* Dollar remains down after housing data disappoints
* Yen hits three-week low against euro
* Bank of Japan holds policy steady
By Sam Forgione
NEW YORK, Feb 18 (Reuters) - The dollar on Tuesday fell against the euro to its lowest in seven weeks after weak U.S. data on factory activity and homebuilder confidence stoked uncertainty about the direction of Federal Reserve monetary policy.
The New York Fed's "Empire State" general business conditions index showed manufacturing growth in New York state slowed in February, while the National Association of Home Builders said on Tuesday its Housing Market Index plunged 10 points to 46 in February, its largest one-month drop ever.
A majority of builders saw market conditions as poor, the data showed. The NAHB, which produces the index together with U.S. bank Wells Fargo, said cold weather kept potential home buyers out of the market across much of the country.
"The softer U.S. data contributed to the weaker tone in the dollar," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.
Signs of U.S. economic weakness have persisted into February after reports showed weak hiring across the economy in December and January. While some have attributed the weakness to unusually frigid temperatures, concerns have grown that the data could reflect deeper problems.
The weakness in the data has also led some to suspect the U.S. Federal Reserve may slow the pace of its reduction in monthly asset purchases. A pause in the Fed's cutback would be negative for the dollar since it would keep interest rates low, driving investors into regions that offer higher yields.
"Some investors are expecting that if the soft patch continues, the Fed may postpone tapering a bit," said Charles St-Arnaud, currency strategist at Nomura Securities in New York.
Janet Yellen, in her first public comments as Fed chief on Feb. 11, emphasized continuity in the U.S. central bank's policy strategy of cutting asset purchases by $10 billion a month, but some suspect the Fed could slow the pace of its reduction in stimulus following weak U.S. economic data.
The Fed's minutes from its January policy meeting are due to be released on Wednesday. Fed members are expected to show they are committed to continuing the reduction in the central bank's bond purchase program.
EURO UP BROADLY
The euro rose to $1.3769, marking a seven-week high against the dollar and surpassing a key resistance of $1.3740. The euro barely reacted to a mixed German ZEW survey of analyst and investor sentiment. It was last at $1.3756, up about 0.4 percent on the day.
The euro also raced to a six-week peak against the Swedish crown of 8.9245 crowns after consumer prices in Sweden fell more than expected in January and revived talk of an interest rate cut.
The euro rose as well against the British pound to trade at 82.47 pence after softer-than-expected UK inflation data.
The yen, meanwhile, fell to its lowest in nearly three weeks against the dollar and the euro after the Bank of Japan held policy steady, as expected, and extended a special lending programme to support the economy.
In an attempt to get Japanese banks to lend more, the BOJ decided to extend three special loan facilities by one year. It also raised the maximum amount of the loans and said financial institutions would be able to borrow funds at a fixed rate of 0.1 percent over 4 years instead of 1-3 years at present.
The measures were seen as an inclination to ease monetary policy and sent Japanese stocks higher and the yen lower. BOJ chief Haruhiko Kuroda said the economy was moving in line with the central bank's assessment, suggesting no further easing steps were likely in the near term.
The Nikkei stock average ended 3.1 percent higher, pushing the yen lower. The dollar was up 0.41 percent at 102.36 yen, having hit a February high of 102.73, while the euro was up 0.79 percent at 140.79 yen.
While the yen recovered slightly later in the day versus the dollar, it remained down on fears that the BoJ could announce more purchases of Japanese government bonds this year to prop up the nation's economy.
"People are on alert for more quantitative easing coming out of Japan this year," said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut.
In other currency pairs, the dollar hit a seven-week trough against the Swiss franc at 0.8868 franc.
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