The dollar fell on Wednesday as concern crept back into the market that the Federal Reserve may cut interest rates again this year to prevent a weak housing sector from damaging the broader economy.

Comments by former Fed Chairman Alan Greenspan on Wednesday and by San Francisco Fed President Janet Yellen late on Tuesday heightened concerns about the economy, adding to fears that signs of slower growth would force the central bank's hand by year-end.

The prospect of further rate cuts have acted as a drag on the dollar, which has been unable to capitalize on last week's solid jobs report and rising bond yields and remained near an all-time low against the euro.

Although minutes from the Fed's September meeting, at which it cut rates by half a percentage point, revealed little inclination to cut again this month, traders have fully priced in a rate cut in December.

Implied prospects for another quarter point cut this month stand at about 35 percent, compared with 64 percent before Friday's stronger-than-expected September payrolls report.

We're in a negative environment for the dollar, said David Watt, senior currency strategist at RBC Capital Markets in Toronto. People are looking at the U.S. economy and still having doubts. It seems obvious that the Fed is playing a waiting game, and if we see spillover from housing, they will be prepared to cut rates.

The euro last traded at $1.4152, up 0.3 percent on the day. It hit a record high of $1.4281 last week. Sterling rose 0.3 percent to $2.0430, boosted when Bank of England Governor Mervyn King said he would monitor inflation closely, raising the bar for a UK rate cut.

Yellen on Tuesday said the Fed's move to slash rates to 4.75 percent last month helped limit risks but added it was too early to say the U.S. economy has dodged a bullet.

Falling home prices and a credit crisis sparked by losses on risky mortgage securities prompted the Fed's September cut.

And on Wednesday, Greenspan said the credit squeeze that has rattled financial markets will take its toll eventually on the U.S. economy, adding to falling home prices and forcing consumers to cut back spending.

Signs of continued growth outside the United States helped support investor risk appetite.

The market remains very short the dollar, and despite higher yields, diversification flows may have been acting as a headwind, UBS strategists wrote in a note to clients.

That also weighed on the yen, often borrowed cheaply to finance purchases of higher-yield assets. The Bank of Japan was expected to end a two-day policy meeting on Thursday by keeping interest rates at 0.5 percent.

The dollar was up 0.1 percent at 117.25 yen, while the euro rose about half a percent to a two-and-a-half-month high above 166 yen.

The euro also got a boost from better-than-expected French and Italian production data, suggesting manufacturers have been able to adjust to a strong euro with minimal pain.

European Central Bank Governing Council member Erkki Liikanen told Reuters following a speech in Moscow that the euro zone faces downside risks to growth and upside risks to inflation.

CMC Markets analyst Ashraf Laidi said the ECB does not appear ready to call an end to its rate-tightening campaign and said he expects the euro to make a run at $1.45 in early 2008.

The ECB last lifted rates, to 4 percent, in June. It left them on hold at its last two policy meetings.

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