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Monday January 14, 2008 - 11:52:00 GMT
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FOREX NEWS-Dollar falls broadly, hits record low vs Swissie

Mon Jan 14, 2008 6:35am EST

(Changes byline, recasts, updates prices)

By Toni Vorobyova

LONDON, Jan 14 (Reuters) - 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 U.S. 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 Jan. 29-30 meeting.

Although analysts say an inter-meeting cut is unlikely, expectation of such a move could get a boost in case of U.S. bank announcing big write-downs linked to the troubles in the subprime mortgage market and consequent global credit crunch.

In contrast, euro zone 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.

"Speculation of either a 50 basis point rate cut or an inter-meeting rate cut both would argue for broad based dollar weakness because it confirms that the Fed is really concerned about both the U.S. economy and also how large the impact will be on the financial industry."

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 <EUR=>.

The dollar fell more than one percent to a record low of 1.0888 Swiss francs <CHF=>.

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 <JPY=>.

But despite some signs of carry unwinding, the high-yielding Australian dollar fared well, supported by record-high gold prices <XAU=> 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 <AUD=>, while the New Zealand dollar also gained strongly <NZD=>.

EYES ON BANK RESULTS

A raft of U.S. 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 U.S. banks this week may be more important for higher-yielding currencies and carry trades.

Merrill and Citigroup, among the hardest hit by the U.S. 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.

That follows a report in the New York Times on Friday that Merrill's write-downs on mortgages could total $15 billion, which spurred selling of stocks and higher-yielding currencies.

"With the size of the write-downs now being reported unprecedented there is a high risk that the FOMC is far more aggressive in its monetary easing campaign by front-loading a lot of the easing into the first half of the year," BTM-UFJ said in a research note.

"With scope for expectations to shift toward the FOMC cutting by say 0.50 point per meeting in the first half of the year, we maintain our view that the euro will break both the record high and $1.5000 over the coming weeks." (Editing by David Christian-Edwards)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

 

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