FOREX-Dollar surrenders to euro and yen as rate supremacy ends

By Wayne Cole
SYDNEY, March 6 (Reuters) - The dollar nursed savage losses
against the yen and euro on Friday as a plunge in U.S. yields to
record lows wiped out the currency's single greatest attraction
for investors - higher interest rates.
Mounting fears over the fallout from the coronavirus has
driven a truly tectonic shift in expectations for U.S. rates as
markets wager the Federal Reserve will have to cut rates by 50
basis points for a second time this month. FEDWATCH
The resulting collapse in Treasury yields has been the death
of one of the most popular carry trades globally - borrowing at
negative rates in the euro and yen to buy U.S. assets.
"Select USD pairs like EUR/USD are turning because of a
dramatic and decisive shift in U.S. rate expectations and
related spreads," said Alan Ruskin, global head of G10 FX
strategy at Deutsche Bank.
"The USD has lost the single most important source of its
over-valuation, a strong carry advantage," he added, warning
this could end a dollar uptrend that has lasted since mid-2018.
In particular, were the euro to close above the December
peak of $1.1239, it would breach a down channel from August 2018
and signal a clear break of the bull trend.
The single currency was almost there, being up at $1.1226
EUR= on Friday having surged 0.9% overnight and a world away
from the February trough of $1.0775. It was already up 1.9% for
the week which would be the largest such gain since June 2017.
There were lots of other miserable milestones, with the
dollar sinking to a six-month low on the yen at 105.96 JPY=
having shed 1.2% overnight. The next bear targets were 105.72
and 104.44, lows from August and September last year.
It also sank to a two-year trough against the Swiss franc at
0.9443 francs CHF= , and was down 2% for the week so far.
The yen, euro and Swiss franc are backed by countries that
run strong external surpluses, while Japan has the added
advantage of being the world's largest creditor nation.
Those safe-haven attributes had grown in importance as U.S.
10-year yields US10YT=RR tumbled to just 0.91%, a drop of 66
basis points in just 11 sessions.
Fed fund futures 0#FF: were also pricing in more than 80
basis points of further easing by year end.
Yet the dollar was not down and out everywhere, as it still
held safe haven status compared to emerging market currencies
and those exposed to commodities.
That left it holding gains on the Canadian CAD= ,
Australian AUD= and New Zealand dollars NZD= , along with a
raft of currencies across Asia.