NEW YORK, Feb 28 ― The dollar fell yesterday as Treasury yields continued to plumb new lows and investors bet the Federal Reserve would cut interest rates to offset the impact of the spreading coronavirus, lifting the euro to its highest in more than three weeks.

Money markets are now fully pricing in one 25 basis point cut in US interest rates by April and three by March 2021. Expectations for a European Central Bank rate cut have also risen; money markets now price a more than 80% chance of a 10 basis point rate cut in July.

“We're seeing a major reversal of the dollar's fortunes,” said John Doyle, vice president of dealing and trading at Tempus, Inc.

With US rates much higher, and the scope for them to fall much wider, investors are reversing out of the dollar.

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“Rate cut expectations have gained momentum and US rate expectations are falling a lot more than they are in the euro zone,” said Thu Lan Nguyen, an analyst at Commerzbank.

Whether or not the dollar retreats further depends on economic data on the coronavirus's impact on confidence and trade outside of China, Nguyen said.

Against the euro, the dollar fell to a three-week low, last down 1.14 per cent to 1.100. The dollar index dropped 0.76 per cent to 98.358, its weakest since February 6.

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It has shed roughly 1 per cent since last week, when it touched a near 3-year high thanks to its safe-haven currency credentials and investors' belief that the US economy was relatively sheltered from the coronavirus fallout. But the currency's safe-haven appeal has worn off.

One-month volatility in euro/dollar, which was near record lows, has shot up to its highest since early October.

New coronavirus infections are now growing faster outside China than within, stoking fears that the economic impact on supply chains and consumer demand might be far greater than previously anticipated.

Investors have rushed for the safety of US government debt. Ten-year US Treasury yields slumped for the third consecutive day to a record low of 1.254 per cent.

The dollar dropped 0.58 per cent to 109.77 Japanese yen as the yen's safe-haven appeal began to return.

China's offshore yuan strengthened to a one-week high, with the dollar down 0.2 per cent at 7.007 yuan per dollar. The Australian dollar, seen as a proxy for investor sentiment towards China, rebounded 0.67 per cent to US$0.659 (RM2.778), away from 11-year lows touched on Wednesday. ― Reuters