Could the Fed get cornered into another rate cut?

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The next interest rate move by the Federal Reserve was supposed to be a hike, sometime in 2009.

Today, courtesy of Lehman Bros. and more troubling economic data, the currency and bond markets started wondering if the Fed might have to cut rates before it raises them.

The possibility of lower U.S. rates helped pull the rug out from under the dollar, which had been on a hot streak since mid-July.

The euro soared to $1.422 today after falling on Thursday to its lowest level in nearly a year, at $1.395. The British pound jumped to $1.794 from $1.753 on Thursday.

Uncertainty about Lehman Bros.’ future and the implications for the U.S. financial system gave some dollar bulls an excuse to take profits, currency traders said.

So did the Commerce Department’s report that retail sales fell 0.3% in August, instead of the 0.2% rise that was the consensus forecast of analysts. Worse, July sales were revised to a 0.5% drop from the originally reported 0.1% decline.

Fed policymakers, who meet on Tuesday, are virtually certain to keep their benchmark rate at 2% for the fourth straight meeting. But if consumer spending keeps crumbling, or turmoil in the financial system worsens dramatically, Fed Chairman Ben S. Bernanke and peers could face new pressure to do the thing they definitely don’t want to do: ease credit again.

That’s still a minority expectation in the markets, but it’s a growing minority.

Interest rate futures contracts in Chicago now show a 36% chance of the Fed cutting its rate by at least a quarter of a percentage point by year’s end, compared with zero odds a month ago, according to Bloomberg data.

The focus on a potential rate cut helped pull down short-term Treasury bill yields today. The 3-month T-bill slid to an eight-week low of 1.47% from 1.61% on Thursday. Longer-term yields rose however; another Fed rate cut could re-stoke inflation worries, hurting long-term bonds.

The dollar’s strength in recent weeks had been based in large part on the assumption that the U.S. would lead the rest of the world out of the current economic funk in 2009, allowing the Fed to begin tightening credit.

Higher interest rates would support the dollar. Lower rates could put the buck right back in the soup.

But one day doesn’t make a trend. Next week will be much more telling as to whether the world’s revived appetite for dollars has already been sated.