FOREX-Euro at five-week high as dollar pressured by Fed rate cut bets

Published 02/03/2020, 14:34
Updated 02/03/2020, 14:36
© Reuters.  FOREX-Euro at five-week high as dollar pressured by Fed rate cut bets
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* Euro firm as euro/dollar carry trade pared back

* Investors bet on Fed rate cut at March 17-18 meeting or

earlier

* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

(Updates prices, adds quote)

By Sujata Rao

LONDON, March 2 (Reuters) - The euro surged to a five-week

high against the dollar on Monday, as investors discounted the

chances of big ECB rate cuts to counter coronavirus damage,

while the greenback was pressured by the likelihood of

full-blown Fed policy easing.

Panic in global markets that saw world shares shed almost $6

trillion last week prompted U.S. Federal Reserve Chairman Jerome

Powell to issue a statement late on Friday saying the Fed would

"act as appropriate" to support the economy. Investors took his comments as a hint that the Fed will

deliver a cut when it meets from March 17-18, and as an

encouragement to central banks around the world to follow suit.

Futures 0#FF: now imply a 50 basis point cut at the meeting.

Investors are also betting that other central banks will

follow its example by easing policy - but some, such as the

European Central Bank, are constrained from cutting rates that

are already deep in negative territory.

"The Fed is among the G10 central banks with the highest

interest rates so it has more room to cut rates, and that's

making the dollar weaker. What's priced for the ECB is roughly

15 basis points by the end of 2020, while for the Fed it's 100

bps," said Ulrich Leuchtman, head of FX strategy at Commerzbank

in Frankfurt.

The dollar index, measured against a basket of currencies,

slipped 0.3% =USD while against the euro the greenback was

down 0.8% EUR=EBS to $1.1128, the lowest since Jan. 23.

Markets now see a 50-50 chance of some kind of European

Central Bank easing next week and a rate cut of 10 basis points

in April. A gauge of long-term euro zone inflation expectations

fell to a new record low of just above 1% EUIL5YF5Y=R .

But ECB policymakers, including its president, Christine

Lagarde, have shown reluctance to cut rates from the current

minus 0.5%.

"I would be cautious in thinking the ECB does anything other

than liquidity provision," said Colin Harte, head of multi-asset

at BNP Paribas Asset Management.

Bank of Japan Governor Haruhiko Kuroda also said the BOJ

would take necessary steps to stabilise financial markets. The

yen JPY= rose 0.4% nonetheless to 107.78 per dollar.

Markets are expecting Australia to cut rates on Tuesday, and

possibly Canada later in the week.

The Australian dollar rose 0.6% to $0.6544 AUD=D3 and

sterling GBP= firmed 0.5% to $1.2752. The offshore-traded

Chinese yuan touched a one-month high at 6.95 to the dollar

CNH=D3 .

But the scale of the virus's spread means markets remain on

edge. Chinese PMI surveys underscored the risk to world growth,

showing the sharpest contraction in manufacturing activity on

record. German PMIs appeared to show the downturn was easing but IHS

Markit, the compiler of the data, said it could be a "false

dawn" that did not fully incorporate the effects of the virus.

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