* Euro, yen hit new highs vs dollar
* Tumbling Treasury yields blunt U.S. rate advantage
* Dollar on course for worst week since 2016
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
(Updates throughout.)
By Tommy Wilkes and Iain Withers
LONDON, March 6 (Reuters) - The euro rose past $1.13 on
Friday and the yen pushed below 105, as a drop in U.S.
government bond yields put the dollar on course for its worst
week since 2016.
Investors have slashed their expectations for U.S. interest
rates after an emergency Federal Reserve rate cut of 50 basis
points this week.
That is wiping out the yield advantage that had fuelled a
popular carry globally - borrowing at negative rates in the euro
and yen to buy U.S. assets. Markets now bet the Federal Reserve
will again cut rates by 50 basis points this month. FEDWATCH
The dollar index is set for its biggest weekly fall since
May 2016, down more than 2% since Monday =USD .
"The driver is the equity markets and the collapse in U.S.
bond yields this week," said Kenneth Broux, FX strategist at
Societe Generale. "It's been a knee-jerk reaction. What we have
now is a reversal simply on the declining U.S. equities and the
compressing differential.
"The reality is the Fed has taken on more insurance ...
No-one knows how long this (the coronavirus outbreak) will last,
but taking a step back, I would expect the dollar to bounce."
Currency volatility gauges rose on Friday, with one-month
euro-dollar implied volatility reaching it highest since
November 2018. ING analysts said they were targeting $1.15 per euro in the
coming weeks as aggressive U.S. rate cuts contrasted with the
limited room for action at the European Central Bank. Fed fund
futures 0#FF: were pricing in about 90 basis points of further
easing by the end of the year.
"For now, expect USD weakness vs G10 FX to continue, and the
G10 FX segment outperforming EM FX, with carry trades under
pressure," they said in a research note.
The euro rose 0.7% to as high as $1.13405 EUR=EBS , its
strongest since July. It was stuck below $1.08 only a few weeks
ago.
The dollar index fell 0.7% to a daily low of 95.795 =USD ,
its weakest since July.
Against the yen, the dollar dropped more than 1% and below
105 yen JPY=EBS , before recovering. It was last up at 105.25
yen. The yen is benefiting both from dollar weakness and its
reputation as a safe haven.
The dollar also shed more than 1% against the Swiss franc,
considered a safe haven, to its weakest since early 2018
CHF=EBS .
The dollar was not weaker everywhere. It has held up against
emerging-market currencies, those exposed to commodities such as
the Canadian CAD=D3 , Australian AUD=D3 and New Zealand
dollars NZD=D3 and against Asia currencies, where the
coronavirus economic effect is pronounced.
The crude-oil linked Norwegian crown suffered. The euro
rocketed to a record high versus the crown, up 0.4% on the day
at 10.4855 crowns EURNOK=D3 .
The euro fell against the Swiss franc, however, dropping
0.3% to 1.0585 francs EURCHF=EBS .
Sterling seized on the dollar's spiral downwards, hitting a
day's high of $1.3026 GBP=D3 before settling at $1.2991.
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U.S. dollar index weekly performances https://tmsnrt.rs/2xjiC8J
Euro vs dollar https://tmsnrt.rs/2VNQsfY
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(Editing by Larry King, Robert Birsel; editing by Larry King)