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By Jamie McGeever
LONDON, Oct 24 (Reuters) - The dollar edged up broadly and the yen benefitted from a fall in high-yielding currencies on Wednesday, with Merrill Lynch's upcoming earnings report and an expected lower open on Wall Street looming large over investors.
U.S. investment bank Merrill Lynch & Co. (MER.N: Quote, Profile, Research) could add $2 billion or more to its write-downs related to collateralised debt obligations and other debt instruments it earlier forecast at $5 billion, the New York Times and Wall Street Journal said.
Although European equities were little changed, Wall Street was called to open around 0.5 percent lower, prompting investors to reduce risk exposure.
"There's a high correlation in equity markets with yen crosses and the dollar," said Michael Klawitter, senior currency strategist at Dredner Kleinwort in Frankfurt.
"Further nasty surprises from Merrill Lynch and rising risk aversion could support the dollar in the near term as leveraged accounts would cut back on local market risk positions and switch back to their base currency, which is mostly the dollar. And any weakness in the equity market ... would hit yen crosses across the board."
Merrill Lynch's results are expected around 1130 GMT.
At 1100 GMT the dollar was down 0.4 percent at 114.25 yen <JPY=> and the euro was down 0.7 percent at 162.24 yen <EURJPY=>.
The euro was down 0.3 percent against the dollar at $1.4218, bringing it further away from all-time highs around $1.4348 set on Monday <EUR=>.
The dollar index, a measure of the greenback's value against a basket of six currencies, was up almost 0.2 percent at 77.716 (.DXY: Quote, Profile, Research).
The high yielding New Zealand dollar fell 0.8 percent against the dollar to $0.7505 <NZD=>.
EYES ON US HOUSING DATA
While Merrill Lynch earnings are at the forefront of investor concerns, they will also look to the U.S. existing home sales report for further direction on the dollar.
Weaker than expected data may point to a further deterioration in the housing market and heighten the chances of more Federal Reserve interest rate cuts this year.
Economists' median forecast is for sales to have declined to a 5.25 million annual rate in September from 5.50 million the previous month. The report is due at 1400 GMT.
U.S. short-term interest rate futures show investors see a roughly 90 percent chance of the Fed cutting rates by 25 basis points from 4.75 percent at a policy meeting next week (FFX7: Quote, Profile, Research).
Markets expect the European Central Bank to keep interest rates flat at 4.0 percent well into 2008 as policymakers gauge how much the economy will slow from the credit and financial market turmoil of recent months. Data on Wednesday showed that euro zone services growth bounced back far more strongly than expected this month from a two-year low in September but the pace of manufacturing expansion waned further.
The RBS/NTC Flash Eurozone Services Purchasing Managers Index rose to 55.6 in October from 54.2 in September, higher than expected, while manufacturing PMI fell to 51.5 from 53.2, its lowest since August 2005 and well below the 53.0 forecast by economists.
"Our view is that in the next two to three quarters downside risks to growth will prevail over upside risks to inflation and will leave the ECB stuck at 4.00 percent," Unicredit wrote in a note to clients.
"The recent hawkish rhetoric appears more as an attempt to keep inflation expectations at bay at a time of accelerating prices, rather than the symptom of a willingness to pursue further tightening. Our view is that conditions to resume tightening will not show up before the second half of 2008."