FOREX-Dollar slides on sharp fall in US business index

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By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 21 (Reuters) - The dollar fell to two-week lows on Thursday after data showing a much sharper-than-expected contraction in U.S. Mid-Atlantic factory activity this month made investors brace for more Federal Reserve rate cuts.

Futures markets have almost fully priced in another half percentage point rate reduction at the Fed's March meeting, up from an 82 percent chance seen before the sharp fall in the Philadelphia Federal Reserve's business index . FEDWATCH

More U.S. rate cuts would further erode the dollar's appeal to global investors, particularly when central banks in Europe and Australia are keeping rates steady or raising them.

"(The Philadephia Fed survey) is a big black eye for dollar bulls. It's really starting to confirm the notion that the U.S. economy is slowing considerably," said Boris Schlossberg, senior currency strategist, at DailyFX.com in New York.

The euro rose to two-week highs against dollar at $1.4800, according to Reuters data, but traded back down to $1.4788 <EUR=>, still up half a percent on the day. The dollar also dropped to two-week lows against a basket of major currencies at 75.686 .DXY.

Against the yen, the dollar fell 0.4 percent to 107.60 yen <JPY=>.

Minutes from the Fed's last policy meeting showed on Wednesday that policy makers are worried about still slower U.S. growth even after their series of aggressive rate cuts. The Fed also lowered its U.S. growth forecast for 2008.