In intraday trading on Friday, the dollar continued to come under pressure after an overnight plunge, pushing the dollar index to a 2-month low of 96.47.
The dollar has struggled since last week, with the dollar index on track for its biggest weekly decline in two years after plunging more than 1% last week.
An emergency interest rate cut by the federal reserve on Tuesday sent a shudder through financial markets as the United States eased monetary policy this week on fears about the economic impact of a new outbreak, threatening a multiyear rally in the dollar and boosting other global currencies.
The dollar took the brunt of the loss at 97 and plunged on Thursday, its biggest one-day drop since Jan. 9, 2019, as a new bout of pneumonia spread in the U.S.
On Tuesday, the federal reserve announced an emergency interest rate cut of 50 basis points, the first such cut since the 2008 financial crisis.
After the fed cut rates three times last year, the benchmark rate is widely expected to remain on hold for some time. But the serious threat posed by the coronavirus outbreak in 2019 to the global economy forced the federal reserve to cut interest rates again by half a percentage point, reducing the target range for the federal funds rate to 1% to 1.25%.
The fed cut rates two weeks before its policy meeting, meaning it had taken the lead in combating the economic damage caused by the outbreak of the new coronavirus, giving other central Banks the green light to cut rates.
Despite this week’s generally good U.S. economic data, the number of americans filing new claims for unemployment benefits fell last week, suggesting the labor market remains strong despite the outbreak of the coronavirus. But analysts remain hesitant to expect a sharp rebound in the dollar.
The fed still has more room to cut rates than other major central Banks, said Karl Schamotta, chief market strategist at Cambridge Global Payments. “Operationally, this suggests a bit more downside for the dollar.”
The current target range for policy rates in the us of 1.00-1.25% still has room to fall further, but in Europe and Japan rates are already below zero in many places and those monetary authorities are reluctant to cut them further.
Expectations that the fed would cut rates later weighed heavily on the dollar. Money markets expect the fed to cut its target range of interest rates from 1% to 1.25% by another 25 basis points at its next policy meeting on March 18-19, followed by another half-point cut before April.
“The rate cut is an emergency move, so it’s worth wondering whether the fed will do it again or will it signal it will do it again,” said Juan Perez, senior currency trader, and strategist at Tempus Inc. They seem ready to help, so the lack of confidence in the dollar is understandable.”
In addition, the federal reserve mentioned the new coronavirus 48 times in its latest Beige Book report, indicating that policymakers are highly concerned about the economic damage caused by the outbreak.
“The report in the beige book could be important for the fed to cut rates between meetings,” said Olle Holmgren, chief strategist at SEB.
“Guard against further dollar weakness,” Mark Haefele, global chief investment officer at UBS wealth management, said in a note to clients.
UBS wealth management advised clients to bet on a rise in sterling against the dollar on expectations of fiscal easing from the British government.
Stephen Innes, the chief market strategist at AxiCorp in Australia, suggested betting on yen and euro appreciation against the dollar as the fed cuts rates further.
“The fed is cutting rates again, the ECB has limited policy room, so the dollar is weaker,” Innes said. I want to short the dollar more than I have in the last two years.”