The dollar slid to record troughs versus the Swiss franc and seven-week lows against the euro and yen on Monday, on expectations that soft US earnings reports this week will boost the need for more interest rate cuts.
The Federal Reserve is widely seen cutting rates in January by a half-point to 3.75 percent, and futures are pricing in the risk of a Fed rate cut even before the January 29-30 meeting. Although analysts say an inter-meeting cut is unlikely, expectation of such a move could get a boost in case of US bank announcing big write-downs linked to the troubles in the subprime mortgage market and consequent global credit crunch. In contrast, eurozone policymakers have remained hawkish, stressing upside risks to inflation.
"Fundamentally, the risk remains to the upside for euro/dollar - it's more a matter of when we will get to the record highs seen in November," said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt. The euro rose as high as $1.4908 according to Reuters data, breaching the $1.49 level for the first time in seven weeks and closing in on record highs of $1.4966.
The dollar fell more than one percent to a record low of 1.0888 Swiss francs. The Swissie tends to do well at times of risk aversion, thanks to its safe haven status and the unwinding of relatively risky carry trade bets funded by cheap borrowing in the franc.
The yen, another low-yielder and carry trade funding currency, rose to a 7-week high of 107.62 per dollar. But despite some signs of carry unwinding, the high-yielding Australian dollar fared well, supported by record-high gold prices and strong domestic data. Data showing rising inflation pressures and solid demand for workers in Australia reinforced expectations rates could rise next month from 6.75 percent, attracting yield-seeking investors. The Aussie rose to a two month high of US $0.90, while the New Zealand dollar also gained strongly.
A raft of US data this week will show how the economy is faring, including retail sales, industrial production, housing and consumer prices. But analysts said that how Wall Street reacts to earnings results from US banks this week may be more important for higher-yielding currencies and carry trades.
Merrill and Citigroup, among the hardest hit by the US subprime mortgage defaults and the resulting credit crisis, will release quarterly results this week. The Financial Times said that Citi - which reports on Tuesday - is seeking up to $14 billion more in capital, while Merrill may secure about $4 billion of cash.
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