FOREX-Dollar slips vs yen, spotlight on banks' results

(Changes dateline, byline, updates prices, adds quotes)

By Toni Vorobyova

LONDON Jan 15 (Reuters) - The dollar matched the previous day's seven-week low against the yen on Tuesday on expectations that U.S. retail sales data and banking results could boost the case for aggressive, growth-boosting interest rate cuts.

Citigroup Inc (C.N) is the first big bank this week to report fourth-quarter earnings -- issuing its results before Wall Street opens -- and the spotlight will be on how much the credit crisis is damaging banks' bottom lines and increasing the risk of a recession.

The largest U.S. bank is likely to announce a dividend cut, at least $10 billion of new capital, a write-down of as much as $20 billion and the loss of more than 20,000 jobs, the Wall Street Journal reported on Monday. [nHKG358018]

"Dollar weakness is the over-riding theme at the moment. The market is set up for bad news," said Adam Cole, global head of FX strategy at RBC Capital Markets.

U.S. retail sales data at 1330 GMT will also be watched for clues on how much monetary easing will likely be needed.

"The risk is probably asymmetric to the downside in terms of market reaction," Cole said. "If it's a soft number it will be seen as evidence that the slowdown is on the way, and opening up the way for the Fed to ease as aggressively as it likes."

Futures markets were reflecting a roughly 50-50 chance of the Fed slashing interest rates by three-quarters of a percentage point to 3.50 percent by the end of the month.

The dollar fell 0.7 percent to 107.35 yen JPY=, matching Monday's seven-week low. Below 107.20 would take it to 2-1/2 year lows.

Traders said some Japanese exporters sold dollars to repatriate overseas earnings as activity resumed after a three-day weekend in Japan.

The euro also slipped to seven-week lows of 159.39 yen EURJPY=. Against the dollar the euro was steady on the day at $1.4857 after stopping about half a cent below November's record high of $1.4966 the previous day EUR=.

SELECTIVE RISK APPETITE

Although the strong yen and the falling equity markets pointed to an increase in risk aversion, the high-yielding Australian and New Zealand dollars -- which tend to trade in tandem with risk appetite -- continued to hold up well.

The Australian dollar hit a fresh two-month peak at US$0.9018 AUD=, helped by a widening yield advantage as expectations grew that Australian interest rates will rise as early as next month on strong domestic data.

Record gold prices XAU= also lent the Aussie support.

The New Zealand dollar, meanwhile, stopped just a few ticks short of six-month highs versus the U.S. currency NZD=.

"With a "substantive" Fed funds rate cut this month almost certain, the U.S. dollar is likely to stay weak for now, particularly versus the currencies where corresponding central banks have not yet begun to ease policy," UBS said in a research note.

U.S. retail sales are seen flat on the month in December. Producer prices data is also due at the same time.

(Editing by Ruth Pitchford)