TOKYO, Sep 18 Credit market jitters and concerns of a deeper U.S. growth slowdown kept st

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TOKYO, Sep 18 (Reuters) Credit market jitters and concerns of a deeper U.S. growth slowdown kept sterling and the dollar struggling on Tuesday, as players awaited the Federal Reserve's decision later in the session with expectations for a rate cut.

Sterling fell below $2 for the first time this month on Monday as funding problems at Northern Rock, Britain's fifth-biggest mortgage lender, fanned concerns other financial institutions could be hit by high interbank lending rates.

Northern Rock said on Monday it had not yet drawn any funds from an emergency facility it had arranged with the Bank of England.

The market expects the Fed to lower the benchmark fed funds rate by at least 25 basis points from 5.25 percent on Tuesday to help cushion the U.S. economy from the housing market slowdown.

The Fed last cut rates in June 2003, when the central bank lowered interest rates by 25 basis points to 1.00 percent.

Recent data including an unexpected fall in core retail sales, weaker-than-forecast industrial output and a drop in U.S.

payrolls have boosted the case for lower U.S. interest rates.

Market players were eyeing quarterly results from major U.S.

investment banks this week, starting with Lehman Brothers on Tuesday, to see the scope of impact from the credit squeeze.

"The dollar and sterling are struggling, but there won't likely be big moves ahead of the Fed meeting and the results from Lehman," said a dealer at a big Japanese bank.

Activity was also likely to be subdued as players returned from a long weekend, with the Japanese financial markets closed on Monday for a national holiday.

The dollar was flat from late U.S. trade near 115.00 yen.

The dollar's trade-weighted index against six major currencies was flat at 79.721, staying above the 15-year low of 79.302 hit last week.

Sterling eased 0.1 percent against the dollar to $1.9925 and also dipped 0.1 percent to 229.10 yen.

The single European currency barely budged near $1.3864 staying near $1.3930 hit last week, the highest since its launch in 1999.

The euro was also little changed near 159.45 yen.

Credit market jitters will continue to make investors wary of taking risks, weighing on higher-yielding currencies.


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