April 21, 2008 / 4:38 PM / 9 years ago

FOREX-Dollar falls on Bank of America results; euro up

(Recasts, adds comments)

By Vivianne Rodrigues

NEW YORK, April 21 (Reuters) - The dollar fell on Monday after unexpectedly weak profits from Bank of America dampened investors' optimism that U.S. financial companies may escape the pinch of the crisis in global credit markets.

In Europe, hawkish European Central Bank inflation comments supported the euro after ECB Governing Council member Klaus Liebscher said there was no reason for pessimism on euro zone growth, suggesting the ECB will maintain interest rates at a six-year high. For more see [ID:nL21705942].

Bank of America Corp (BAC.N), the No. 2 U.S. bank, reported a fall in first-quarter profit due to write-downs and rising credit losses. Net income fell to $1.21 billion, or 23 cents per share. [ID:nN21410537].

Analysts said Bank of America's results suggest the fallout from the credit crisis may not be over as some have speculated, chilling risk appetite as such problems were expected to continue weighing on the U.S. economy and the dollar.

"The dollar started Monday on a weak note, while the euro got a lift from ECB hawkish comments," said Matthew Strauss, a currency strategist at RBC Capital Markets in Toronto. "Bank of America's results obviously don't help the dollar and we also have the ECB making comments suggesting rates may remain steady."

In midday trading in New York, the euro was 0.5 percent higher at $1.5888 EUR=. The euro zone single currency rose to a record $1.5983 on April 17, its highest since its inception in 1999, according to Reuters data.

The euro rose for the first time in three days amid a growing view that the ECB is in no hurry to cut interest rates from 4.0 percent for now due to nagging inflation risks.

Strauss said traders may attempt to push the euro through $1.60 this week.

"That level has become almost magical," he added. "But before the euro breaks through it, it will find a lot of resistance and stop barriers on the way."

The U.S. currency also came under selling pressure as investors continued to fret about the inflationary effect of oil prices, which hit a record high of $117.40 a barrel.

The greenback slipped 0.3 percent to 103.30 yen JPY= and it fell more than 0.3 percent against a basket of six major currencies to 71.748 .DXY.

Results on Friday from Citigroup (C.N), the largest U.S. bank, showed less damage from the credit market crisis than some had expected, with write-downs of $6 billion contrasting with market rumors of write-downs approaching $22 billion.

This had sparked dollar buying late last week as some speculated that the worst of the credit crunch may have passed.

But having seen several "false dawns" in the credit crisis, investors were reluctant to place too much faith in the banking results as marking the beginning of the end for the squeeze.

The U.S. Federal reserve has cut its main interest rate 3 percentage points since September to prevent the economy from sliding into recession.

Sterling also fell, with markets unimpressed by a Bank of England offer to swap government bonds worth 50 billion pounds for banks' riskier mortgage debt to help them navigate the credit squeeze as the amount was known before the announcement.

Despite a tentative pickup in risk appetite from last week's banking results and Royal Bank of Scotland (RBS.L), Britain's second-biggest bank, confirming it is considering a rights issue, UK markets had been on tenterhooks over the BoE plan to help ease strains in British mortgage markets.

The pound extended losses in reaction to the news, pushing the euro up 1.3 percent to 80.19 pence EURGBP=, not far from a record high near 81 pence hit last week. The UK currency fell 0.8 percent to $1.9806 GBP=. (Additional reporting by Naomi Tajitsu in London; Editing by James Dalgleish)

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