Dollar dives on Fed rate-cut hint

New York

THE US dollar slid to a 20-week low against the Japanese yen on Friday after Federal Reserve Chair Jerome Powell suggested the central bank could cut interest rates in the wake of the novel coronavirus.

Mr Powell on Friday said the central bank will ''act as appropriate'' to support the economy in the face of risks posed by the virus outbreak, though he said the economy remained in solid condition.

The Japanese yen was on track for its largest daily gain since May 2017 as investors moved into the safehaven currency. It had strengthened to as high as 107.52 versus the dollar and was last trading up 1.51 per cent at 107.92.

The dollar index was last down 0.324 per cent to 98.127, down about 1 per cent this week on rising expectations of a rate cut. A cut of at least 25 basis points at the Fed's March meeting was fully priced in on Friday, versus expectations of 57.6 per cent on Thursday.

Some investors suggested the Fed could even cut rates sooner.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

''It's likely that markets will force the Fed to cut even before the March 18 meeting, and the question is... will that be enough to settle down markets in the near term?'' said Bill Zox, chief investment officer at Diamond Hill Capital.

The yield on the two-year Treasury note, which moves with expectations of changes in rate policy, has fallen by about 32.5 per cent this week.

The rapid spread of the virus increased fears of a pandemic, with six countries reporting their first cases and the World Health Organisation (WHO) raising its global spread and impact risk alert to ''very high''.

''The yen is significantly stronger from where it was even last week, when I was hearing people saying that the yen wasn't a safe-haven anymore. We're now back to appropriate levels,'' said Mark McCormick, global head of foreign exchange strategy at TD Securities.

He also said one additional factor undermining the yen could be the fact that Japan's public pension funds have been rebalancing assets.

''I think it's pretty clear that the (Japanese Government Pension Investment Fund) is trading ahead of the announcements of their weights, which if you think about what they've done over the past five years, they've created an allocation that leans much more towards global equities, global credit, global fixed income - which in this environment would see dollaryen rally as they're pushing some of their flows outside of Japan.'' REUTERS