* Dollar hits 2-½ month low vs euro
* Fed's rate cut to near zero undermines dollar's appeal
* Greenback within sight of 13-year low vs yen
* BOJ expected to cut rates this week after Fed move
By Satomi Noguchi
TOKYO, Dec 18 (Reuters) - The dollar dropped to a 2-½ month low against the euro on Thursday after the Federal Reserve's dramatic interest rate cut further eroded the greenback's relative yield appeal.
The euro extended gains from the previous day above $1.44 as the U.S. central bank slashed rates to virtually zero, widening the interest rate differential in favour of the euro zone currency.
The euro also strengthened against the pound after comments from a Bank of England official reinforced expectations the central bank may aggressively cut rates to avoid a prolonged recession.
The dollar stayed near its weakest in more than 13 years versus the yen after the Fed's bold cut brought U.S. interest rates below the Bank of Japan's benchmark rate target.
"The market move is all about the interest rate differential. The Fed's decision to take quantitative easing measures to combat the recession was faster and bolder than expected, knocking down the dollar against the euro," said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Trust Bank.
"Euro/dollar looks close to its near-term peak for now, but it could extend its gains to as high as $1.47 if we hear bad news about the fate of the struggling U.S. automakers," Inoue said.
The euro rose 0.4 percent from late New York trade on Wednesday to $1.4476 after climbing as high as $1.4495 on trading platform EBS, the highest since late September.
In contrast to the aggressive monetary easing pursued by central banks in the United States and Britain, European Central Bank officials have tried to cool expectations that they would make another big interest rate cut in January.
Against the yen, the euro gained 1.1 percent to 127.13 yen.
The euro edged up 0.1 percent to 92.93 pence, near record highs above 93.00 pence, while sterling was 0.4 percent higher against the dollar at $1.5585.
Bank of England Deputy Governor Charles Bean said zero interest rates in Britain are a possibility.
BOJ VERDICT AWAITED
The bold rate cut by the Fed has ratcheted up the pressure on a reluctant Bank of Japan to follow suit this week, with economists saying to hold back would rock Japanese markets and worsen the crisis.
Japanese government officials have pushed the BOJ to take more action and voiced concern about a rising yen.
The BOJ ends its two-day policy meeting on Friday.
The dollar rose 0.6 percent to 87.78 yen, but stayed in sight of 87.13 yen hit on Wednesday on EBS, the lowest since mid-1995.
A senior Japanese Ministry of Finance official said the ministry would take appropriate action as needed in the currency market, fuelling speculation that Japanese authorities may intervene to rein in the yen's rise.
Still, some market participants said the chances of Japanese intervention looked slim.
"It would be difficult for Japan to intervene in the market as the pace of the yen's appreciation against the dollar is not so rapid and given the fact that the yen is lower against other currencies such as the euro," said Kazuyuki Kato, treasury department manager at Mizuho Trust & Banking.
Two-thirds of economists expect the BOJ to cut interest rates this week, and most of them see rates coming down to 0.10 percent from the current 0.30 percent, which is now higher than Fed's target of zero to 0.25 percent.
Traders said it was unclear what impact a BOJ rate cut this week would have on currencies, but it may help to slow the yen's advance. (Additional reporting by Kaori Kaneko; Editing by Chris Gallagher)