FOREX-U.S. dollar falls as Fed rate cut expectations rise

(New throughout; changes dateline, previous LONDON)
By Kate Duguid
NEW YORK, Feb 25 (Reuters) - The U.S. dollar weakened on
Tuesday as expectations grew that the Federal Reserve would cut
interest rates this year to relieve pressure on the economy
caused by China's coronavirus outbreak.
The dollar rose last week to its highest in years as the
virus spread further around the world, with investors regarding
all U.S. assets as safe havens. But money managers now think the
Fed may be more inclined to cut rates, since it has the most
room to do so.
Against a basket of other currencies the dollar slipped
0.265% to 99.066 =USD , after reaching a three-year high of
close to 100 last week. However, without good news on the virus,
few expect the dollar to give back much of its recent gains.
Lee Hardman, currency analyst at MUFG, said he expected
"some downside risk for the U.S. dollar," given the Fed's
potential dovish shift in policy. Expectations for further Fed
easing continue to build, with money markets pricing in a 25-
basis-point cut for the meeting in June. FEDWATCH=
According to CME Group's FedWatch tool, expectations that
the Fed will cut rates to between 1% and 1.25% from the current
1.5% to 1.75% range in June were at 45.9% on Tuesday. The same
tool shows a 5.0% chance that rates will be at current levels in
December, down from 28.6% a month ago.
Versus the euro, the dollar was modestly weaker, last down
0.1% at $1.086 EUR= . Market gauges of implied volatility in
euro/dollar eased on Tuesday after rising to their highest since
October on Monday. EUR1MO=FN
"The USD lost upside momentum on Monday. Why? The USD has
already appreciated dramatically in 2020 and some
positioning/valuations look more stretched," said Alan Ruskin,
chief international strategist at Deutsche Bank.
"Signs of the USD being penalized for having a central bank
with some capacity to cut rates raises the question of whether
rate spreads are likely to become a key driver any time soon?"
Japanese Prime Minister Shinzo Abe said on Tuesday that
clusters of coronavirus cases had emerged in the country and
that the government would take stronger steps to fight
contagion. That gave Asian investors another reason to avoid the
yen, which had been losing its safe-haven status recently.
The yen last traded up 0.55% at 110.10 per dollar JPY= .
China's yuan was last up 0.16% at 7.024 per U.S. dollar in
the offshore market, after rising to a five-day high earlier in
the session CNH= .