Despite being one of the biggest gainers from the coronavirus outbreak as a ‘safe haven’ currency, the US dollar could be experiencing a drop-off from investors as its Federal Reserve (Fed) rate cut odds continue to increase amid the disease. The coronavirus continues to spread across the globe with the disease now reaching as far West as Italy, causing the country to quarantine towns and villages. Other countries like South Korea have seen their number of infected grow from single to triple digits in a matter of days.
Rising Fed Rate Cut Bets See the Dollar Dwindle
The US dollar remained soft on Tuesday amid expectations that the Fed could be due to cut its interest rates this year to curb the downside pressure on the economy that has been caused by China’s coronavirus outbreak. USD initially rose as the virus continued to spread throughout the world, with investors eyeing all US assets as safe-haven investments. However, the market is now predicting that the Federal Reserve will be more likely to ease their monetary policy and cut their interest rates, which has sent USD lower. The greenback was 0.2% lower against some of its major rivals yesterday at 99.19, which saw the currency drift away from the three-year high it saw last week. However, with little positive news being released on the virus, many expect USD to keep hold of most of its gains as a safe haven currency.
Euro Rises Against Dollar, with Downside Risk for the USD Expected
The euro saw a rise of 0.1% earlier today at $1.0863, which saw the single currency pull away from the three-year lows it saw last week, which saw the currency drop to below $1.07 as money flooded into USD. Market gauges of implied volatility in the EURUSD interbank exchange rate eased off a bit on Tuesday after rising to their highest levels since October at the start of the week. The market is expecting further downside risk for the US dollar as the Federal Reserve could potentially shift its stance on its monetary policy to that of a more dovish approach.
Investors continue to lie in wait for the Federal Reserve’s decision in the next months concerning their monetary policy; the market has priced in a 25-basis points cut for the meeting in June. For the year as a whole, traders expect the US central bank to lower rates to between 1% and 1.25% down from the current 1.5% to 1.75% range.
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