The dollar fell broadly on Monday after softer than expected Bank of America profits damped investors' initial optimism that companies may escape the pinch of an ongoing crisis in global credit markets. Bank of America Corp, the No 2 US bank, reported a fall in its first-quarter profit due to write-downs and rising credit losses.
Its net income fell to $1.21 billion, or 23 cents per share, from $5.26 billion, or $1.16, a year earlier. Hawkish European Central Bank inflation rhetoric supported the euro, with Governing Council member Klaus Liebscher saying that there was no reason for pessimism on eurozone growth.
Analysts said that BoA's results suggested the fallout from the credit crisis may not be over as some have speculated, chilling risk appetite as such problems were expected to continue weighing on the US economy and hurt the dollar.
"The market generally is about to begin reassessing the extent of optimism that's currently priced in," said Derek Halpenny, currency economist at BTM UFJ.
"The shift in expectations has gone way over board. We're still in for a prolonged downturn in US economic growth that will warrant much more monetary easing than is currently priced in the market," he added.
Sterling also fell, with markets unimpressed by a Bank of England offer to swap government bonds worth 50 billion pounds for banks' riskier mortgage debt to help them navigate through the credit squeeze, as the amount was known before the announcement.
The euro gained as much as around 0.7 percent to $1.5921, inching towards a record high of $1.5983 hit last week according to Reuters data. The single European currency was supported by a growing view that the European Central Bank is in no hurry to cut interest rates from 4.0 percent for now due to nagging inflation risks.
The dollar slipped 0.6 percent to a session low of 102.99 yen, pulling away from a seven-week high of 104.64 yen hit on Friday according to Reuters data. By 1234 GMT, the dollar had fallen more than 0.4 percent against a basket of six major currencies to 71.660.
The US currency also came under selling pressure as investors were still worrying about the inflationary effect of oil prices, which hit a record high of $117.40 a barrel. Results on Friday from Citigroup, the largest US bank, showed less damage from the credit market crisis than some had expected, with writedowns of $6 billion contrasting with market rumours of writedowns approaching $22 billion.
This had sparked dollar buying late last week as some speculated that the worst of the credit crunch may have passed. But having witnessed several 'false dawns' in the credit crisis, investors were reluctant to place too much faith in the banking results as marking the beginning of the end for the squeeze.
"The market jumped too quickly to the possibility that the credit crunch has ended," said Lena Komileva, market economist at Tullett Prebon. "The improvement in risk sentiment was overdone," she said, adding that the dollar would likely reverse its gains against the yen and head towards a record low against the euro this week.
Despite a tentative pickup in risk appetite from last week's banking results and Royal Bank of Scotland, Britain's second-biggest bank, confirming it is considering a rights issue, UK markets had been on tenterhooks over the plan to help ease strains in British mortgage markets. But the pound extended losses in reaction to the news, pushing the euro up 1.3 percent to 80.15 pence, not far from a record high near 81 pence hit last week. The UK currency fell 0.7 percent to $1.9830.
"The plan didn't offer any massive surprises ... Sterling has had a good run over the last few days on the news and so it's a bit of the 'buy the rumour, sell the fact'," said Daragh Maher, senior currency strategist at Calyon.