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FOREX-Yen, euro gain on dollar as Fed rate cut talks heat up

Published 02/03/2020, 01:58
Updated 02/03/2020, 02:01
© Reuters.  FOREX-Yen, euro gain on dollar as Fed rate cut talks heat up
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* Yen rides high after biggest weekly gains since 2016

* Euro also up as euro carry trade pared back

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

earlier

* Pound, Aussie, emerging markets currencies suffer

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

By Hideyuki Sano

TOKYO, March 2 (Reuters) - The yen and the euro rose against

the dollar on Monday on growing expectations that the U.S.

Federal Reserve will cut interest rates at its policy review

this month to protect the economy from the rapid spread of the

coronavirus.

As U.S. shares were routed in recent days, Federal Reserve

Chair Jerome Powell said on Friday the central bank will "act as

appropriate" to support the economy in the face of risks posed

by the coronavirus epidemic. Investors took his comments as a hint that the Fed will cut

interest rates by at least 0.25 percentage point at its next

scheduled meeting on March 17-18.

There is even increasing chatter of an unscheduled move,

with a U.S. bank lobby economist saying a coordinated global

interest rate cut by the top central banks could happen as early

as on Wednesday.

The expectations around the Fed underscored the speed and

scale of the virus' spread from China through to dozens of

countries and the potentially crippling blow to the global

economy.

Investors expect the dollar's yield advantage - a key

support for the U.S. currency - to shrink as the European

Central Bank and the Bank of Japan are seen having limited room

for further cuts given their rates are already in negative

territory.

The yen rose to as high as 107.00 to the dollar in early

Monday trade and last stood at 107.75 yen JPY= , up 0.3% from

its levels in New York late on Friday.

The Japanese currency had risen 3.2% last week, the biggest

gain since July 2016. Japan's current account surplus and the

yen's vast liquidity make the yen behave like safe haven asset.

The euro stood at $1.1042 EUR= , up 0.14% so far in Asia,

trading near its highest level in almost a month after a 1.7%

gain last week, the largest in two years.

The common currency's rise stemmed from unwinding of

so-called euro carry trade, in which speculators borrow the euro

to invest in higher-yielding currencies, market players said.

The safe haven Swiss franc CHF= also hit 1-1/2-year high

of 0.9610 franc per U.S. dollar on Friday and last stood at

0.9642.

Underscoring investors' concerns, China's official

Purchasing Managers' Index (PMI) fell to a record low of 35.7 in

February from 50.0 in January, the National Bureau of Statistics

said on Saturday, showing factory activity contracted at the

fastest pace ever. "The data showed the severity of the damage from the

coronavirus. If upcoming data undershoots market expectations,

that will weigh on sentiment further," said Kyosuke Suzuki,

director of currency trading at Societe Generale.

The offshore yuan slipped only slightly to 6.9840 yuan per

dollar CNH= , down about 0.17% in early Asian trade, off

Friday's high of 6.9777, its highest since Feb. 17.

But the Australian dollar, often used as a liquid proxy on

China, lost 0.34% to $0.6485 AUD=D4 , down 0.34% having hit a

11-year low of $0.64345 on Friday.

The New Zealand dollar was also on the defensive after

sliding to a decade low of $0.6180 last week. It last traded at

$0.6218 NZD=D4 , down 0.46% NZD=D4 .

Selling spread to some emerging market currencies.

The Mexican peso MXN= and the South African rand ZAR=

both lost more than 1% in early Monday trade.

The Turkish lira TRYTOM=D4 , which has been weighed by the

country's intensifying involvement in fighting in Syria, slipped

a tad to record lows.

Among developed market currencies, the pound is seen more

vulnerable than its peers at time of major economic crisis as

UK's sizable current account deficit meant the country depends

on foreign capital.

Investors are also fretting about Britain's negotiations

with the European Union over a trade deal and whether a UK

budget next month will include much more spending, which many

investors say is necessary to boost economic growth.

Sterling traded at $1.2799 GBP=D4 , down 0.15% so far on

the day, not far from its 4-1/2-month low of $1.2726 hit on

Friday.

The pound stood near its lowest levels since October against

the euro and the yen.

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