Rate cut expectations give pause to soaring dollar
The dollar checked its march higher on Tuesday, as investors sharply raised bets that the growing fallout from the coronavirus outbreak would prompt U.S. interest rate cuts.
World markets are in a tailspin as infections spread quickly beyond China. The World Health Organization has said it is not a pandemic yet, but the potential exists.
Supply chains around the world are jammed as China locks down to combat the virus and stocks have tumbled, bonds have jumped and expectations of rate hikes in the United States have vanished.
Futures for the Federal Reserve funds rate <0#FF:> have surged to now price in a rate cut by June and more than 50 basis points of reductions by year end – pause for thought in the recent rush to buy dollars.
“It’s been quite dramatic,” said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.
“We’ve seen not only a repricing of Fed expectations, but a bigger re-pricing because the Fed is the one that can actually do something in terms of moving the cash rate,” he said.
In morning trade, the Australian and New Zealand dollars were creeping up from milestone lows against the greenback, as was the euro. The Aussie last bought $0.6616, a third of a cent more than the 11-year low hit on Monday.
China’s yuan firmed 0.2% to its strongest level since last week at 7.0220. The Korean won, Taiwan dollar and Singapore dollar steadied their slides on the greenback.
Against a basket of currencies the dollar was flat at 99.321. However, without much good news on the virus, few expect the dollar to give back too much of its recent strength.
Indeed, the Japanese yen, which rebounded hard overnight with the flight to safety, handed back a bit of its rise as Asian traders still fret about its exposure to China.
“Despite the Aussie/dollar holding up overnight, we see the balance of risks to the downside as tail risks rise,” ANZ analysts said in a note.
China reported another rise in new coronavirus infections on Tuesday, with 508 compared to 409 a day earlier.
Almost 2,700 people have died in China and its economy has been paralysed by lockdown measures imposed to try and halt the virus’ spread.
Italy and South Korea are now beginning to use similar tactics to quell their outbreaks.
“The jump in cases outside of China raises the risk of a sharper Q1 2020 global economic slowdown,” said CBA analyst Kim Mundy. “It also raises the risk that the economic disruption is more prolonged.”