By Hideyuki Sano and Tom Westbrook
TOKYO/SINGAPORE (Reuters) – The British pound erased early gains after an unexpected interest rate cut by the Bank of England on Wednesday, while the dollar resumed its descent against the safe-haven Japanese yen and Swiss franc on fears over the spreading coronavirus.
Sterling last traded at $1.2873
“Markets had priced in more than 25 basis points, but not the full extent of 50 basis points,” said Moh Siong Sim, currency strategist at the Bank of Singapore.
“But it’s not a surprise in the sense that the market was kind of expecting the bank to team up with the U.K. government…it looks like that 50 basis point rate cut could signal that we could expect something quite substantial from the budget itself.”
The BoE’s move comes as a number of central banks and governments around the world stepped up efforts to shore up their economies from the economic impact of the coronavirus epidemic.
The recovery in safe-haven currencies mirrored falls in U.S. equity futures and U.S. bond yields in Asian trade on Wednesday, as the spread of the virus in major economies threatens to brake business activity and curb consumer spending.
The dollar lost 0.9% to 104.67 yen The dollar had fallen to as low as 101.18 on Monday. While Japan may already be in recession, its currency normally rises at times of major financial market stress because of the country’s current account surplus and its net creditor status. The Swiss franc gained 0.65% to 0.9335 franc per dollar The dollar jumped on Tuesday as investors hoped global monetary policymakers would launch further stimulus plans to reduce the drag on economies from trade and travel disruptions.
But a lack of clarity on what Washington will do has kept many investors on guard.
U.S. President Donald Trump said on Tuesday he will ask Congress for a payroll tax cut and other “very major” stimulus moves, but the details remain unclear.
“It is too early to say the market sentiment has turned positive. Yesterday’s rebound in the dollar and in risk assets is a type of a rebound you often see in a downtrend,” said Shinji Ishimaru, senior currency analyst at MUFG Bank. “In addition to economic measures, the focus will be on how much the U.S. can contain the infections to keep the economy going. That is a very big unknown,” he said.
The U.S. Centers for Disease Control and Prevention (CDC) reported on Tuesday 696 new cases of coronavirus, an increase of 224 from its previous count, and said the number of deaths had risen by six to 25. Investors are also expecting the U.S. Federal Reserve to cut interest rates by at least 0.5 percentage point at its policy review next week, in addition to its emergency rate reduction earlier this month. It is not clear if such a move could boost investors’ risk tolerance after global equities tumbled following the Fed’s surprise rate cut just over a week ago, market players said.
But that will surely diminish the dollar’s yield advantage over other major currencies, which has been a main driver of the dollar’s strength in the past few years.
Financial markets are also betting the European Central Bank will cut its interest rates by 0.10 percentage point on Thursday. Still with interest rates at minus 0.50%, many investors think the ECB has limited room for additional cuts. (Editing by Kim Coghill and Jacqueline Wong)
