FOREX-Dollar nurses losses as epidemic fuels talk of Fed rate cut

* Dollar loses momentum as U.S. relative strength seen
eroding
* Markets bet on Fed rate cuts in H1 this year
* U.S. CDC official urges Americans to prepare for outbreak
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

By Hideyuki Sano
TOKYO, Feb 26 (Reuters) - The dollar nursed losses on
Wednesday as rising expectations of a U.S. rate cut and warnings
from U.S. health officials about the spread of the coronavirus
called into question the perceived strength of U.S. financial
assets.
The dollar's index against a basket of six major currencies
.DXY stood at 99.081, little changed on the day but down 0.9%
from a near three-year high of 99.915 hit last week.
Against the yen, the U.S. currency traded at 110.37 yen
JPY= , gaining 0.1% in Asia on Japanese buying before month-end
but still almost two full yen below its 10-month high touched
last Thursday.
The euro fetched $1.08815 EUR= , extending its rebound
since it hit near three-year low of $1.0778 on Thursday.
The dollar had risen until last week as investors had
regarded the United States as less exposed to the coronavirus
and believed its economy more resilient than other major
economies, making U.S. assets a safe harbour.
Growth in China looks set to fall further from a
three-decade low of 6.1% last year after the outbreak caused
massive economic disruptions, while both the euro zone and Japan
are seen on the brink of recession.
Such convictions have started to crumble, however.
A top official at the U.S. Centers for Disease Control and
Prevention (CDC) urged Americans to begin preparing for
coronavirus to spread within the country, while another official
said it was no longer a question of if, but when, the virus
would become a pandemic. As outbreaks started to quickly spread to the Middle East
and Europe, investors no longer saw the U.S. economy immune and
started to bet the U.S. Federal Reserve will have to cut
interest rates to support the U.S. economy.
U.S. money market futures 0#FF: now fully price in a 0.25
percentage point cut by the end of June, compared to about 50%
chance a week ago, although Fed officials have shied away from
indicating a policy move.
Fed Vice Chair Richard Clarida said late on Tuesday the Fed
is "closely monitoring" the escalating coronavirus outbreak but
it is still too soon to gauge if it would require a change in
monetary policy. Still the 10-year U.S. Treasuries yield plunged to a record
low near 1.30% US10YT=RR , reducing the dollar's relative yield
attraction.
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.
Chiba said the risk-off mood is likely to linger for another
month or so until the market reach the extreme in the opposite
direction by over-estimating the risk.
"I would think we will see the peak of fears when people
become seriously worried about an epidemic in the United
States."
The risk-sensitive Australian dollar stood at $0.6603
AUD=D4 , stuck near Monday's 11-year low of $0.6585.