By Wayne Cole and Hideyuki Sano
SYDNEY/TOKYO, March 6 (Reuters) - The dollar nursed savage
losses against the yen and euro on Friday as a plunge in U.S.
yields to record lows wiped out the currency's single greatest
attraction for investors - higher interest rates.
Mounting fears over the fallout from the coronavirus has
driven a truly tectonic shift in expectations for U.S. rates as
markets wager the Federal Reserve will have to cut rates by 50
basis points for a second time this month. FEDWATCH
The resulting collapse in Treasury yields -- which fell
another 10 basis points in Asia -- has been the death of one of
the most popular carry trades globally - borrowing at negative
rates in the euro and yen to buy U.S. assets.
"Select USD pairs like EUR/USD are turning because of a
dramatic and decisive shift in U.S. rate expectations and
related spreads," said Alan Ruskin, global head of G10 FX
strategy at Deutsche Bank.
"The USD has lost the single most important source of its
over-valuation, a strong carry advantage," he added, warning
this could end a dollar uptrend that has lasted since mid-2018.
In particular, were the euro to close above the December
peak of $1.1239, it would breach a down channel from August 2018
and signal a clear break of the bull trend.
The single currency was almost there, being up at $1.1231
EUR= on Friday, having surged 0.9% overnight and a world away
from the February trough of $1.0775. It was already up 1.9% for
the week which would be the largest such gain since June 2017.
The U.S. Treasuries yield dropped 10 basis points to a
record low of 0.825% US10YT=RR , a drop of about 75 basis
points in just 11 sessions.
"U.S. bond yields have sunk to unbelievable levels," said
Kazushige Kaida, head of foreign exchange at State Street Bank
in Tokyo.
"The Fed's fast responses will be applauded in the long run.
But in the near term, even if it cuts rates, it won't stop the
virus. Markets are hoping for more measures such as tax cuts and
steps to support funding for cash-strapped firms," he said.
There were lots of other miserable milestones, with the
dollar sinking to a six-month low on the yen at 105.83 JPY= ,
having shed 1.2% overnight. The next bear targets were 105.72
and 104.46, lows from August and September last year.
It also sank to a two-year trough against the Swiss franc at
0.9443 francs CHF= , and was down 2% for the week so far.
The yen, euro and Swiss franc are backed by countries that
run strong external surpluses, while Japan has the added
advantage of being the world's largest creditor nation.
Those safe-haven attributes had grown in importance as U.S.
10-year yields US10YT=RR tumbled.
Fed fund futures 0#FF: were also pricing in about 90 basis
points of further easing by the year-end.
Yet the dollar was not down and out everywhere, as it still
held safe haven status compared to emerging market currencies
and those exposed to commodities.
That left it holding gains on the Canadian CAD= ,
Australian AUD= and New Zealand dollars NZD= , along with a
raft of currencies across Asia.
The Australian dollar lost 0.3% to fetch $0.6585 AUD=D4 ,
off this week's high of $0.6646 as its rebound from 11-year lows
of $0.64345 hit a week ago lost steam.
Similarly, the Canadian dollar traded at C$1.3412 per U.S.
dollar CAD=D4 , near a nine-month low of C$1.3465 set last
Friday.
(Editing by Lincoln Feast and Jacqueline Wong)