Dollar weighed down by rate cut prospects

London

THE dollar retreated on Monday to one-month lows against a basket of currencies, weighed down by the prospect of a full-blown rate-cutting cycle to counter the economic damage inflicted by the coronavirus.

Panic in global markets that saw world shares shed almost US$6 trillion last week prompted US Federal Reserve Chairman Jerome Powell to issue a statement late on Friday saying the central bank will "act as appropriate" to support the economy.

Investors took his comments as a hint the Fed will deliver a cut when it meets on March 17-18, and as an encouragement to central banks around the world to follow suit. Futures now imply a 50 basis point cut at the March 18 meeting.

"The Fed is among the G10 central banks with the highest interest rates so it has more room to cut rates, and that's making the dollar weaker. What's priced for the ECB is roughly 15 basis points by the end of 2020 while for the Fed it's 100 bps," said Ulrich Leuchtman, head of FX strategy at Commerzbank in Frankfurt.

The dollar index slipped 0.2 per cent while against the euro the greenback was down half a per cent to touch a one-month low of US$1.109.

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

Markets are now expecting Australia to cut rates on Tuesday, and possibly Canada later in the week, while seeing a 50-50 chance of a European Central Bank move next week.

Despite money market pricing, ECB policymakers remain reluctant to ease policy further from the current rate of minus 0.5 per cent and the euro is benefiting from that as well as the lack of room for monetary stimulus.

Bank of Japan Governor Haruhiko Kuroda also issued a statement to say it would take necessary steps to stabilise financial markets. The yen rose nonetheless and was up 0.3 per cent to 107.82 per dollar.

The Australian dollar rose 0.4 per cent to US$0.6531 and the pound also rose 0.4 per cent to US$1.2850. The offshore-traded Chinese yuan rose 0.2 per cent, having earlier touched a one-month high at 6.95. Analysts said that the scale of the virus' spread meant markets would stay on edge, however, keeping a lid on moves.

"It's a bit of a dilemma today between celebrating Fed cut prematurely and really selling off risk," said Vishnu Varathan, head of economics at Mizuho Bank in Singapore.

"What's most important, to quote (movie) Jerry Maguire, is 'show me the money'. It's not so much about the interest rate - a 25 basis point interest rate cut is not going to make a business that cannot find cashflow feel better," he said. REUTERS