* 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.