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USD falls, virus impact lifts rate-cut expectations

London

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 the spreading novel coronavirus, lifting the euro to its highest in more than two weeks.

Money markets are now fully pricing in one 25 basis-point cut in the Fed's rate by April and three by March 2021. Expectations for a European Central Bank rate cut have also risen; money markets now price a more than 80 per cent chance of a 10 basis-point rate cut in July.

But analysts point out that, with United States rates much higher, and therefore the scope for them to fall much larger, investors are reversing out of the dollar.

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

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Whether or not the dollar retreats further depends on economic data on the virus's impact on confidence and trade outside of China, she said.

The dollar index dropped 0.4 per cent to 98.658, its weakest since Feb 12. It has shed 1.2 per cent since last week, when it touched a near three-year high, thanks to its safe-haven currency credentials and investors' belief that the US economy was relatively sheltered from the virus fallout.

The euro rose 0.6 per cent to US$1.0948. Last week, it had dropped below US$1.08, although it remains down 2.4 per cent so far in 2020.

One-month volatility in euro/dollar, which was near record lows, has shot up to its highest since early October.

New Covid-19 infections are now growing faster outside China than within, stoking fears that the economic impact on supply chains and consumer demand might be far greater than previously anticipated.

Investors have rushed for the safety of US government debt. Ten-year US Treasury yields slumped to a record low of 1.289 per cent.

The dollar dropped 0.5 per cent to 109.93 Japanese yen before recovering to 110.11 yen.

ING analysts said the dollar's medium-term outlook remained positive.

They said that the closed nature of the US economy left it less exposed to a coronavirus-induced global downturn, and with the pace of any Fed response unclear, "we think it is too early to pencil in a trend reversal and more meaningful USD weakness".

The British pound gave up earlier gains and slipped 0.2 per cent against the dollar to US$1.2877. REUTERS

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