* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Feb 26 (Reuters) - The dollar rebounded on Wednesday
from a two-week low hit in the previous session as investors
scaled back expectations that the U.S. Federal Reserve would
signal more policy easing in response to a deadly virus
spreading outside China.
However, broader market sentiment remained cautious, with
implied volatility gauges on euro/dollar rising to 4-1/2 month
highs while commodity currencies like the Australian and the
kiwi dollar came under fresh selling pressure.
"The broader theme of risk aversion is still impacting FX
markets, though markets are starting to reprice some of their
excessive policy easing expectations," said Manuel Oliveri, a
currency strategist at Credit Agricole In London.
That was evident in expected price swings for the euro
currency, with one-month maturities rising to an early October
high of 5.7% after hitting a six-year low of 2.3% last week.
EUR=EBS
But gyrations in derivatives had little impact on broader
cash markets, with the single currency struggling to push above
the $1.09 level on Wednesday. It was trading at $1.08760.
Commodity currencies came under some selling pressure, with
the Aussie AUD=D3 and the Kiwi dollar NZD=D3 shedding half a
percent each against a broadly sturdy greenback.
UNWINDING FED POLICY BETS
As the coronavirus outbreak started to spread quickly to the
Middle East and Europe, some investors no longer saw the U.S.
economy as immune and started to bet the Federal Reserve would
have to cut interest rates to support growth.
But Fed Vice Chair Richard Clarida said on Tuesday that
while the central bank is monitoring the impact of the epidemic
on the U.S. economy, it is still too soon to gauge if it would
require a change in monetary policy. While money markets have also increased expectations of more
cuts from the Fed, with interest rate futures 0#FF: now
pricing in about 60 bps of cuts by the end of the year compared
to 40 bps a month earlier, investors were slightly more
cautious.
The bid-to-cover ratio, an indicator of demand, of a U.S.
2-year Treasury note auction was less than a similar sale,
indicating hedge funds were not aggressively buying
shorter-dated debt, expecting a more cautious Fed.
"The significant dovish tilt being priced in by markets from
the FOMC may not materialise and that might cause the next leg
of the dollar rally," said Peter Chatwell, head of multi-asset
strategy at Mizuho Bank.
Against a basket of its rivals =USD , the dollar edged 0.1%
higher to 99.04, recovering from two-week low of 98.876 hit in
the previous session.
EURUSD implied vol https://tmsnrt.rs/393iXdr
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