Dollar's rally sputters as investors eye more Fed cuts

By Ritu,

Capital Sands

Monetary policy easing in the United States fueled by worries about the economic impact of the coronavirus is endangering the dollar’s years-long rally and giving a boost to currencies around the world.

The U.S. Dollar Currency Index shed most of its gains for the year over the last few days, as expectations grew that the Federal Reserve would ease rates to cushion the U.S. economy from the ripple effects of the a spreading coronavirus outbreak.

The Fed acted on Tuesday, delivering a 50-basis point emergency rate cut, with many traders expecting at least two more such moves in coming months.

But while U.S. policy rates, which stand at a target range of 1.00% to 1.25%, have more room to fall, many rates in Europe and Japan are already below zero and monetary authorities there are hesitant to lower them much further.

Officials in those countries have discussed the prospects of using fiscal measures to boost their economies, which some believe could support their currencies, further narrowing the gap in yields that has drawn income-seeking investors to the dollar in recent years.

The euro zone’s ultra-low interest rates have made the single currency a popular funding vehicle for such strategies, which have become less appealing as market volatility has grown.

A weaker dollar would be a boon for U.S. multinationals that have already taken a hit from the coronavirus’ impact on global business conditions because it makes it less expensive to convert foreign profits into the U.S. currency.

A falling greenback could also soften the coronavirus’ impact on the economies of developing countries, making it easier for them to service their dollar-denominated debt.

The dollar index is down about 2.5% from its year high. It remains up about 10% from a low hit in early 2018.

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