dollar," he said.
Sterling fell as low as $1.8405 <GBP=D4>, its lowest since
late July 2006. The fall in the pound also dragged the euro
lower, with the single currency trading down 0.6 percent against
the dollar at $1.4708 <EUR=>, but still holding above a six-month
low of $1.4630 hit last week.
Trading was thin with British markets closed for a holiday.
While the global economic slowdown and the outlook for
monetary easing outside the United States were supporting the
dollar, market participants remained sceptical about the dollar's
sharp gains due to persistent worries about the U.S. financial
system.
In addition to problems at U.S. mortgage finance companies
Fannie Mae <FNM.N> and Freddie Mac <FRE.N>, and speculation over
investment bank Lehman Brothers <LEH.N>, traders will also be
watching a slew of U.S. housing data due this week -- existing
and new home sales and two surveys of nationwide house prices.
"While the commodity markets are still volatile, they are no
longer going through a one-way decline. Dollar buying momentum
seems to be slowing under such conditions," wrote Masafumi
Yamamoto, head of forex strategy for Japan at Royal Bank of
Scotland, in a note.
The dollar is less correlated to commodities and instead the
greenback is becoming more sensitive to U.S. financial sector
woes and their impact on U.S. equity prices and bond yields, he
said.
The slide by sterling earlier on Monday added to an
unexpected buildup in short positions, possibly paving the way
for the currency to rebound, some traders said.
"While the overall tone remains solid, the dollar's recovery
is not smooth, as seen in the euro holding firmly above a recent
low amid growing optimism about the dollar," said a dealer at a
another European bank.
Oil prices fell on Friday in the biggest one-day slide since
2004 on weakening global demand and rising supply, and the
dollar's rebound reinforced its sell-off. Oil stayed below $115
<CLc1> a barrel on Monday.
Comments by influential investor Warren Buffett that he has
no bets against the dollar also added to the dollar's upward
momentum. []
The dollar's rise this month has been driven by players
unwinding bets on the global economy weathering the U.S. downturn
and the credit crisis. In the process, investors have sold the
euro, sterling, the Australian dollar and commodities.
The dollar inched up 0.1 percent against the yen to 110.09
yen <JPY=>.
(Additional reporting by Shinichi Saoshiro; Editing by Michael
Watson)
