FOREX-Dollar loses its luster as rate cut expectations rise

(New throughout; changes dateline, previous LONDON)
By Kate Duguid
NEW YORK, Feb 27 (Reuters) - 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 coronavirus, lifting the euro to its
highest in more than three weeks.
Money markets are now fully pricing in one 25 basis point
cut in U.S. interest rates 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% chance of a 10
basis point rate cut in July.
"We're seeing a major reversal of the dollar's fortunes,"
said John Doyle, vice president of dealing and trading at
Tempus, Inc.
With U.S. rates much higher, and the scope for them to fall
much wider, investors are reversing out of the dollar.
"Rate cut expectations have gained momentum and U.S. rate
expectations are falling a lot more than they are in the euro
zone," said Thu Lan Nguyen, an analyst at Commerzbank.
Whether or not the dollar retreats further depends on
economic data on the coronavirus's impact on confidence and
trade outside of China, Nguyen said.
Against the euro EUR= , the dollar fell to a three-week
low, last down 1.14% to 1.100. The dollar index =USD dropped
0.76% to 98.358, its weakest since Feb. 6.
It has shed roughly 1% since last week, when it touched a
near 3-year high thanks to its safe-haven currency credentials
and investors' belief that the U.S. economy was relatively
sheltered from the coronavirus fallout. But the currency's
safe-haven appeal has worn off.
One-month volatility in euro/dollar, which was near record
lows, has shot up to its highest since early October EUR1MO= .
New coronavirus 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 U.S. government
debt. Ten-year U.S. Treasury yields US10YT=RR slumped for the
third consecutive day to a record low of 1.254%.
The dollar dropped 0.58% to 109.77 JPY= Japanese yen as
the yen's safe-haven appeal began to return.
China's offshore yuan strengthened to a one-week high, with
the dollar down 0.2% at 7.007 yuan per dollar CNH= . The
Australian dollar, seen as a proxy for investor sentiment
towards China, rebounded 0.67% to $0.659 AUD= , away from
11-year lows touched on Wednesday.