FOREX-Dollar falls to new low vs euro on data, earnings

NEW YORK, Oct 18 (Reuters) - The dollar sank to a record low against the euro and a basket of currencies on Thursday, weighed down by soft U.S. economic data and sluggish corporate earnings that bolstered chances of an interest rate cut.

Bank of America's (BAC.N: Quote, Profile, Research) poor third-quarter earnings on the back of mounting credit losses took their toll on the currency market early as it fanned concerns that the global liquidity crunch is far from over. It also strengthened the case for a cut in the target federal funds rate from the current 4.75 percent to avert a sharper slowdown.

U.S. short-term rate futures on Thursday showed a 68 percent implied chance of a rate cut at the Fed's next monetary policy meeting on Oct. 30-31. Futures now price fully a half-percentage-point's worth of cuts by mid-2008.

"All the economic numbers are pretty soft and the U.S. economy is starting to get much weaker than the market expected. That's putting pressure on the dollar to weaken further," said Rafael Martorell, chief FX dealer at BNP Paribas in New York.

The Philadelphia Federal Reserve business activity survey was the latest report to provide evidence of a slumping U.S. economy. For details see [ID:nN18417318].

Earlier in the session, higher-than-expected initial weekly U.S. jobless claims added a negative tone to the dollar.

In early afternoon trading, the euro was up around 0.6 percent on the day at $1.4285 , after climbing to a lifetime peak at $1.4310 in the opening hours of the New York session, according to Reuters data.

The dollar index, a measure of the dollar's value against six major currencies, was down 0.6 percent at 77.620 (.DXY: Quote, Profile, Research). Earlier it fell to 77.478, the lowest since its post-Bretton Woods inception more than 30 years ago. It was the largest one-day percentage drop on the index since Sept. 28.

The yen gained as investors became more risk-averse and unwound carry trades in which they buy high-yielding currencies funded by borrowing low yielders such as the yen.

It was the yen's fourth straight day of gains against the dollar, the longest streak since the four days leading up to the Fed's surprise half-percentage-point cut in the discount rate, at which it lends to banks, on Aug. 17.

The dollar was 0.8 percent weaker at 115.66 yen , near an earlier two-week low. The euro fell 0.3 percent against the yen to 165.20 yen .

The dollar was already weak prior to the release of Bank of America's earnings after dire U.S. housing data on Wednesday.

"Bank of America earnings play up concerns about the health of the financial sector and suggest we are likely to see fallout from market volatility, with the yen being the main beneficiary," said Omer Esiner, foreign exchange analyst at Ruesch International in Washington.

Foreign exchange investors are also cautious ahead of a Group of Seven meeting over the weekend. European businesses on Thursday urged France, Germany, and Italy to push for a clear commitment from the G7 group of rich industrial nations against further euro appreciation.

But few analysts were willing to bet any action will be taken to address the euro's surge against the dollar.

"The reality is that currency volatility has fallen significantly from the spikes seen in mid-August," said Calyon in a research note.

On the U.S. side, the bank believes that dollar weakness will not be mentioned in the statement at all given its limited impact on inflation.

"Given that there is little sign of imported inflation pressure at present, it gives further reason for the U.S. not to act in any form of concerted intervention," Calyon said.

Analysts said the G7's focus is more likely to be on the tightly-controlled Chinese yuan currency. (Additional reporting by Nick Olivari)