* Dollar dips vs euro in thin trade, dollar index down
* Investors await U.S. GDP, housing data
* U.S. firms forced to reduce costs; GM, Ford ratings cut
(Adds quotes, changes byline, dateline, previous TOKYO)
By Jessica Mortimer
LONDON, Dec 23 (Reuters) - The dollar edged lower against the euro and a basket of currencies in thin trade on Tuesday as worries mounted about the depth of the U.S. recession ahead of major U.S. economic data due later in the day.
The dollar struggled on news that big U.S. manufacturers were slashing costs, while ratings agencies dropped their ratings on debt held by U.S. automakers which have just received a lifeline from the U.S. government.
"Everything that is taking place (is) in conditions of extremely low liquidity," Bank of New York Mellon head of currency research Simon Derrick said.
"We have had a litany of bad news on the U.S. economy over the past 24 hours and this continued negative news will weigh on the dollar," he said, adding that ongoing bad news suggested the economy was in for an extended period of recession.
In thin trade ahead of the Christmas and year-end holidays, market players awaited U.S. data due later on Tuesday including new and existing home sales for November and final figures on U.S. third-quarter growth.
At 0906 GMT, the euro rose 0.2 percent against the dollar to $1.3967, while the dollar index -- a gauge of the U.S. currency's performance against six major currencies -- edged down 0.1 percent to 81.109.
The euro also gained 0.2 percent to 125.90 yen.
The dollar was steady at 90.17 yen, having recovered from a 13-year low of 87.13 yen struck last week, after Bank of Japan Governor Masaaki Shirakawa said on Monday yen strength and a global slowdown may reduce Japanese exports further.
U.S. DATA EYED
The dollar stayed on the back foot after several U.S. manufacturers joined the list of firms slashing costs, with Caterpillar Inc cutting white-collar pay by up to 50 percent and Textron Inc announcing 2,200 job cuts worldwide.
Concerns over the prospects for U.S. automakers also mounted as ratings agency Standard & Poor's cut its unsecured debt rating on General Motors to 'C' and Moody's lowered ratings on Ford to 'Caa3'.
The dollar has lost momentum since the summer as demand from U.S. portfolio managers receded and from hedge funds liquidating assets and boosting cash holdings before year-end as the financial crisis deepened.
U.S. data on Tuesday are expected to highlight the bleak outlook facing the world's largest economy.
Economists expect the GDP data at 1330 GMT to confirm the government's previous estimate of a 0.5 percent contraction in the third quarter, which would mark the sharpest fall since the third quarter of 2001.
U.S. existing and new home sales figures at 1500 GMT are forecast to reveal further falls, while a University of Michigan survey is expected to show consumer sentiment remains weak. "A further decline in new and existing home sales in November and a softening of the University of Michigan confidence index implies that the cocktail of a weak labour and employment market will keep consumer spending and hence growth subdued well in to 2009," Calyon currency analyst Stuart Bennett said in a note. (Editing by Tony Austin)