Dollar dives after U.S. Federal Reserve cuts interest rates to battle coronavirus

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – The U.S. dollar fell across the board on Tuesday after the U.S. Federal Reserve cut interest rates in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus.

Though Fed Chair Jerome Powell reiterated his view that the U.S. economy remains strong, he acknowledged that the spread of the virus had caused a material change in the U.S. central bank’s outlook for growth.

“The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,” Powell said in a news conference shortly after the central bank said it was cutting rates by a half percentage point to a target range of 1.00% to 1.25%.

The dollar index <=USD>, which measures the greenback’s strength against a basket of six other major currencies, was 0.41% lower at 97.13. The index slipped to a near 8-week low of 96.926 after the interest rate decision before paring losses.

“This is definitely not good for the dollar,” said Mark McCormick, global head of FX strategy at TD Securities.

While the U.S. has room to cut interest rates, other developed economies have already slashed rates to record lows and may be hesitant to reduce them further. That is likely to weigh on the U.S. currency and boost the currencies of other countries, he said.

(GRAPHIC: Major central bank policy rates – https://fingfx.thomsonreuters.com/gfx/mkt/13/2795/2760/Pasted%20Image.jpg)

Tuesday’s rate cut boosted the 3-month euro-dollar cross currency basis swap to a 12-year high of 0.80 basis points, up from 0.29 basis on Monday. The move pointed to a sharp reduction in dollar shortage.

The Fed’s move comes shortly after Group of Seven finance officials said on Tuesday they would use all appropriate policy tools to achieve strong, sustainable global growth and safeguard against downside risks posed by the fast-spreading coronavirus.

Global risk assets, including equities, were hammered last week as investors worried about the economic impact of the global spread of the virus.

The safe-haven Japanese yen and Swiss franc gained on the dollar on Tuesday, as investors remained nervous about the economic fallout of the coronavirus outbreak.

The yen, which tends to attract investors during times of geopolitical or financial stress as Japan is the world’s biggest creditor nation, was up about 1% against the dollar, while the Swiss franc, another safe haven, rose 0.3%.

The euro, lifted in recent sessions by hopes that the U.S. would be able to do more on rate cuts than the Europe, was up 0.42% against the dollar.

(GRAPHIC: Euro dollar exchange rate – https://fingfx.thomsonreuters.com/gfx/mkt/13/2788/2753/Pasted%20Image.jpg)

On Tuesday, the Australian dollar <AUD=D3> was 0.84% higher after the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points, as anticipated. Markets had priced the possibility of a larger cut.

Sterling rose 0.42% against the dollar on Tuesday, even as Britain’s fractious trade talks with the EU and expectations of rate cuts to counter coronavirus damage kept the currency near recent 4-1/2-month lows.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Ira Iosebashvili in New York and Sujata Rao in London; Editing by Steve Orlofsky and Chizu Nomiyama)

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