February 25, 2020 / 6:08 PM / in a month

FOREX-U.S. dollar falls as Fed rate cut expectations rise

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By Kate Duguid

NEW YORK, Feb 25 (Reuters) - The U.S. dollar weakened on Tuesday as expectations grew that the Federal Reserve would cut interest rates this year to relieve pressure on the economy caused by China’s coronavirus outbreak.

The dollar rose last week to its highest level in years as the virus spread further around the world, with investors regarding all U.S. assets as safe havens. But money managers now think the Fed may be more inclined to cut rates, since it has the most room to do so.

Expectations that the Fed will cut rates at least 25 basis points at its June meeting were at 79.5% on Tuesday, according to CME Group’s FedWatch tool. The same tool shows a 4.0% chance that rates will be at the current 150-175 basis point range in December, down from 28.6% a month ago.

Against a basket of other currencies the dollar slipped 0.375% to 98.956, after reaching a three-year high of close to 100 last week. However, without good news on the virus, few expect the dollar to give back much of its recent gains.

Lee Hardman, currency analyst at MUFG, said he expected “some downside risk for the U.S. dollar,” given the Fed’s potential dovish shift in policy. Expectations for further Fed easing continue to build, with money markets pricing in a 25- basis-point cut for the meeting in June.

Versus the euro, the dollar was modestly weaker, last down 0.25% at $1.088. Market gauges of implied volatility in euro/dollar eased on Tuesday after rising to their highest level since October on Monday.

“The USD lost upside momentum on Monday. Why? The USD has already appreciated dramatically in 2020 and some positioning/valuations look more stretched,” said Alan Ruskin, chief international strategist at Deutsche Bank.

“Signs of the USD being penalized for having a central bank with some capacity to cut rates raises the question of whether rate spreads are likely to become a key driver any time soon?”

Japanese Prime Minister Shinzo Abe said on Tuesday that clusters of coronavirus cases had emerged in the country and that the government would take stronger steps to fight contagion. That gave Asian investors another reason to avoid the yen, which had been losing its safe-haven status recently.

The yen last traded up 0.63% at 110.00 per dollar.

China’s yuan was last up 0.12% at 7.027 per U.S. dollar in the offshore market, after rising to a five-day high earlier in the session. (Reporting by Kate Duguid in New York and Olga Cotaga in London; Editing by Steve Orlofsky and Sandra Maler)

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