NEW YORK The dollar fell on Monday to its lowest level in seven weeks against the euro and yen on fears that weak U.S. corporate earnings will push the economy closer to recession, requiring the Federal Reserve to slash interest rates.
Some of Wall Street's largest banks will be reporting their earnings this week, beginning with Citigroup on Tuesday, and currency dealers will be watching for indications of how much the credit crisis is damaging their bottom lines and increasing the risk of prolonged economic weakness.
Federal Reserve Chairman Ben Bernanke's comments last week that the central bank stood ready to take "substantive additional action" to maintain growth cemented expectations for a half-percentage point cut in the Fed's benchmark interest rate to 3.75 percent.
Futures are also reflecting a 50/50 chance that the Fed could reduce its interest rate by three-quarters of a point between now and the central bank's January 29-30 policy meeting, giving a fresh reason for dealers to sell dollars.
"It's the reality that the Fed is going to cut 50 and there's an interest-rate play between the currencies," said Andrew Goldberg, managing director of foreign exchange with BNP Paribas in New York.
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 a record high of $1.4966. It last traded at $1.4865, up 0.6 percent from late Friday.
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.
The dollar fell to a record low of 1.0888 Swiss francs, before paring losses. It last traded at 1.0925 Swiss francs, down 0.8 percent.
Against the yen, the dollar tumbled to a seven-week low of 107.37 yen. It last traded around 108.21 yen.
Although analysts say a rare inter-meeting cut by the Fed is unlikely, expectations 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.
Citigroup is first in line this week among the banks to report fourth-quarter earnings. The bank could write down as much as $24 billion and cut up to 24,000 jobs, CNBC television said on Monday.
If Citi's earnings come in well below expectations, the dollar as well as currencies that typically do well when investors are more willing to take risks will probably weaken, dealers said.
Weak earnings may have an "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 Australian dollar, which has one of the highest interest rates among the 10 most traded developed currencies, was trading higher, supported by record-high gold prices and strong domestic data. It rose to a two-month high of US$0.9003, while the New Zealand dollar also was up, rising 1 percent to US$0.7905.
Sterling was flat at $1.9555.
In addition to corporate earnings, investors will be on the lookout for December U.S. retail sales and consumer inflation data. Since consumer spending makes up around two-thirds of output, any weakness in retail sales or upward price pressures will be viewed as negative for growth and for the dollar.
(Additional reporting by Nick Olivari; Editing by Leslie Adler)