USD recovers from low as markets pare Fed bets

London

THE dollar recovered from a two-week low on Wednesday as investors reduced expectations that the US Federal Reserve will signal more policy easing as the novel coronavirus spread quickly outside of China.

As outbreaks started to quickly spread to the Middle East and Europe, some investors no longer saw the US economy immune and started to bet that the US Federal Reserve would have to cut interest rates to support the American economy.

But Fed vice-chair Richard Clarida said on Tuesday, as the central bank monitored the impact of the epidemic on the US economy, that it is still too soon to gauge whether it would require a change in monetary policy.

While money markets have also increased expectations of more cuts from the Fed with interest rate futures now pricing in about 60 basis points of cuts by the end of the year, compared to only 40 bps a month earlier, investors were slightly more cautious.

The bid-to-cover ratio, an indicator of demand, of a US two-year Treasury note auction was less than a similar sale, indicating hedge funds were not aggressively buying shorter-dated debt, expecting a more cautious Fed. "The significant dovish tilt being priced in by markets from the FOMC may not materialise and that might cause the next leg of the dollar rally," said Peter Chatwell, head of multi-asset strategy at Mizuho Bank.

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

Against a basket of its rivals, the dollar edged 0.1 per cent higher at 99.04, recovering from the two-week low of 98.876 hit in the previous session.

In contrast to the Fed, the world's other major central banks, such as the European Central Bank and the Bank of Japan, have limited room for easing, with their policy rates already at record lows.

"Markets had been under-estimating the risk of coronavirus, but I think that phase is over by now," said Tatsuya Chiba, manager of forex at Mitsubishi Trust Bank.

He added that the risk-off mood is likely to linger for another month or so, until the market reaches the extreme in the opposite direction by over-estimating the risk.

The risk-sensitive Australian dollar stood at US$0.6603, stuck near Monday's 11-year low of US$0.6585.

The euro also struggled to gain traction, with the single currency holding below the US$1.088 line versus the greenback. REUTERS