(Recasts, updates prices)
NEW YORK, Jan 14 (Reuters) - 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> and Citigroup <C.N>, 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)
