Forex

Dollar retreats as coronavirus fallout raises expectations of rate cut

Reuters TOKYO | Updated on February 27, 2020 Published on February 27, 2020

Risk aversion to remain a diver of currency markets. File Photo   -  Reuters

Dollar benefits as investors flock to Treasuries

The dollar fell on Thursday as Treasury yields continued to plumb new lows and investors bet the Federal Reserve would cut interest rates to offset the impact of a spreading coronavirus, while the euro bounced half a per cent higher.

Money markets are now fully pricing in a 25 basis point cut in the Fed's rate by April and three by March next year.

Expectations for a European Central Bank rate cut have also risen: money markets are now pricing in a more than 80 per cent chance of a 10 basis point rate cut in July.

But analysts point out that with Fed rates much higher, and therefore the range for them to fall much larger, investors are dumping the dollar - reversing some of the US currency's gains in the past week.

“Rate cut expectations have gained momentum and  US rate expectations are falling a lot more than they are in the euro zone,” said Thu Lan Nguyen, an analyst at Commerzbank.

However, Nguyen said whether or not the dollar, which last week touched an almost 3-year high, would fall further depended on economic data on the coronavirus's impact on confidence and trade outside of China.

The dollar index, measured against a basket of currencies, was last down 0.4 per cent at 98.783, its weakest since February 12.

It has lost 1.2 per cent since last week, when its safe haven currency credentials and investors' belief that the  US economy was relatively sheltered from the coronavirus fallout encouraged buying of the greenback.

The euro added 0.5 per cent to $1.0939. Last week it had dropped below $1.07, although it still remains down 2.4 per cent so far in 2020.

“The dollar doesn't look so safe if we are dealing with the spread of the virus in the United States,” said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities in Tokyo.

“The are some concerns that the  US government is underestimating the coronavirus.”

New infections of the virus are now growing faster outside of China than within, stoking fears that the economic impact of travel curbs, supply chain disruptions, and falling demand might be far greater than previously anticipated.

Investors have rushed for the safety of  US government debt. Benchmark 10-year  US Treasury yields slumped to a record low of 1.2970 per cent in Asia on Thursday.

The dollar dropped 0.5 per cent to 109.93 Japanese yen per dollar.

Elsewhere the pound rose 0.3 per cent to $1.2942. Sterling hovered near a two-week low versus the euro, at 84.52 pence per euro.

The new round of talks between Britain and the EU is scheduled to start on Monday, but comments from both sides suggest their views on the scope of a fee-trade agreement differ greatly.

The Australian dollar, seen as a proxy for investor sentiment towards China, rebounded 0.5 per cent to $0.6571, away from 11-year lows touched this week.

 

 

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Published on February 27, 2020
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