FOREX-Dollar retreats on rising expectations of a rate cut

* Dollar hits two-year high against basket of currencies
* Poor German manufacturing data adds to global economy woes
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

(Recasts, adds analyst quote, updates prices)
By Kate Duguid
NEW YORK, May 23 (Reuters) - The U.S. dollar retreated after
hitting its highest level in two years as weaker domestic data
and the threat of economic fallout from the trade war with China
increased expectations for an interest-rate cut this year.
Against a basket of six rivals, the dollar .DXY erased
gains made earlier in the day, last trading down 0.16% at
97.885. The dollar move pulled the euro with it, which was up
0.22% to $1.118.
Sales of new U.S. single-family homes fell from near an
11-1/2-year high in April as prices rebounded and manufacturing
activity hit its lowest level in almost a decade in May,
suggesting a sharp slowdown in economic growth was underway.
Some of the loss of momentum is the result of the escalating
U.S.-China trade war, which economists say is undermining
business confidence, as well as sluggish growth overseas.
"There was a lot of discussion today about interest-rate
differentials, even in this risk-off environment," said Marvin
Loh, senior global markets strategist at State Street Global
Markets.
"While U.S. rates can come down a whole lot more, the rest
of the world can't come down as much because they're already so
low. That's driving the dollar trade even though we have this
pretty strong risk-off move in stocks."
Loh added that the move was being driven by the dollar,
rather than a euro pulled lower by weak economic data from the
currency bloc. G10 currencies, in addition to the euro, were
weaker, suggesting a dollar effect.
Market expectations that the Federal Reserve would cut
interest rates increased on Thursday, according to the CME
Group's FedWatch tool. There is only a 36.2% expectation that
rates will be at current levels in October of this year, down
from 50.8% yesterday.
Worries over German manufacturing, the impact of a trade war
on Asian economies and deepening concerns over Brexit and
European parliamentary elections have broadly curbed risk
appetite and sent investors to perceived safe-haven assets.
U.S. stocks were lower, and safe-haven currencies such as
the Japanese yen JPY= and the Swiss franc CHF= were up,
0.72% and 0.64% respectively.
Activity in Germany's services and manufacturing sectors
fell in May, a survey showed on Thursday, reflecting the toll
that unresolved trade disputes are having on Europe's largest
economy. Compounding these worries, European parliamentary elections
began on Thursday with euroskeptic parties expected to do well,
raising concerns about the single currency's stability.
Brexit uncertainty has set sterling up for its 14th straight
day of losses against the euro - its longest losing streak in
the 20-year history of the single currency EURGBP= .