Dollar on defensive as rate cut spooks markets, yields slide By Reuters
By Stanley White
TOKYO (Reuters) – The dollar hovered near five-month lows versus the yen on Wednesday after the U.S. Federal Reserve’s emergency 50 basis point rate cut sparked more anxiety about the impact of the coronavirus and sent Treasury yields tumbling to record lows.
The greenback also traded near the lowest in almost two years against the Swiss franc as investors flocked to traditional safe havens as rate cuts were deemed insufficient to offset risks posed by the global spread of the coronavirus.
The euro was one of the currencies to benefit most from the broad-based dollar weakness as traders bet the Fed will cut rates more than the European Central Bank.
Disappointment that a Group of Seven statement on Tuesday did not lay out a specific response to a global slowdown caused by the coronavirus has reinforced the view among some investors that policymakers have fallen behind the curve.
“The G7 and the Fed were not enough to support markets,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
“This Fed rate cut is bad for dollar/yen, partly because Treasury yields are now very low. The dollar’s weakness is reflected in the euro, because the Fed will likely ease more than the ECB.”
The dollar fell to 106.85 yen
The greenback bought 0.9561 Swiss franc
The Fed surprised investors by cutting rates by 50 basis points to a target range of 1.00% to 1.25% on Tuesday, two weeks ahead of a regularly scheduled policy meeting.
Interest rate futures traders were pricing in a 60% probability of a further 25 basis point cut in April, according to the CME Group’s FedWatch Tool.
The rate cut failed to arrest a sell-off in U.S. equities and sent benchmark 10-year Treasury yields () crashing to a record low of 0.906%, further reducing the appeal of the dollar.
The new coronavirus that emerged in China late last year has spread to more than 60 countries and claimed more than 3,000 lives. Travel restrictions and factory closures aimed at halting the spread of the virus raise the risk of a global recession.
Sentiment also took at a hit after G7 finance ministers issued a statement on Tuesday that stopped short of calling for new government spending or coordinated central bank interest rate cuts.
In the onshore market, the yuan
The yuan shrugged off data showing China’s services sector crumbled to its weakest on record in February, but the grim numbers offer a sign of the economic impact of the spread of the flu-like virus.
Elsewhere, the Australian dollar
Broad-based selling in the U.S. dollar encouraged euro bulls to aggressively buy the common currency.
The euro () last traded at $1.1166, close to a one-month high reached on Tuesday.
Against sterling, the euro () traded at 87.10 pence, close to the highest in almost four months.
Uncertainty about trade talks between Britain and the European Union is weighing on sterling, along with growing expectations for UK interest rate cuts.
Money markets are now fully pricing in a cut of 25 basis points on March 26 when the Bank of England next meets.
Almost two cuts are priced by the end of 2020, compared to none a few weeks ago.