CORRECTED-FOREX-Dollar slips again on caution over US economy, Aussie falls after RBA

By Rocky Swift and Lucy Raitano

TOKYO, May 20 (Reuters) - The dollar slipped on Tuesday after declining for a week, weighed down by the Federal Reserve's caution over the economy and as U.S. lawmakers came closer to passing a bill expected to widen the nation's fiscal deficit.

The greenback sold off broadly on Monday following last week's downgrade of the U.S. sovereign rating by Moody's on deficit concerns. Now attention turns to a critical vote in Washington over U.S. President Donald Trump's sweeping tax cuts.

Dollar selling continued on Tuesday, leaving the U.S. currency down 0.35% against the yen at 144.305 JPY= hitting a fresh 12-day low.

The euro rose 0.14% EUR=EBS to $1.1259, and the Swiss franc strengthened, pushing the dollar down 0.2% to 0.83280 francs.

Bucking the trend was the Australian dollar which edged lower after the Reserve Bank of Australia's cut benchmark interest rates by 25 basis points and left the door open to further easing in the months ahead. It was last down 0.59% to $0.64195 AUD=D3, trimming a 0.8% gain on Monday.

"Ultimately, the RBA's statement does not indicate that it is considering pausing or ending the interest rate cycle. This is why the AUD took a slight hit this morning," Antje Praefcke, FX Analyst at Commerzbank, wrote in a note.

But traders remain focused on the U.S., with Atlanta Federal Reserve President Raphael Bostic telling CNBC on Monday the U.S. central bank may only be able to cut interest rates by a quarter point over the rest of the year given concerns about rising inflation stoked by higher tariffs.

Trump is expected to join the congressional debate over his tax bill on Tuesday. The vote comes after Moody's stripped the U.S. government of its top-tier credit rating, citing concerns over the nation's growing $36.2 trillion debt pile.

"The market is still very wary of the lack of austerity coming from the fiscal side in the U.S." said Rodrigo Catril, senior FX strategist at National Australia Bank.

"We think that is potentially a driver for dollar weakness over the coming quarters as the market is likely to demand a higher premium to lend money to the U.S.," he added.

Trump's bill would add $3 trillion to $5 trillion to the debt, according to nonpartisan analysts. Ballooning fiscal debt, trade frictions, and weakened confidence have weighed on U.S. assets. The U.S. dollar index has tumbled as much as 10.6% from its January highs, one of the sharpest retreats for a three-month period.

The dollar got a breather after Trump paused many of the largest tariffs he announced last month. But comments from Japan's top trade envoy on Tuesday that Tokyo was firm in its anti-tariff stance pointed to no easy off-ramp in the negotiations in the weeks and months ahead.

And in the wake of Trump's tariff turmoil, Britain on Monday agreed to the most significant reset of defence and trade ties with the European Union since Brexit

The pound was last up 0.16% at 1.33840 GBP=D3 having risen 0.6% on Monday.

"Optimism surrounding key UK economic data and a major political breakthrough has fuelled sterling’s gains alongside broad-based dollar weakness," wrote George Vessey, lead FX and macro strategist at Convera.

Elsewhere, the Chinese yuan weakened against the as China cut key benchmark lending rates while corporate seasonal demand for dollars remained high.