Dollar Pressured by Expected Fed Rate Cut

The U.S. dollar stayed soft on Tuesday amid expectations that the Federal Reserve may cut interest rates this year to curb downside pressure on the economy caused by China’s coronavirus outbreak.

The dollar initially rose as the virus spread further around the world, with investors eyeing all U.S. assets as safe-haven investments. However, money managers now think the Fed would be more likely to easy monetary policy and cut rates, given that it benefits from the biggest room to do it.

Against a basket of currencies the dollar was 0.2% weaker at 99.19, drifting away from the three-year high reached last week. However, without much good news on the virus, few expect the dollar to give back too much of its recent gains.

The euro was last up 0.1% at $1.0863, drifting away from the three-year low it fell to last week, sending it below $1.07 as money flooded into the safe-haven dollar.

Market gauges of implied volatility in euro/dollar eased off a bit on Tuesday after rising to their highest since October on Monday.

Lee Hardman, currency analyst at MUFG, said he expected “some downside risk for the U.S. dollar” going further given the Fed’s potential dovish shift in policy.

Market participants continue to build up expectations for further Fed easing, with money markets pricing in a 25-basis points cut for the meeting in June.

For the year as a whole, traders expect the central bank to lower rates to between 1% and 1.25%, down from the current 1.5% to 1.75% range.