* Euro falls as money markets ramp up ECB rate cut bets
* Williams’ comments undermined dollar overnight
* Emerging market currency index hits 4-month high
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Adds Swiss franc hitting 2-year high)
By Tommy Wilkes
LONDON, July 19 (Reuters) - The euro fell against a rebounding U.S. dollar on Friday and hit a 2-year low versus the Swiss franc, as investors ramped up bets for a European Central Bank interest rate cut as early as next week.
Money markets are now pricing in a roughly 60% chance of a 10 basis point rate cut next week, versus a 40% chance earlier in the week.
The euro’s drop reversed some of its gains in the previous session when dovish comments from a key Federal Reserve policymaker bolstered expectations of an aggressive interest rate cut this month, hurting the dollar
Rabobank analyst Jane Foley said ECB President Mario Draghi had surprised the market with dovish comments twice already in 2019, although her bank’s base case was still for a September cut.
“An ECB move would be more likely to have a shock impact...A 25 basis point cut by the Fed is priced in,” she said, adding that euro/dollar could test $1.11 or even $1.10 if the ECB did lower rates.
The euro was 0.4% lower at $1.1231.
Against the Swiss franc it touched a two-year low of 1.1033 francs per euro, down 0.3% on the day. The franc, viewed as a safe haven, has benefitted as investors grow nervous about the euro zone economic outlook.
Central banks are launching another round of policy easing in an attempt to lift stubbornly low inflation and fight signs of an economic slowdown.
At a conference on Thursday, New York Fed President John Williams argued for pre-emptive measures to avoid having to deal with too-low inflation and interest rates.
The dollar dropped before rebounding slightly after a New York Fed representative subsequently said Williams’ comments were not about immediate policy direction.
Investors are now pricing in a roughly 40% chance of a 50 basis point cut in U.S. rates later this month, although the dollar has held up reasonably well as investors bet other central banks will ease policy too.
The dollar index , which hit a two-week low of 96.648 on Thursday, was 0.2% higher at 96.988.
Expectations of a dovish shift in the rate cycle have boosted emerging market currencies.
MSCI’s emerging market currency index on Friday hit a four-month high.
“We stay bearish on the U.S. dollar but put most focus versus high carry emerging market currencies, helped by global central bank easing,” Morgan Stanley analysts said in a note.
The yen dropped against the dollar, falling 0.3% to 107.66
Sterling was on the back foot again, falling 0.2% to $1.2527 and undoing some of its recovery on Thursday when British lawmakers voted for a plan to make it harder for a new prime minister to push through a no-deal Brexit.
The New Zealand dollar, which has rallied more than 1% to a 3-1/2 month high this week as investors expect Fed rate cuts to boost the attractiveness of the higher-yielding kiwi, eased 0.2% to $0.6769.
The currency has the second-highest bond yield among G10 currencies after the U.S. dollar. (Editing by Kevin Liffey and Kirsten Donovan)