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The euro held near two-month highs and the dollar recouped some losses on Wednesday as traders evaluated the impact of an emergency Fed rate cut a day earlier. The Fed surprised investors by slashing rates by 50 basis points to a target range of 1.00 per cent to 1.25 per cent on Tuesday, two weeks before a regularly scheduled policy meeting, in an effort to combat the effects of the coronavirus.
The euro was one of the currencies to benefit most from the broad-based dollar weakness as traders bet the Fed would cut rates more than the European Central Bank.
The euro rose 0.1 per cent in early London trade to $1.11760, but remained shy of Tuesday's two-month high at $1.12135.
Money markets in the euro zone are pricing a 90 per cent chance that the ECB will cut its deposit rate, now minus 0.50 per cent, by 10 bps next week. They are pricing a 50 per cent chance of a second, 25 bps cut in April by the Fed.
“The dollar's weakness is reflected in the euro, because the Fed will likely ease more than the ECB,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
The dollar, which fell to a five-month low at 106.85 yen in Asia on Wednesday, rebounded and was last up 0.2 per cent at 107.355 yen. It was also up against a basket of currencies.
The dollar slumped on Tuesday as rate cuts were deemed insufficient to offset the effects of the coronavirus. Disappointment that the Group of Seven did not lay out on Tuesday specific responses to the coronavirus has reinforced the view that policymakers have fallen behind the curve.
In the United States, Joe Biden scored a surprisingly strong showing in the contest to select a Democratic challenger to President Donald Trump in the Nov. 3 election.
“The resurgence of Joe Biden will help to dampen some of the downside risks for the US dollar given fears over a sharper shift to the left under Bernie Sanders have eased,” wrote MUFG currency analyst Lee Hardman.
In the onshore market, the yuan touched a six-week high of 6.9288 per dollar in early trade, another sign of the dollar's weak bias. It shrugged off a survey showing China's services had their worst month on record in February.
Sterling bought $1.2792, down 0.2 per cent on the day. Uncertainty about trade talks between Britain and the European Union is weighing on sterling, along with growing expectations for UK interest rate cuts.
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