FOREX-Dollar retreats as coronavirus fallout lifts rate cut expectations

* Dollar down to two-week low as Treasury yields slide
* Analysts say rate expectations in U.S. falling fastest
* Euro recovers back above $1.09, yen also gains vs dlr
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

(Adds details, new analyst quote, latest prices)
By Tommy Wilkes
LONDON, Feb 27 (Reuters) - The dollar fell on Thursday as
Treasury yields continued to plumb new lows and investors bet
the Federal Reserve would cut interest rates to offset the
impact of the spreading coronavirus, lifting the euro to its
highest in more than two weeks.
Money markets are now fully pricing in one 25 basis point
cut in the Fed's rate by April and three by March 2021.
Expectations for a European Central Bank rate cut have also
risen; money markets now price a more than 80% chance of a 10
basis point rate cut in July.
But analysts point out that, with United States rates much
higher, and therefore the scope for them to fall much larger,
investors are reversing out of the dollar.
"Rate cut expectations have gained momentum and U.S. rate
expectations are falling a lot more than they are in the euro
zone," said Thu Lan Nguyen, an analyst at Commerzbank.
Whether or not the dollar retreats further depends on
economic data on the coronavirus's impact on confidence and
trade outside of China, Nguyen said.
The dollar index =USD dropped 0.4% to 98.658, its weakest
since Feb. 12.
It has shed 1.2% since last week, when it touched a near
3-year high thanks to its safe-haven currency credentials and
investors' belief that the U.S. economy was relatively sheltered
from the coronavirus fallout.
The euro rose 0.6% to $1.0948 EUR=EBS . Last week it had
dropped below $1.08, although it remains down 2.4% so far in
2020.
One-month volatility in euro/dollar, which was near record
lows, has shot up to its highest since early October EUR1MO= .
New coronavirus infections are now growing faster outside
China than within, stoking fears that the economic impact on
supply chains and consumer demand might be far greater than
previously anticipated. Investors have rushed for the safety of U.S. government
debt. Ten-year U.S. Treasury yields US10YT=RR slumped to a
record low of 1.289%.
The dollar dropped 0.5% to 109.93 JPY=EBS Japanese yen
before recovering to 110.11 yen.
ING analysts said the dollar's medium-term outlook remained
positive.
They said that the closed nature of the U.S. economy left it
less exposed to a coronavirus-induced global downturn, and with
the pace of any Fed response unclear, "we think it is too early
to pencil in a trend reversal and more meaningful USD weakness".
The British pound gave up earlier gains and slipped 0.2%
against the dollar to $1.2877 GBP=D3 . The euro rose 0.8% to
84.97 pence EURGBP=D3 , its highest in more than two weeks.
Sterling weakened as Britain launched its mandate for trade
talks with the European Union. China's offshore yuan strengthened to a one-week high, with
the dollar down 0.1% at 7.010 yuan per dollar CNH=EBS .
The Australian dollar, seen as a proxy for investor
sentiment towards China, rebounded 0.5% to $0.6572 AUD=D3 ,
away from 11-year lows touched on Wednesday.

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U.S. dollar vs a basket of currencies https://tmsnrt.rs/384pp2o
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(Editing by Kevin Liffey)