By Noreen Burke
Investing.com – The dollar eased on Tuesday following a recent run of strong gains amid heightened expectations that the anticipated hit to economic growth from the spread of the coronavirus will prompt the U.S. Federal Reserve to cut interest rates.
Futures for the have surged in the last few days to price in a 50-50 chance of a quarter-point rate cut as early as April. In all, they imply more than 50 basis points of reductions by year end.
Central banks across Asia have already been easing policy, while governments have pledged fiscal stimulus measures, something western countries might also have to consider.
“It’s been quite dramatic,” said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.
“We’ve seen not only a repricing of Fed expectations, but a bigger re-pricing because the Fed is the one that can actually do something in terms of moving the cash rate,” he said.
Against a basket of currencies, the was down 0.2% at 99.07 by 03:58 AM ET (8:58 GMT), pulling back from the three-year highs it reached last week.
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 I will be carefully monitoring,” she said.
But Mester pushed back against the notion that the Fed would be driven to act in response to jittery financial markets.
“I just caution that you don’t want to over-react to volatility in the markets if you’re a monetary policymaker,” she said.
Without too much good news on the virus, few expect the dollar to give back too much of its recent gains.
The outbreak has now affected 80,000 people globally and the death toll in Italy climbed to seven on Monday, adding to fears the virus is morphing into a pandemic that could wreak far greater economic damage than first thought.
China reported a rise in new coronavirus cases in Hubei province, the epicentre of the outbreak, even though the rest of the country saw a fourth-straight day of declines.
South Korea, which has the most virus cases in Asia outside China, reported 60 new cases on Tuesday, increasing the total number of infected patients there to 893.
The edged up a little from recent three-year lows to reach 1.0863, while the dollar was trading at 110.52 per , off a 10-month high of 112.21.
Japan’s Prime Minister Shinzo Abe said on Tuesday that clusters of cases had emerged there and that the government would take stronger steps to combat the outbreak.
Meanwhile, the and were little changed against the greenback.
“Despite the Aussie/dollar holding up overnight, we see the balance of risks to the downside,” ANZ analysts said in a note.
That could add to the dollar’s 5.7% rise against the Aussie so far this year.
–Reuters contributed to this report