FOREX-Dollar rises with stocks, investors stay cautious

(New throughout; changes dateline, previous LONDON)
By Kate Duguid
NEW YORK, Feb 26 (Reuters) - The U.S. dollar rebounded on
Wednesday from a two-week low hit in the previous session in
step with U.S. equity markets, though moves were muted as
investors remained cautious as the coronavirus continues to
spread.
The dollar index =USD was 0.13% higher at 99.144 as Wall
Street's main indexes rose about 1% on Wednesday after suffering
their worst four-day percentage fall in more than a year.
"We're still fixated on equity market moves," said Shaun
Osborne, chief foreign exchange strategist at Scotia Capital.
However, he said, "ranges are pretty contained. I don't
think anybody is reading too much into this rebound in equities
at this point."
"On a day without much data, we're going to continue
tracking stocks.
The dollar was also dented as investors scaled back
expectations that the U.S. Federal Reserve would signal more
policy easing in response to the spread of the coronavirus
outside of China.
As the coronavirus spread, some investors no longer saw the
U.S. economy as immune and started to bet the Fed would have to
cut interest rates to support growth.
But Fed Vice Chair Richard Clarida said on Tuesday that
while the central bank is monitoring the impact of the epidemic
on the U.S. economy, it is still too soon to gauge if it would
require a change in monetary policy. Expectations of a rate cut at the Fed's June meeting fell
from 80.8% to 79.2% today, according to CME Group's FedWatch
tool.
Broader market sentiment remained cautious, with implied
volatility gauges on euro/dollar rising to 4-1/2 month highs
while commodity currencies like the Australian and the kiwi
dollar came under fresh selling pressure.
"The broader theme of risk aversion is still impacting
foreign exchange markets, though markets are starting to reprice
some of their excessive policy easing expectations," said Manuel
Oliveri, a currency strategist at Credit Agricole in London.
That was evident in expected price swings for the euro
currency, with one-month maturities rising to an early October
high of 5.7% after hitting a six-year low of 2.3% last week.
EUR=
But gyrations in derivatives had little impact on broader
cash markets, with the single currency struggling to push above
the $1.09 level on Wednesday. It was trading at $1.087.

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