FOREX-Euro and yen surge as Treasury yield collapse whacks dollar

Published 06/03/2020, 11:54
Updated 06/03/2020, 12:00
© Reuters.  FOREX-Euro and yen surge as Treasury yield collapse whacks dollar
DX
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* Euro, yen hit highs vs dollar overnight

* Tumbling Treasury yields blunt U.S. rate advantage

* Dollar on course for worst week since May 2016

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Tommy Wilkes and Iain Withers

LONDON, March 6 (Reuters) - The euro roared past $1.13 on

Friday and the yen pushed below the 105 level, as a dramatic

collapse in U.S. government bond yields sent the dollar on

course for its worst week since 2016.

Investors have slashed their expectations for U.S. interest

rates following an emergency Federal Reserve 50 basis point cut

this week.

That is wiping away the yield advantage that had fuelled one

of the popular carry trades globally - borrowing at negative

rates in the euro and yen to buy U.S. assets.

Markets now bet the Federal Reserve will have to cut rates

by 50 basis points for a second time this month. FEDWATCH

The greenback 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."

Choppy global markets led currency volatility gauges to rise

on Friday, with one-month euro-dollar implied volatility hitting

the 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 gained 0.7% to as high as $1.1324 EUR=EBS , its

strongest since July.

The single currency was stuck below $1.08 last month.

The dollar index skidded 0.7% to 95.892 =USD , its weakest

since July.

Against the yen, the dollar dropped more than 1% and below

105 yen JPY=EBS . The yen is benefiting both from dollar

weakness and its reputation as a safe haven.

The dollar was not weaker everywhere, however. It still

holds safe-haven status compared with emerging-market

currencies, those exposed to commodities such as the Canadian

CAD=D3 and Australian AUD=D3 and New Zealand dollars

NZD=D3 and versus Asian currencies, where the coronavirus

economic effect is pronounced.

Sterling seized on the dollar's spiral downwards, hitting

$1.3015 GBP=D3 before settling at $1.2987.

Euro vs U.S. dollar https://tmsnrt.rs/32Z01KS

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(Editing by Larry King, Robert Birsel)

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