Dollar rebounds after Fed rate cut blow

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – The dollar climbed against a basket of currencies on Wednesday after an emergency interest rate cut in the previous session by the U.S. Federal Reserve shoved the U.S. currency down to an eight-week low.

Investors were likely waiting to see which other major central banks might follow the Fed and make emergency cuts to their interest rates, as they try to fend off the economic damage from the spreading coronavirus, analysts said.

The U.S. central bank surprised investors by slashing rates by 50 basis points to a target range of 1.00% to 1.25% on Tuesday, two weeks before a regularly scheduled policy meeting, in an effort to combat the effects of the coronavirus.

The dollar index <=USD>, which measures the greenback’s strength against a basket of six other major currencies, was 0.24% higher at 97.365. The index slipped as low as 96.926 on Tuesday, its weakest since Jan. 8.

“The dollar has found its feet after a phase of underperformance against the euro and some other major currencies,” Jonathan Coughtrey, managing director at Action Economics, said in a note.

Upbeat data also supported the greenback.

U.S. private payrolls increased more than expected in February, pointing to labor market strength before a recent escalation of recession fears ignited by the coronavirus epidemic.

U.S. services sector activity accelerated to a one-year high in February, suggesting underlying strength in the economy despite the coronavirus outbreak.

On Wednesday, the euro , which has been one of the currencies to climb on the broad-based dollar weakness of recent weeks, was 0.31% lower at $1.1136.

“With the ECB about to cut imminently, it has deflated the euro balloon a bit,” Stephen Innes, chief market strategist at Australian FX services provider AxiCorp, said, referring to the European Central Bank.

Money markets in the euro zone are pricing a 90% chance that the ECB will cut its deposit rate, now minus 0.50%, by 10 basis points next week .

The Canadian dollar weakened against the greenback on Wednesday after the Bank of Canada slashed its benchmark interest rate to 1.25% from 1.75% due to the coronavirus outbreak and said it was prepared to cut again if needed to support economic growth.

Sterling headed for its best day against the euro in two weeks and inched up from 4-1/2-month lows against the dollar on Wednesday, as incoming Bank of England Governor Andrew Bailey said action could be needed to offset the effects of the virus.

Bailey said any BoE measures would be best done in tandem with Britain’s government, curbing expectations the bank might follow Tuesday’s emergency rate cut by the Fed.

The pound was about flat against the greenback at $1.2817.

(Graphic: Coronavirus hits financial markets – https://fingfx.thomsonreuters.com/gfx/mkt/13/2852/2817/Pasted%20Image.jpg)

(Reporting by Saqib Iqbal Ahmed; Editing by Jonathan Oatis)