Dollar rally tempered by rate cuts

NEW YORK (CNNMoney.com) -- The dollar's recent rally ran into headwinds Monday as traders weighed the widening gap between the U.S. central bank's lending rates and other rates around the globe.

Monday afternoon, the dollar fell versus the 15-nation euro. One euro bought $1.5497, up from $1.5418 late Friday. The dollar gained on the British pound. The pound fell to $1.9720 from $1.9744 from Friday, while the dollar held steady against the yen, buying ¥105.26 in New York, same as last week.

"The dollar's been rallying because the Fed's rate cut expectations have been reversed," said MKM Partners chief economist Michael Darda. "The dollar's undergoing a correction, but it's temporary and not permanent."

The Federal Reserve cut its key lending rate to 2% last week, but it also hinted at a pause in its rate-cutting campaign. Though lower interest rates can help boost the economy, they also tend to be inflationary. Rate cuts can weigh on a nation's currency as investors move their funds to other countries where they can earn better returns.

"The fundamentals for the dollar don't look particularly good with the Fed rates so much lower than everywhere else in the world."

The European Central Bank and the Bank of England, both of which meet Thursday, currently hold their rates much higher than in the United States - 4% and 5%, respectively. They are both widely expected to keep rates steady, which could help boost the euro against the dollar.

The dollar has gotten a boost recently by some positive economic data. Though the Labor Department reported there were another 20,000 jobs lost in April, the number was well below the 75,000 lost jobs that economists expected. Also, the Commerce Department reported that a measure of consumer spending rose more than expected in March, and a key measure of service sector performance released Monday showed the first growth in the non-manufacturing sector in five months.