The dollar loses strength on Tuesday following the recent streak of strong gains due to rising expectations that the expected impact on economic growth due to the spread of the coronavirus will lead the US Federal Reserve to cut interest rates.
Federal Reserve interest rate futures have risen in recent days to estimate a 50% chance of a quarter-point interest rate cut in April. In total, they estimate more than 50 basis points for cuts by the end of the year.
Central banks in Asia have already relaxed their monetary policy, while governments have promised to implement fiscal stimulus measures, something that Western countries might also have to consider.
“It has been quite dramatic,” says Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.
“We have not only seen a review of the Fed’s expectations, but an even bigger review because the Fed is the one that can really do something in terms of changing the cash rate,” he explains.
The dollar index, which follows the evolution of this currency with respect to a basket of six other major currencies, falls 0.2% to 99.07 at 9:58 a.m. (CET).
Cleveland Fed President Loretta Mester described the outbreak as a “big risk” on Monday.
“At this point, it is difficult to assess the magnitude of the economic effects, but this new source of uncertainty is something that must be followed very closely,” he said.
But Mester revived the idea that the Fed would be driven to act in response to concerns in the financial markets.
“I only warn you that it is not a good idea to react too much to market volatility if you are responsible for monetary policy,” he said.
Without too much good news about the virus, few expect the dollar to reverse its recent gains too much.
The outbreak has already affected 80,000 people worldwide and the death toll in Italy rose to seven on Monday, which adds to fears that the virus is transforming into a pandemic that could cause much greater economic damage than What was thought.
China has reported an increase in new cases of coronaviruses in the province of Hubei, the epicenter of the outbreak, despite the fact that the rest of the country has registered the fourth consecutive day down.
South Korea, which is the country with the most virus cases in Asia after China, has reported 60 new cases on Tuesday, increasing the total number of infected patients there to 893.
The euro departs slightly from the recently recorded three-year lows and reaches the level of 1.0863, while the dollar stands at 110.52 per yen, departing from the 10-month highs recorded at 112.21.
Japan’s Prime Minister Shinzo Abe said Tuesday that case groups had emerged there and that the government would take more stringent measures to combat the outbreak.
Meanwhile, the Australian and New Zealand dollars barely register variations against the greenback.
“Although the AUD / USD pair is holding, we believe that the balance of risks is down,” ANZ analysts said in a note.
That could contribute to the 5.7% increase of the US dollar against the Australian dollar so far this year.