Dollar drops, hits fresh record low vs Swiss franc
The dollar dropped to a record low versus the Swiss franc and seven-week lows against the euro and yen on Monday as concern that weak U.S. corporate earnings will prompt more interest rate cuts weighed on the currency.The Federal Reserve is widely expected to cut its key rate in January by a half-point to 3.75 percent, and futures are pricing in the risk that the Fed rate could cut even before the Jan. 29-30 meeting.
Although analysts say a rare inter-meeting cut is unlikely, expectation of such a move could get a boost if U.S. banks announce big write-downs linked to the troubles in the subprime mortgage market and consequent global credit crunch.
A 50 basis point cut would put the benchmark U.S. rate below the key euro-zone interest rate for the first time in more than three years. In contrast to the Fed, euro zone policy-makers have remained hawkish, stressing risks from inflation.
Weak earnings “impact on confidence and expectations for Fed funds (interest rates), and that is spilling over into FX markets,” said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
The euro rose as high as $1.4914 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=>. It last traded at 1.4874.
The dollar fell more than 1 percent to a record low of 1.0888 Swiss francs <CHF=>, before paring some of those losses. It last traded at 1.0935 Swiss francs.
The Swiss franc typically does better 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 seven-week high of 107.37 per dollar <JPY=>. It last traded around 108.06.
Despite some signs of carry unwinding, the high-yielding Australian dollar fared well, supported by record-high gold prices <XAU=> and strong domestic data.
The Aussie rose to a two-month high of US$0.9003 <AUD=>, while the New Zealand dollar also gained strongly <NZD=>.
EYES ON BANK RESULTS
The state of the U.S. economy will be reflected in a raft of U.S. data this week on retail sales, industrial production, housing starts and inflation.
However, analysts said that investor reaction to earnings results from U.S. banks this week may be more important for higher-yielding currencies and carry trades.
Merrill (MER.N: Quote, Profile, Research) and Citigroup (C.N: Quote, Profile, Research), 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 Citigroup — which reports on Tuesday — is seeking up to $14 billion in capital, while Merrill may secure about $4 billion.
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.” (Reporting by Nick Olivari; Additional reporting by Toni Vorobyova in London; Editing by Tom Hals)