The Dollar fell on Monday to its lowest level in seven weeks against the Euro and Yen on fears that weak US 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 50bp cut in the Fed's benchmark interest rate to 3.75%. Futures are also reflecting a 50/50 chance that the Fed could reduce its interest rate by 0.75bp between now and the central bank's Jan. 29-30 policy meeting, giving a fresh reason for Forex dealers to sell Dollars. A 50bp cut would put the benchmark US 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. Although analysts said a rare inter-meeting cut by the Fed is unlikely, expectations of such a move could get a boost if US banks announce big write-downs linked to the troubles in the sub-prime mortgage market and consequent global credit crunch. Citigroup is first in line this week among the banks to report 4Q earnings. The bank could write down as much as $24 billion and cut up to 24,000 jobs, analysts said on Monday.
EurUsd rose as high as 1.4915 breaching the 1.4900 level for the first time in seven weeks. It last traded at 1.4869, up 0.63%. UsdChf fell to a record low of 1.0886, before paring losses. It last traded at 1.0931 down 0.76%. UsdJpy dropped to a seven-week low of 107.37. It last traded at 108.30, down 0.51%. 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. AudUsd rose to a two-month high of 0.9005, while NzdUsd went up to 0.7915. They respectively last traded at 0.8983 up 0.83% and 0.7886 up 0.78%. Sterling was unchanged at 1.9542.
In addition to corporate earnings, investors will be on the lookout for December US 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.