* Dollar hits 2-month low vs euro
* Greenback under pressure ahead of Fed rate decision
* Fed seen lowering rates further, eyeing other tools
* NZ dollar hits 1-month high vs dollar
By Satomi Noguchi
TOKYO, Dec 16 (Reuters) - The dollar fell broadly and hit a two-month low against the euro on Tuesday as expectations grow that the Federal Reserve will cut interest rates to near zero and may lay out emergency tools to curtail a recession.
The euro extended gains above $1.37 as repatriation flows into the dollar ebbed and technical players jumped back into buying the single currency to cover short positions before the year-end.
As signs mounted that the United States may be facing a deep and protracted downturn, the Fed is widely expected to cut interest rates by at least a half percentage point to 0.50 percent at its two-day policy meeting ending later in the day.
Investors will also focus on the accompanying statement for clues on whether the Fed will clearly state it will deploy so-called quantitative easing to restore growth.
Fed Chairman Ben Bernanke said earlier this month that the Fed could purchase long-term securities issued by the Treasury or government-sponsored agencies to cut yields and stimulate demand.
"Given prospects for further falling U.S. yields, in both short- and longer-maturities, the dollar's relative appeal is diminishing," said Hideki Amikura, deputy general manager of forex section at Nomura Trust Bank.
"There is no reason to buy more dollars," said Amikura.
The dollar has lost steam this month, having risen broadly since the summer, when financial market turmoil prompted investors to liquidate investments across the world and convert funds into the greenback.
The euro rose 0.2 percent from late New York trade on Monday to $1.3719 after earlier rising as high as $1.3738 on trading platform EBS, the highest since mid-October.
The sharp rebound in the euro had taken the currency right up to the 38.2 percent retracement of its July-October slide at $1.3740, a key resistance point.
The euro had already broken through several resistance levels above a 2-½ year low around $1.2330 hit in late October. The technical break added momentum to short-covering in the single currency before the end of the year, traders said.
"The euro and other European currencies which were trading in a range in the past month or so are now being bought back against the dollar, catching up with the yen's gains versus the dollar," said Shuichi Kanehira, a senior trader at Mizuho Corporate Bank.
"The euro could draw more buying from players who look at charts and technical analysis after its having broken above key levels," Kanehira said.
Against the yen, the euro edged down 0.1 percent to 123.97 yen but stayed close to a three-week high around 124.55 yen touched the previous day.
The higher-yielding currency New Zealand dollar hit a one-month high against the U.S. dollar on prospects for a Fed rate cut. The kiwi rose 0.7 percent to $0.5580 after rising as high as $0.5598, the highest since mid-November.
The dollar dropped 0.3 percent to 90.35 yen, above a 13-year low of 88.10 yen hit on Friday.
With Japan's key interest rate already low at 0.3 percent, a further rate cut by the Fed would take both the U.S. and Japanese key rates close to zero.
"Right after the expected rate cut decision by the Fed, the dollar may be sold against the yen. But the dollar is expected to rebound as the market will likely shift its focus on a clear message that the Fed is supporting financial markets," said Mitsuru Sahara, a senior manager at Bank of Tokyo-Mitsubishi UFJ.
Sahara also said downside risks remain for the dollar in the longer perspective as investors will refrain from buying the U.S. currency amid deteriorating fiscal conditions.
The Bank of Japan has a two-day policy meeting ending on Friday with the market mulling whether it will take steps to shore up the economy.
Uncertainty over the fate of U.S. automakers was also hurting dollar sentiment as the White House kept mum after saying it was considering tapping a $700 billion financial industry bailout fund to help them.
There are growing fears that a failure of one or more of the carmakers could exacerbate a year-long economic downturn and drag down other companies. A decision by the Bush administration to offer them a lifeline could help the dollar recover briefly, traders said, though the sustainability of its gains would remain in question with a gloomy economic outlook.
(Additional reporting by Eric Burroughs and Kaori Kaneko; Editing by Michael Watson)