February 26, 2020 / 1:04 AM / a month ago

FOREX-Dollar slips on caution U.S. may not be immune to epidemic

* Dollar loses momentum as U.S. relative strength seen eroding

* Markets bet on Fed rate cuts in H1 this year

* U.S. CDC official urges Americans to prepare for outbreak

* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E

By Hideyuki Sano

TOKYO, Feb 26 (Reuters) - The dollar was on the defensive on Wednesday as rising expectations of a U.S. rate cut and warning from U.S. health officials on a domestic coronavirus outbreak called into question the perceived relative strength of U.S. financial assets.

The dollar’s index against a basket of six major currencies fell to 98.980, having lost 0.9% since it peaked at a near three-year high of 99.915 last week.

Against the yen, the U.S. currency traded at 110.25 yen , about two full yen below its 10-month high touched last Thursday, after three straight days of losses.

The euro fetched $1.08815, extending its rebound since it hit near three-year low of $1.0778 on Thursday.

The dollar had risen until last week as investors had regarded the United States as less exposed to the coronavirus and its economy more resilient than other major economies, making U.S. assets a safe harbour.

But such convictions have started to crumble.

A top official at the U.S. Centers for Disease Control and Prevention (CDC) urged Americans to begin preparing for coronavirus to spread within the country, while another official said it was no longer a question of if, but when, the virus would become a global pandemic.

As outbreaks started to quickly spread to the Middle East and Europe, investors no longer saw the U.S. economy immune and started to bet the U.S. Federal Reserve will have to cut interest rates to support the U.S. economy.

U.S. money market futures now fully price in a 0.25 percentage point cut by the end of June, compared to about 50% chance a week ago.

The 10-year U.S. Treasuries yield plunged to a record low near 1.30%, reducing the dollar’s relative yield attraction.

In contrast to the Fed, the world’s other major central banks such as the European Central Bank and the Bank of Japan have limited room for easing with their policy rates already at record lows.

“Markets had been under-estimating the risk of coronavirus but I think that phase is over by now,” said Tatsuya Chiba, manager of forex at Mitsubishi Trust Bank.

Chiba said the risk-off mood is likely to linger for another month or so until the market reach the extreme in the opposite direction by over-estimating the risk.

“I would think we will see the peak of fears when people become seriously worried about an epidemic in the United States.”

The risk-sensitive Australian dollar stood at $0.6603 , stuck near Monday’s 11-year low of $0.6585. (Reporting by Hideyuki Sano; Editing by Lincoln Feast.)

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