LDN - Business

Swingeing Fed rate cut bets send dollar reeling to one-month low

[March 02, 2020] By Sujata Rao

LONDON (Reuters) - 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 $6 trillion last week prompted U.S. 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 from March 17-18, and as an encouragement to central banks around the world to follow suit. Futures now imply a 50 basis point cut <0#FF:> 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% <=USD> while against the euro the greenback was down half a percent to touch a one-month low <EUR=EBS> of $1.109.

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% 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 <JPY=> rose nonetheless and was up 0.3% to 107.82 per dollar.

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U.S. Dollar and Japan Yen notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

The Australian dollar rose 0.4% to $0.6531 <AUD=D3> and the pound <GBP=> also rose 0.4% to $1.2850. The offshore-traded Chinese yuan rose 0.2%, having earlier touched a one-month high at 6.95 <CNH=D3>.

Analysts said that the scale of the virus' spread meant markets would stay on edge, however, keeping a lid on moves. Officials in Washington state confirmed the second U.S. death from the virus, while New York has confirmed its first positive case.

Chinese PMI surveys underscored the risk to world growth, showing factories were dealt a devastating blow in February as the outbreak triggered the sharpest contraction in activity on record.

While German PMIs appeared to show the downturn was easing, IHS Markit, the compiler of the data, said it could be a "false dawn" which didn't fully incorporate the effects of the virus.

"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.

Speculation has also risen of a coordinated move by global central banks but there was no official comment on this.

(Additional reporting by Hideyuki Sano in Tokyo and Tom Westbrook in Sydney; Editing by Catherine Evans)

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