* Yen rises 0.5% vs dollar, jumps 1.2% on Aussie
* Money markets price 3 Fed cuts by July
* Euro/dollar volatility surges
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E
By Tom Westbrook
SINGAPORE, Feb 28 (Reuters) - The Japanese yen returned as a
beacon of safety on Friday, hitting a one-month high against the
dollar as deepening worries about coronavirus sent global
financial markets into a tailspin.
Hopes the coronavirus outbreak could be contained in China
have vanished this week as infections spread around the globe,
prompting governments into action and investors to panic.
Stocks are in freefall and a rush for U.S. Treasuries has
pushed yields to record lows. MKTS/GLOB
Money markets are now all but certain the U.S. Federal
Reserve will lower its benchmark lending rate next month and the
yen - heavily sold a week ago - has roared back to life.
It rose half a percent to a month-high of 109.03 per
greenback on Friday, leaving the dollar heading for its worst
week on the Japanese currency in more than three years JPY= .
As investors dumped China-sensitive regional currencies, the
yen soared. The Australian dollar tanked 0.5% to a fresh 11-year
low on the dollar, but it lost twice as much against the yen.
Against the kiwi the yen rose 1.6% JPYNZD= .
"I'm not surprised it's reasserting itself," said Mayank
Mishra, FX strategist at Standard Chartered in Singapore.
"The safe-haven yen tends to do well even in scenarios when
the Japanese economic outlook may be at risk. Unlike the Fed,
which may be cutting rates, the Bank of Japan does not have that
luxury - so the downward pressure on the currency from the yield
channel does not materialise."
The Aussie last bought $0.6535 AUD=D3 and 71.31 yen
AUDJPY=R . The kiwi hit a four-month low of $0.6247 NZD=D3 .
SEISMIC SHIFT
While much is still unknown about the virus, measures to
contain it have wreaked havoc on supply chains, the world's
economy and financial markets.
In currencies, implied volatility, seen in one-month
euro/dollar options, has shot up from near record lows to its
highest in a year EUR1MO= .
Fed futures pricing has shifted enormously, with investors
now expecting three Fed cuts by mid year 0#FF: , beginning with
one in March which had been rated just a 9% chance a week ago.
FEDWATCH
That had sent the euro sharply higher overnight, as
investors unwind carry trades, and has offered a slight brake on
the massive flight from Asian currencies. But there are few
other places for money storming out of Asia to go.
"Until the virus data says otherwise, the trading strategies
should probably still err (towards safety)," Deutsche Bank
strategist Alan Ruskin said in a note. "Buy gold, short oil," he
said.
"Initially, the dollar weakness is expected to be only
modest versus alternatives like the yen, franc and euro; and,
the dollar should strengthen versus commodity FX and emerging
markets' currencies."